The amount you earn depends on your bank's rate and how much money you keep in the account

The interest you earn on a savings account comes from your bank paying you a percentage of your balance each month. That percentage is called the Annual Percentage Yield, or APY. A bank with a 4.50% APY will pay you more than a bank with a 0.01% APY — the difference between earning real money and earning almost nothing on the same $5,000.

The actual dollar amount you receive depends on three things: the APY the bank offers, how much money sits in your account, and how long it stays there. A $10,000 balance at 4.50% APY earns roughly $450 per year. The same $10,000 at 0.01% APY earns about $1 per year. Banks set their own rates, so the bank you use matters more than the account type.

Interest compounds, meaning you earn interest on your interest. If you leave your earnings in the account, next month's interest is calculated on a slightly larger balance. Most savings accounts compound daily or monthly, so the effect builds over time — though it takes years to notice on smaller balances.

Key Takeaways

  • Your earnings equal your account balance multiplied by the APY, divided by 12 for a monthly estimate, though the exact amount depends on how your bank compounds interest.
  • Banks set their own rates, so a savings account at one bank may earn 4.50% APY while another offers 0.01% APY on the same balance.
  • Online banks typically offer higher rates than brick-and-mortar banks because they have lower operating costs.
  • Your rate is fixed only until the bank changes it — most banks can lower rates without notice, though some may provide a rate for a set period.
  • Interest is taxable income, so you will receive a 1099-INT form at tax time if you earn $10 or more in a year.

How to calculate what you will earn

The basic formula is: Balance × APY ÷ 12 = approximate monthly interest. If you have $5,000 in an account earning 4.50% APY, that is $5,000 × 0.045 ÷ 12 = roughly $18.75 per month, or $225 per year.

This is an approximation because banks compound interest on different schedules. Some compound daily (365 times per year), others monthly (12 times per year). Daily compounding earns slightly more because interest gets added to your balance more often. The difference is small on modest balances but grows with larger amounts and higher rates.

Your bank's website or account statement shows your current APY and often includes a calculator. You can also ask a banker directly — they can tell you exactly what $5,000 or $10,000 would earn over a year at the current rate.

Why rates vary so much between banks

Online banks offer higher rates than traditional banks because they do not maintain physical branches. A brick-and-mortar bank pays for buildings, tellers, and local staff. An online bank operates from a few data centers and customer service centers, so it can afford to pay depositors more of the interest it earns.

Large national banks often offer the lowest rates because they rely on brand recognition and convenience rather than competing on interest. A small regional bank or credit union may offer a middle rate. Online banks typically offer the highest rates because they have the lowest costs.

Rates also change based on what the Federal Reserve does. When the Fed raises its benchmark rate, banks usually raise savings rates within weeks. When the Fed cuts rates, banks lower savings rates — sometimes when ready, sometimes after a delay. This is why the same account might earn 4.50% one month and 4.25% the next.

What happens to your rate over time

Most savings accounts have a variable rate, meaning the bank can change it whenever it wants. You will not lose money if the rate drops — your balance stays the same — but your monthly earnings will shrink. Some banks lower rates without notice, while others send an email or letter first.

A few banks offer a promotional rate that is may provide for a specific time, usually three to twelve months. After that period ends, the rate drops to the bank's standard rate, which is usually much lower. Read the fine print to see when a promotional rate expires.

If your rate drops and you want to earn more, you can move your money to a different bank. There is no penalty for closing a savings account and transferring your balance elsewhere. Some people move their money every few months to chase the highest available rate, though this only makes sense if you have a large balance where the difference adds up to real money.

How interest gets taxed

Interest you earn on a savings account is taxable income. If you earn $10 or more in a calendar year, your bank will send you a Form 1099-INT by January 31 of the following year. You report this amount on your tax return, and you owe income tax on it at your regular tax rate.

This means a $5,000 balance earning 4.50% APY generates $225 in taxable income. If you are in the 22% tax bracket, you owe roughly $50 in federal income tax on that interest. State income tax may explore too, depending on where you live.

Some people keep savings in a regular savings account and investment accounts (like a Roth IRA) in separate places specifically to manage the tax impact. A financial advisor or tax professional can explain whether that strategy makes sense for your situation.

Comparing rates across different account types

A traditional savings account, a money market account, and a certificate of deposit (CD) all earn interest, but at different rates. Money market accounts often pay slightly more than savings accounts because they require a higher minimum balance. CDs usually pay the most because you agree to leave your money untouched for a set period — three months, one year, five years, or longer.

The tradeoff is access. You can withdraw from a savings account anytime without penalty. A money market account may limit how many withdrawals you can make per month. A CD charges a penalty if you withdraw before the term ends — sometimes a few months of interest, sometimes more.

If you need the money within a year, a high-yield savings account usually makes more sense than a CD. If you know you will not touch the money for two years, a two-year CD might pay 0.50% to 1.00% more than a savings account, which adds up on a large balance.

Where to find the highest current rates

Rate comparison websites like Bankrate, DepositAccounts, and NerdWallet update daily and let you filter by account type, minimum balance, and whether you want FDIC insurance. These sites do not sell anything — they show you what banks are currently offering.

Online banks change their rates frequently, so a rate that is highest today may not be highest next month. Check the rate again before you move your money, and read the terms to see if there are any restrictions (like a minimum balance or a limit on how many deposits you can make).

Your current bank may also raise its rate if you ask. Some banks offer better rates to existing customers who call and request a review, especially if you have been with them for years. It never hurts to ask, though you should compare their offer to what other banks are paying first.

Frequently Asked Questions

If I move my money to a different bank, do I lose the interest I already earned?

No. Interest you have already earned stays in your account and transfers with your balance. You only stop earning the old rate once the money leaves the old bank. The new bank begins paying its rate on the full balance you deposit.

Can a bank take away my interest or lower my rate without warning?

A bank can lower your rate anytime on a variable-rate account, though many send notice first. They cannot take away interest you have already earned. If a promotional rate expires, it drops to the standard rate automatically — check your account terms to see when that happens.

What if I have less than $1,000 — will I still earn interest?

Yes, most banks pay interest on any balance, even $100. The amount will be small — $100 at 4.50% APY earns about $4.50 per year — but you still earn something. Some banks have minimum balance requirements to open an account, but once it is open, you earn interest on whatever you keep there.

Does keeping money in a savings account instead of a checking account earn me more interest?

Usually yes. Most checking accounts earn little to no interest, while savings accounts earn the rate the bank advertises. Some banks offer high-yield checking accounts that pay competitive rates, but these are less common. Check your bank's website to see what each account type currently pays.

If interest rates go down, should I move my money to a CD to lock in the current rate?

That depends on how long you can leave the money untouched and what the CD rate is compared to savings account rates. If a one-year CD pays 4.50% and you think savings rates will drop to 3.50%, locking in the CD rate makes sense. If you might need the money within a year, the early withdrawal penalty could erase your gains.