The amount you earn depends on three things: how much money you have in the account, the interest rate the bank offers, and how long you leave it there

A savings account earns interest by paying you a percentage of your balance each month or year. The bank uses your money to lend to other customers, and they share a small portion of what they earn with you. The higher the interest rate, the more you earn. A $5,000 balance at 4.5% annual percentage yield (APY) earns roughly $225 per year, while the same balance at 0.01% earns 50 cents.

The catch is that interest rates change constantly, and they vary wildly between banks. A high-yield savings account at an online bank might offer 4% or 5%, while a traditional bank branch might offer 0.01%. The difference between these two is not a small detail — it is the difference between earning $200 and $2,500 per year on a $5,000 balance. Shopping around for the rate matters more than almost anything else you can do.

Key Takeaways

  • Your earnings equal your balance multiplied by the APY, divided by 12 if the bank compounds monthly (though most online banks compound daily, which earns slightly more).
  • Interest rates vary from under 0.01% at traditional bank branches to over 5% at online banks, so the bank you choose determines most of your earnings.
  • Money market accounts and certificates of deposit (CDs) often pay higher rates than savings accounts, but CDs lock your money away for a set time.
  • Interest rates fall when the Federal Reserve lowers rates, and rise when it raises them — your bank's rate will follow within weeks or months.

How to calculate what you will earn

The basic formula is straightforward: take your account balance, multiply it by the APY, and divide by 12 to get your monthly earnings. A $10,000 balance at 4.5% APY earns roughly $37.50 per month ($10,000 × 0.045 ÷ 12). Over a year, that is $450.

Most banks compound interest daily, which means they calculate and add your earnings to your balance every single day. This matters because once interest is added, the next day's calculation includes that interest too — you earn interest on your interest. The difference between daily and monthly compounding is small (usually less than 1% more per year), but it adds up over time. Your bank's website or account statement will tell you how often it compounds.

The formula gets slightly more complex with daily compounding, but you do not need to do the math yourself. Your bank publishes the APY specifically so you can compare rates directly — a 4.5% APY at one bank is the same as a 4.5% APY at another, compounding already factored in.

Why rates differ so much between banks

Online banks pay higher rates than branch banks because they have lower costs. They do not maintain physical locations, do not pay tellers, and do not spend money on in-person customer service. They pass those savings to customers through higher interest rates. A bank like Ally or Marcus might offer 4.5% while Chase or Bank of America offers 0.01% on the same type of account.

Banks also set rates based on what the Federal Reserve does. When the Fed raises its benchmark interest rate, banks raise what they pay on savings accounts within weeks. When the Fed cuts rates, banks cut what they pay you — sometimes when ready. This is why a savings account that earned 5% in 2023 might earn 4% in 2024. You are not losing money, but your earnings shrink when rates fall.

Some banks use promotional rates to attract new customers. They might offer 5.5% for the first three months, then drop to 4% after that. Read the fine print to see when a promotional rate expires and what the regular rate will be.

Comparing savings accounts, money market accounts, and CDs

A savings account lets you withdraw money whenever you want with no penalty. Interest rates are usually moderate — currently between 4% and 5.5% at online banks.

A money market account is a hybrid. It works like a savings account (you can withdraw anytime), but it usually pays a slightly higher rate because the bank can use the money more flexibly. The tradeoff is that some money market accounts require a higher minimum balance, and a few limit how many withdrawals you can make per month.

A certificate of deposit (CD) locks your money away for a set period — three months, six months, one year, or longer. In exchange, the bank pays a higher rate. A one-year CD might pay 5.5% while a savings account pays 4.5%. The catch is that if you withdraw before the term ends, you pay a penalty (usually a few months of interest). CDs make sense if you know you will not need the money for a specific time period.

What happens to your earnings over time

Interest compounds, which means your balance grows faster as time passes. A $10,000 deposit at 4.5% APY grows to $10,450 after one year. If you leave it untouched for five years, it grows to $12,462 — not just because of the interest, but because you are earning interest on the interest.

This matters more the longer you save. Over 10 years, that same $10,000 grows to $15,530. Over 20 years, it grows to $24,117. You did not add any new money — compounding did the work. This is why starting to save early, even with small amounts, makes a real difference.

The flip side is that when rates fall, your earnings fall too. If your 4.5% rate drops to 3% in a year when the Fed cuts rates, your $10,000 earns $300 instead of $450 that year. You still have your $10,000, but the growth slows down.

How to find the best rate for your situation

Start by checking what your current bank pays. Go to their website, log in, and look at your savings account details — the APY should be listed there. Write it down.

Then check rates at three to five online banks. Sites like Bankrate, DepositAccounts, or the banks' own websites show current rates. Look for accounts with no monthly fees, no minimum balance requirements, and FDIC insurance (all legitimate banks have this). Write down the APY for each one.

Compare the rates. If your current bank pays 0.5% and an online bank pays 4.5%, switching would earn you $400 more per year on a $10,000 balance. That is worth the 15 minutes it takes to open a new account. If the difference is 0.1%, it probably is not worth the hassle.

Once you open a new account, you can transfer money electronically from your old bank. This usually takes one to three business days. You do not have to close your old account if you do not want to — some people keep multiple savings accounts at different banks.

What to watch out for

Do not confuse APY with APR. APY (annual percentage yield) includes compounding and is what you actually earn. APR (annual percentage rate) does not include compounding and is used for loans and credit cards. Always look for APY when comparing savings accounts.

Watch for accounts that require a minimum balance. Some banks pay high rates only if you keep at least $25,000 in the account. If you fall below that, the rate drops to nearly nothing. Read the terms before you open the account.

Be aware that rates change. The 4.5% you see today might be 3.5% in six months if the Fed cuts rates. This is normal and not a reason to panic — your money is still safe and still earning interest. But it means you should check rates once or twice a year and consider switching if a better option appears.

Frequently Asked Questions

How often does interest get added to my account?

Most banks compound daily, meaning they calculate and add interest every day. Some compound monthly or quarterly. Daily compounding earns slightly more, but the difference is small — usually less than 1% per year. Your bank statement or account details page will tell you the compounding frequency.

If I withdraw money, do I lose the interest I earned?

No. Interest you have already earned stays in your account. If you withdraw $1,000 from a $10,000 balance, you keep the interest that was already added. You just earn less going forward because your balance is now smaller.

Why does my bank's rate keep changing?

Banks change rates when the Federal Reserve changes its benchmark rate. When the Fed raises rates, banks raise what they pay you. When the Fed cuts rates, banks cut what they pay. This can happen several times per year, and your rate may go up or down.

Is my money safe in a high-yield savings account?

Yes, as long as the bank is FDIC-insured, which all legitimate banks are. FDIC insurance protects up to $250,000 per account per bank. Your money is just as safe at an online bank paying 4.5% as at a branch bank paying 0.01%.

Should I move money to a CD if rates are high right now?

Only if you will not need the money for the CD's term. CDs pay more than savings accounts, but you pay a penalty if you withdraw early. If you might need the money within the next year, a savings account is safer because you can withdraw anytime without penalty.