The amount you earn depends on three things: your balance, the APY the bank offers, and how long the money sits there

Your savings account interest is calculated by multiplying your balance by the annual percentage yield (APY), then dividing by 365 days. If you have $10,000 in an account with a 4.5% APY, you earn roughly $450 per year, or about $1.23 per day. But that's only if your balance stays at $10,000 all year. Most people's balances change, so the actual amount varies month to month.

Banks compound interest daily, weekly, or monthly depending on their terms. Daily compounding means you earn interest on your interest almost when ready, which adds up faster than monthly compounding. The difference is small on modest balances but becomes noticeable above $50,000.

The real variable is the APY itself. A high-yield savings account at an online bank might offer 4.5% to 5.35% right now, while a traditional brick-and-mortar bank might offer 0.01%. That difference means $10,000 earns either $450 or $1 per year. APY changes when the Federal Reserve adjusts interest rates, so what you earn this month may not be what you earn next month.

Key Takeaways

  • Interest earned equals your balance multiplied by the APY, divided by 365 days, so a $5,000 balance at 5% APY earns roughly $250 per year.
  • Daily compounding means you earn interest on your interest, which adds slightly more than monthly or quarterly compounding on the same APY.
  • Online banks typically offer 4% to 5.35% APY on savings accounts, while traditional banks often offer less than 0.5%, creating a significant difference in annual earnings.
  • APY is not fixed—it changes when the Federal Reserve adjusts rates, so your earnings may increase or decrease without you moving your money.
  • Withdrawals reduce your balance and therefore your interest, so moving money out mid-month lowers that month's earnings.

How the math works with real numbers

The formula banks use is: (Balance × APY) ÷ 365 = Daily Interest. If you have $20,000 at 4.75% APY, you earn ($20,000 × 0.0475) ÷ 365 = $2.60 per day. Over a month with 30 days, that's roughly $78. Over a year, it's about $950.

But that assumes your balance never changes. If you deposit $5,000 on day 15, your daily interest jumps to ($25,000 × 0.0475) ÷ 365 = $3.25 per day for the rest of the month. If you withdraw $10,000 on day 20, it drops to ($15,000 × 0.0475) ÷ 365 = $1.95 per day. Banks track this daily, so every deposit and withdrawal shifts your earnings.

Compounding frequency matters slightly. With daily compounding, you earn interest on yesterday's interest starting today. With monthly compounding, you wait until the end of the month. On $50,000 at 5% APY, daily compounding earns roughly $2,564 per year, while monthly compounding earns roughly $2,560. The difference is $4—small, but it adds up over years.

Why APY varies between banks and changes over time

Banks set their own APY based on what the Federal Reserve charges them to borrow money. When the Fed raises its benchmark rate, banks can afford to pay you more interest to attract deposits. When the Fed cuts rates, banks lower what they pay you. This happens in real time—some banks change rates within hours of a Fed announcement, while others wait days or weeks.

Online banks typically offer higher APY than traditional banks because they have lower overhead costs. They don't maintain physical branches, so they pass some of those savings to depositors in the form of higher rates. A traditional bank might offer 0.05% APY while an online bank offers 4.75% on the same type of account. That's a difference of $4,700 per year on a $100,000 balance.

Some banks offer promotional rates for new customers—a higher APY for the first few months, then a drop to their standard rate. Read the fine print to see when the promotional period ends and what your rate becomes afterward.

What happens to your interest if you withdraw money early

Withdrawals reduce your balance when ready, so your daily interest drops the day the money leaves your account. If you withdraw $5,000 on day 10 of the month, you lose interest on that $5,000 for the remaining 20 days. On a 5% APY account, that's roughly $13.70 in lost interest for that month.

Some savings accounts have no withdrawal limits, so you can take money out whenever you need it without penalty. Others—particularly money market accounts or certain promotional accounts—may limit you to a set number of withdrawals per month or charge a fee if you exceed that limit. Check your account terms before you assume you can withdraw freely.

If you're saving for a specific goal and won't need the money for months or years, keeping it in a savings account is straightforward. If you might need it within a few months, the interest you earn is usually small enough that the convenience of straightforward access matters more than the rate.

How to compare interest earnings across different accounts

The only number that matters for comparison is the APY. Ignore marketing language about "high-yield" or "premium" rates—just look at the APY percentage. A 4.75% APY is a 4.75% APY whether it's at Bank A or Bank B. Use that number to calculate what you'll actually earn on your balance.

Most banks publish their current APY on their website, and many comparison sites list rates across multiple banks. Rates change frequently, so a comparison from last month may not reflect today's rates. Check the date on any comparison you find and verify the current rate directly with the bank before you move your money.

Consider whether the bank is FDIC-insured. This means your deposits up to $250,000 are protected if the bank fails. Nearly all traditional banks and most online banks carry FDIC insurance. A few online banks do not, which is a significant risk even if their APY looks attractive.

The impact of inflation on what your interest actually buys

Interest earnings are only meaningful if they outpace inflation. If inflation is running at 3% per year and your savings account earns 2% APY, you're actually losing purchasing power. Your money grows in dollar amount but buys less in real terms.

Right now, many high-yield savings accounts offer 4.5% to 5.35% APY, which is above the current inflation rate. That means your money is actually gaining purchasing power. But this changes. When inflation drops or the Fed cuts rates, your APY may fall below inflation again, and your savings will slowly lose value in real terms.

This is why savings accounts are meant for money you need within a few years, not long-term wealth building. For money you won't touch for 10 or 20 years, other options like bonds or stock market investments historically outpace inflation by a wider margin, though they carry more risk.

Frequently Asked Questions

If I have $10,000 at 5% APY, do I really earn $500 a year?

Yes, roughly $500 per year if your balance stays at $10,000 the entire year and the APY doesn't change. That's about $41.67 per month or $1.37 per day. Any withdrawals reduce that amount proportionally. If you withdraw $2,000 halfway through the year, you'd earn closer to $400 instead.

Does my interest get taxed?

Yes. Interest earned on savings accounts is taxable income. Banks send you a 1099-INT form at the end of the year showing how much interest you earned. You report this on your tax return. The amount owed depends on your tax bracket, but it's typically 10% to 37% of the interest earned, depending on your income.

Why does my bank's APY keep changing?

Banks adjust APY when the Federal Reserve changes its benchmark interest rate, which happens several times per year. When the Fed raises rates, banks can afford to pay you more. When the Fed cuts rates, banks lower what they pay. Some banks change rates within hours of a Fed announcement, while others wait days.

Is a 4.5% APY may provide to stay at 4.5% forever?

No. APY is variable on most savings accounts, meaning the bank can change it at any time. They typically give you notice before lowering rates, but the rate you see today may not be the rate you earn next month. Only fixed-rate products like CDs lock in a rate for a set period.

Should I move my money to a bank with a higher APY?

If the difference is more than 1% and you have a substantial balance, the extra earnings may justify the move. Moving $50,000 from a 0.5% account to a 4.5% account gains you roughly $200 per year. But consider whether the new bank is FDIC-insured and whether you'll actually use their other services before switching.