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

A savings account earns interest by paying you a percentage of your balance each month or year. That percentage is called the APY (annual percentage yield). A bank offering 4.5% APY will pay you $4.50 per year on every $100 you keep in the account — but only if you leave it untouched for the full year.

The real number you earn depends on your specific situation. A $1,000 deposit at 4.5% APY earns roughly $45 per year. A $10,000 deposit at the same rate earns roughly $450. If the APY is 0.01% instead — which is what many traditional banks still offer — that same $10,000 earns about $1 per year. The difference between banks can be enormous.

Interest also compounds, which means you earn interest on your interest. If you leave your earnings in the account instead of withdrawing them, next month's interest is calculated on your original deposit plus the interest you already earned. This compounds monthly at most banks, sometimes daily. The longer your money sits, the more this compounding adds up — though the effect is small in the first few months.

Key Takeaways

  • Your earnings equal your balance multiplied by the APY, divided by 12 for monthly interest — so $5,000 at 4.5% APY earns about $18.75 per month.
  • Banks vary wildly in what they offer: online banks often pay 4% to 5% APY, while traditional brick-and-mortar banks may pay 0.01% or less on the same deposit.
  • Interest compounds monthly or daily depending on the bank, meaning you earn small amounts of interest on your previous interest if you don't withdraw it.
  • Withdrawing money before the end of the month may mean you lose that month's interest, depending on the bank's rules.

How to calculate what you'll earn in a specific timeframe

The simplest way is to use the bank's own calculator, which you'll find on their savings account page. You enter your deposit amount, the APY they're offering, and how many months or years you plan to keep the money there. The calculator shows you the total interest earned and your final balance.

If you want to do it yourself, the basic formula is: (Balance × APY ÷ 12) × Number of Months. So if you deposit $2,000 at 4.5% APY and leave it for one year, you earn roughly ($2,000 × 0.045 ÷ 12) × 12 = $90. For six months, it's ($2,000 × 0.045 ÷ 12) × 6 = $45.

This math assumes you don't add or withdraw money during the period. If you deposit $2,000 in month one and another $2,000 in month six, the second deposit only earns interest for six months, not twelve. Banks that compound daily will earn you slightly more than this formula shows, but the difference is usually a few cents.

Why APY varies so much between banks

Online banks typically offer much higher APY than traditional banks because they have lower costs. They don't maintain physical branches, don't employ as many staff, and don't spend money on building leases. They pass some of that savings to customers through higher interest rates. A bank offering 4.5% APY online might be the same company that offers 0.01% at a branch location.

Banks also change their APY based on what the Federal Reserve does. When the Fed raises its benchmark interest rate, banks usually raise what they pay on savings accounts within days or weeks. When the Fed cuts rates, banks cut their savings rates too — sometimes when ready, sometimes after a delay. This means the APY you see today may not be the APY you earn six months from now.

Some banks offer promotional rates for new customers: a higher APY for the first few months, then a drop to a lower rate. Read the fine print to see when the promotional period ends and what your rate will be after that.

The difference between monthly and daily compounding

Most online banks compound interest daily, while some traditional banks compound monthly. Daily compounding means the bank calculates and adds interest to your account every single day, so you earn interest on that interest when ready. Monthly compounding calculates interest once per month.

The difference is small for most balances. On $5,000 at 4.5% APY, daily compounding earns you roughly $2.30 more per year than monthly compounding. On $50,000, it's about $23 more per year. The benefit grows with larger balances and higher APY, but it's rarely the reason to choose one bank over another. A bank offering 4.5% APY with monthly compounding will almost always beat a bank offering 0.5% APY with daily compounding.

What happens to your interest if you withdraw money early

Most savings accounts have no penalty for withdrawals, but you may lose that month's interest if you withdraw before the end of the interest period. Some banks calculate interest daily and credit it daily, so withdrawing mid-month doesn't cost you anything. Others calculate monthly and only credit interest on the last day of the month, so withdrawing on the 15th means you lose the month's interest entirely.

Check your bank's specific rules before you open the account. The disclosure document — usually called the "Truth in Savings" form or "Account Disclosure" — will say exactly when interest is credited and what happens if you withdraw early. If you think you might need the money within a few months, ask the bank directly whether you'll lose interest by withdrawing.

How inflation affects what your interest earnings are actually worth

Interest earnings are real money, but inflation can reduce what that money can buy. If your savings account earns 4.5% APY but inflation is running at 3%, your money is only gaining 1.5% in real purchasing power. If inflation is 5% and your APY is 4.5%, you're actually losing 0.5% in purchasing power each year, even though the account balance is growing.

This doesn't mean you shouldn't save — having money in a savings account earning 4.5% is much better than keeping it under a mattress. But it's worth knowing that the interest you earn may not keep pace with rising prices. This is one reason some people keep emergency savings in a high-APY account (which at least beats inflation most of the time) and invest longer-term money in other ways.

Frequently Asked Questions

Do I have to pay taxes on savings account interest?

Yes. Interest earned in a savings account is taxable income. Banks send you a 1099-INT form at the end of the year if you earned $10 or more in interest. You report this on your tax return. The amount you owe depends on your tax bracket — someone in a higher bracket pays more tax on the same interest earnings than someone in a lower bracket.

What's the difference between APY and APR on a savings account?

APY (annual percentage yield) includes the effect of compounding and is what you actually earn. APR (annual percentage rate) does not include compounding. Banks are required to show you the APY, so that's the number to compare between banks. APR is used more often for loans than for savings accounts.

Can I lose money in a savings account?

No. A savings account cannot have a negative balance due to interest. The worst that happens is you earn very little interest if the APY is low. Your principal — the money you deposited — is protected by FDIC insurance up to $250,000 per account at banks, or NCUA insurance at credit unions.

Will my interest rate stay the same forever?

No. Banks change their APY regularly based on what the Federal Reserve does and what other banks are offering. Your rate could go up or down. Some banks notify you before a rate change; others don't. Check your account statements or log in to your bank's website to see your current APY.

Is it better to put money in a savings account or a money market account?

Money market accounts often pay slightly higher APY than savings accounts, but they usually require a larger minimum deposit and limit how many withdrawals you can make per month. For most people, a high-APY savings account is simpler and offers nearly the same earnings without the restrictions.