The formula is straightforward: multiply your balance by the annual rate, then adjust for how often interest compounds

Interest earned on a savings account depends on three things: how much money sits in the account, what annual percentage yield (APY) the bank pays, and how often that interest compounds—meaning how often the bank adds earned interest back into your balance so you earn interest on the interest.

The basic calculation is: Balance × APY ÷ 365 × number of days. If you have $10,000 in an account earning 4.5% APY and leave it untouched for one year, you earn $450. But most banks compound daily or monthly, which means the actual amount is slightly higher because interest gets added to your balance partway through the year, and then you earn interest on that new total.

The difference between straightforward interest and compound interest grows larger the longer money sits in the account and the higher the APY. Over one year the difference is small. Over five years at a high APY, it becomes meaningful enough to notice.

Key Takeaways

  • Interest earned equals your balance multiplied by the APY, divided by 365, then multiplied by the number of days the money was in the account.
  • Daily compounding means the bank adds interest to your balance every day, so you earn interest on yesterday's interest starting tomorrow.
  • Monthly compounding adds interest once per month, so you earn slightly less than with daily compounding over the same period.
  • Your bank statement shows interest earned in the "Interest Paid" or "Interest Credited" line, so you can verify the calculation yourself.

How daily compounding changes the math

When a bank compounds interest daily, it divides the annual rate by 365, calculates one day's interest on your current balance, and adds that amount back to your account. The next day, it calculates interest on the new, slightly larger balance. This repeats every day of the year.

For example: $10,000 at 4.5% APY compounded daily. Day one, you earn $10,000 × 0.045 ÷ 365 = $1.23. Your balance becomes $10,001.23. Day two, you earn $10,001.23 × 0.045 ÷ 365 = $1.23 (rounded). By the end of the year, you have earned $460.41 instead of exactly $450, because you earned interest on the compounded interest.

Most high-yield savings accounts compound daily. Some money market accounts compound monthly. The difference between the two compounds over time, but in the first year on a typical balance, it amounts to a few dollars.

What happens when you deposit or withdraw mid-year

Banks calculate interest based on the balance on each day of the month or quarter, depending on their method. If you deposit $5,000 on June 15, the bank counts that $5,000 toward interest starting June 15, not from January 1. If you withdraw $3,000 on September 10, that $3,000 stops earning interest on September 10.

This is why the interest you see on your statement may not match a straightforward calculation from your opening balance. The bank is tracking your balance on each day and compounding based on the actual money present each day.

Some banks use the "average daily balance" method instead: they add up your balance for each day of the month, divide by the number of days, and calculate interest on that average. This produces a slightly different result than daily compounding but is easier to calculate by hand.

Reading your bank statement to verify interest earned

Your monthly or quarterly bank statement lists interest paid in a line item labeled "Interest Paid," "Interest Credited," or "Interest Earned." This is the actual amount the bank added to your account during that period. Add up all the interest line items for the year to see your total annual interest.

To check whether the number is reasonable, take your average balance for the year, multiply by the APY, and divide by 12 (for a rough monthly average). The result should be close to what your statement shows, though not exact, because compounding adds a small amount each month.

If the interest earned is much lower than you expected, check whether your APY changed during the year. Banks can lower rates at any time, and the rate you opened the account with may not be the rate you earned for the full year. Your statement should show the APY that applied during each period.

Why APY matters more than interest rate

Banks sometimes advertise an "interest rate" separate from the APY. The interest rate is the base percentage; the APY is what you actually earn after compounding is factored in. APY is always equal to or higher than the interest rate, depending on how often compounding happens.

When comparing savings accounts, always use the APY, not the interest rate. A 4.45% interest rate compounded daily becomes 4.56% APY. A 4.50% interest rate compounded monthly becomes 4.60% APY. The APY is the true number that tells you how much money you will have at the end of the year.

Using a calculator for longer time periods

For balances held longer than one year, the compound interest formula is: Final Balance = Starting Balance × (1 + APY) ^ number of years. The caret symbol means "to the power of," so if you are calculating five years, you raise (1 + APY) to the fifth power.

Example: $10,000 at 4.5% APY for five years. Final balance = $10,000 × (1.045) ^ 5 = $10,000 × 1.2462 = $12,462. You earned $2,462 in interest over five years.

Most online savings calculators do this math for you. Enter your starting balance, the APY, and the number of years, and the calculator shows the final balance and total interest earned. This is faster and more accurate than doing it by hand, especially for periods longer than a few years.

Frequently Asked Questions

Does interest compound on the interest I already earned?

Yes, if your account compounds daily or monthly. The bank adds interest to your balance, and then calculates the next period's interest on that larger balance. This is why compound interest grows faster than straightforward interest over time.

What if my bank changes the APY mid-year?

The bank calculates interest at the old rate until the change takes effect, then switches to the new rate. Your statement will show two different APY figures for the year. You can calculate interest for each period separately and add them together to find your total.

Is the interest I earn on a savings account taxable?

Yes. Interest earned on a savings account is ordinary income and must be reported on your tax return. Banks send a 1099-INT form if you earned $10 or more in interest during the year, though you may owe tax on smaller amounts depending on your total income.

Can I earn interest on interest that was already paid out?

No. Once interest is credited to your account, it becomes part of your balance and earns interest going forward. But the interest itself does not earn a separate "interest on interest" payment—it just becomes part of the balance that earns the next period's interest.

Why do different banks show different interest earned on the same balance and APY?

The difference usually comes from when compounding happens (daily versus monthly) or how the bank counts days in a month. Some banks use 360 days; others use 365. Over one year the difference is small, but it explains why two accounts with the same APY and balance earn slightly different amounts.