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

A savings account earns interest because the bank uses your money to lend to other customers. In return, they pay you a percentage of your balance each month or year. That percentage is called the Annual Percentage Yield, or APY. The higher the APY, the more you earn.

The actual dollar amount is straightforward math. If you have $1,000 in an account earning 4.5% APY, you earn roughly $45 per year — though the bank usually divides that into monthly payments of about $3.75. If you have $5,000 at the same rate, you earn roughly $225 per year. The more you deposit, the more interest you earn.

The catch is that APY rates change. Banks raise them when the Federal Reserve raises its benchmark rate, and lower them when the Fed cuts rates. An account earning 4.5% today might earn 3.5% in six months if rates fall. This is why comparing rates matters — different banks offer different rates even when the Fed's rate is the same.

Key Takeaways

  • Your interest earnings equal your account balance multiplied by the APY, divided by 12 for a monthly estimate.
  • Banks with no physical branches typically offer higher APY than banks with many locations, because their costs are lower.
  • Interest rates change when the Federal Reserve changes its benchmark rate, so the APY you see today may not be the APY you earn next month.
  • Money market accounts and certificates of deposit often pay higher rates than basic savings accounts, but with different rules about when you can withdraw.

Why different banks pay different rates

Two banks might both be safe and insured by the FDIC, but one pays 4.5% APY and the other pays 1.2%. The difference usually comes down to overhead costs. A bank with 500 branches across the country pays for building rent, staff, and security at each location. An online-only bank has one or two data centers and a small customer service team, so their costs are much lower. They pass those savings to customers through higher interest rates.

Size also matters. Very large banks sometimes pay lower rates because they have so many customers that they don't need to attract more deposits. Smaller regional banks or newer online banks often pay higher rates to compete for your money.

The Federal Reserve's benchmark rate sets a ceiling for what banks can pay. When the Fed raises its rate, banks can afford to pay more. When the Fed cuts its rate, banks lower what they pay you. But within that ceiling, each bank chooses its own rate based on how much money it needs and what it costs to run.

How interest compounds and grows your balance

Most savings accounts compound interest monthly, meaning the bank calculates interest on your balance, adds it to your account, and then next month calculates interest on the new, larger balance. This creates a snowball effect — you earn interest on your interest.

The difference is small at first. On $1,000 earning 4.5% APY, you earn about $3.75 in the first month. In the second month, you earn interest on $1,003.75, not just $1,000, so you earn about $3.77. The extra two cents seems tiny, but over years it adds up. After five years of monthly compounding at 4.5%, your $1,000 becomes about $1,247, not $1,225. That extra $22 came entirely from earning interest on interest.

The longer money sits in the account, the more compounding matters. This is why starting early, even with small deposits, builds more wealth than waiting to deposit a large amount later.

How to estimate your earnings before opening an account

Most banks show their current APY on their website. Write down the rate, then use this straightforward formula: multiply your deposit by the APY, then divide by 12 for a rough monthly estimate.

Example: $5,000 deposit × 4.5% APY ÷ 12 months = about $18.75 per month, or $225 per year. This is close enough for planning purposes. The actual amount will be slightly higher because of compounding, but the difference is small in the first year.

Some banks have APY calculators on their websites that do this math for you. If you're comparing two banks, calculate the annual earnings at each one — the difference might surprise you. A $10,000 deposit earning 4.5% at one bank versus 1.5% at another means $300 more per year in your pocket.

When rates change and what happens to your money

Banks can change the APY they offer on new deposits at any time, usually without notice. If you opened an account at 4.5% APY last month and the bank drops its rate to 3.5% this month, your existing balance still earns 4.5% — the old rate applies to money already deposited. Only new money deposited after the rate change earns the new, lower rate.

However, some banks reserve the right to lower the rate on existing balances too, though they must give you notice before doing so. This is rare with savings accounts but more common with money market accounts. Read the account agreement to see what the bank promises.

If rates rise and your bank doesn't raise its APY, you have the option to move your money to a bank paying more. There's no penalty for closing a savings account and opening one elsewhere. Many people move their savings every year or two to chase the highest available rate.

Savings accounts versus other ways to earn interest

A money market account works like a savings account but usually pays a slightly higher rate. The tradeoff is that you may have limits on how many withdrawals you can make per month, and you might need a larger minimum balance to open one.

A certificate of deposit, or CD, locks your money away for a set period — three months, six months, one year, five years, or longer. In exchange, the bank pays a higher rate than a savings account. If you withdraw before the term ends, you pay a penalty, usually a few months' worth of interest. CDs make sense if you know you won't need the money for a specific amount of time.

A regular savings account is the most flexible. You can withdraw whenever you want with no penalty, and your money is always available for emergencies. The tradeoff is a lower interest rate than a CD or sometimes a money market account. For most people starting out, a savings account is the right choice because flexibility matters more than squeezing out an extra 0.5% in interest.

Why your earnings might be lower than you expect

Banks round down when calculating interest. If your balance earns $3.756 in a month, the bank credits $3.75, not $3.76. Over time, these tiny rounding losses add up slightly, though they're usually less than a dollar per year on a typical account.

Some banks also charge monthly maintenance fees that reduce your earnings. A $10 monthly fee on an account earning $15 per month means you're actually only gaining $5. Always check whether the account has fees and whether you can waive them by keeping a minimum balance or setting up direct deposit.

Inflation also eats into your real earnings. If your account earns 2% APY but inflation is 3%, your money is actually losing purchasing power — you can buy less with it next year than you can today. This is why comparing the APY to inflation matters when deciding where to keep long-term savings.

Frequently Asked Questions

Is the interest I earn taxed?

Yes. Interest earned in a savings account is taxable income. At the end of each year, the bank sends you a 1099-INT form showing how much interest you earned, and you report that on your tax return. The amount is usually small enough that it doesn't change your tax bracket, but it still counts as income.

Can I lose money in a savings account?

No, as long as the bank is FDIC insured. The FDIC guarantees that if the bank fails, you get your money back up to $250,000 per account. You can't lose your deposit, but inflation can reduce what it's worth. You earn interest to help offset that.

Why do online banks pay more interest than big banks?

Online banks have lower costs because they don't operate physical branches. They pass those savings to customers through higher interest rates. They're just as safe as big banks — most are FDIC insured — but they compete on rate rather than convenience.

What's the difference between APY and APR?

APY includes compounding, while APR does not. For savings accounts, you want to see APY because that's what you actually earn. APR is used for loans and credit cards, where it works against you instead of for you.

Should I move my money if another bank offers a higher rate?

If the difference is more than 0.5%, it's usually worth moving. On $10,000, a 0.5% difference is $50 per year. Moving takes 10 minutes online. Just make sure the new bank is FDIC insured and has no fees that would eat into your gains.