What you earn depends on the interest rate and how much you have saved

A savings account earns money through interest—a percentage of your balance that the bank pays you each year. How much you actually earn depends on two things: the interest rate the bank offers and the amount of money sitting in your account. A $10,000 balance at 4.5% annual interest earns $450 per year. The same $10,000 at 0.01% earns $1 per year. The difference between these two rates is real and happens right now, not in some theoretical future.

Interest rates change constantly. Banks raise and lower their rates based on what the Federal Reserve does with its benchmark rate, what other banks are offering, and how much they need deposits at any given moment. A rate that was competitive last month may be below average this month. This means the earnings you see today might not be what you earn next quarter.

Most savings accounts use annual percentage yield (APY) to show what you'll earn. APY accounts for compounding—the way interest earned gets added to your balance and then earns interest itself. A bank might advertise 4.5% APY, which means if you leave $10,000 untouched for a year, you'll have $10,450 at the end (assuming the rate doesn't change).

Key Takeaways

  • Your annual earnings equal your account balance multiplied by the APY rate—a $5,000 balance at 4.5% APY earns $225 per year.
  • Interest rates vary widely between banks, from under 0.01% at some large national banks to over 5% at online banks and credit unions.
  • APY includes the effect of compounding, so the stated rate is what you actually earn if you don't withdraw money during the year.
  • Banks can change their rates at any time, so earnings you calculate today may be different three months from now.
  • Deposits and withdrawals during the year change your average balance, which changes how much interest you earn overall.

How to calculate what you'll earn in a year

The basic formula is straightforward: multiply your balance by the APY rate. If you have $25,000 in an account paying 4.75% APY, you earn $1,187.50 per year (assuming the rate stays the same and you don't add or withdraw money). If the rate drops to 4.0%, that same $25,000 earns $1,000 per year instead.

The math gets more complicated if you add money throughout the year or if the bank changes the rate. Most banks calculate interest daily but pay it monthly or quarterly. This means each deposit you make starts earning interest when ready, but you won't see the money in your account until the next interest payment date. A $5,000 deposit made on the first of the month might earn a few dollars by the end of that month, depending on the rate and how many days are left.

If you want to know what you'll actually earn with deposits and withdrawals mixed in, ask the bank directly or use their online calculator. Most banks have tools on their websites that let you enter your starting balance, monthly deposits, and the current rate to see a projection. These projections assume the rate doesn't change, which is a big assumption.

Why rates vary so much between banks

Online banks typically offer higher rates than brick-and-mortar banks because they have lower overhead costs. They don't maintain physical branches, so they can pass savings along to customers in the form of better interest rates. A large national bank might offer 0.01% APY on a basic savings account, while an online bank offers 4.5% or higher on the same type of account.

Credit unions often offer competitive rates too, sometimes matching or beating online banks. Credit unions are member-owned, so they're not trying to maximize profits for shareholders the way banks are. Some credit unions offer 5% or higher on savings accounts, though usually with limits—you might earn that rate only on the first $500 or $1,000 of your balance.

Money market accounts and certificates of deposit (CDs) often pay more than regular savings accounts. A money market account might pay 4.75% while a regular savings account at the same bank pays 4.25%. A CD with a one-year term might pay 5.0% or higher. The tradeoff is that CDs lock your money away for a set period, and money market accounts sometimes have higher minimum balances or limit how many withdrawals you can make.

What happens to your earnings over time

If you leave money in a savings account and never touch it, compounding means your balance grows faster as time goes on. In year one, a $10,000 balance at 4.5% APY earns $450. In year two, you're earning interest on $10,450, which earns $470. By year five, the annual interest is over $500 even though the rate hasn't changed. This is compounding at work.

The longer your money sits, the more noticeable compounding becomes. Over ten years, that same $10,000 at 4.5% APY grows to about $15,530, with compounding accounting for roughly $530 of that growth. Over twenty years, it grows to about $24,117, with compounding adding over $4,000 to what straightforward interest alone would have earned.

But this only works if the rate stays the same and you don't withdraw money. In reality, rates change frequently. If your bank drops the rate from 4.5% to 3.5%, your annual earnings drop when ready. If you withdraw $5,000 to pay for something, your balance shrinks and so does the interest you earn going forward.

How to find the best rate for your situation

Check what your current bank is paying first. Log into your account online or call and ask what APY you're earning. Many people discover they're earning 0.01% or less because they've never looked. If that number seems low, it probably is.

Then compare rates at online banks, credit unions, and other banks in your area. Websites like Bankrate, DepositAccounts, and the Federal Deposit Insurance Corporation (FDIC) website let you search by account type and see what different institutions are offering. Rates change daily, so these sites update frequently.

Consider whether you need straightforward access to your money. A regular savings account lets you withdraw anytime without penalty. A CD pays more but locks your money away for a set period—if you withdraw early, you pay a penalty that can wipe out months of interest. A money market account is somewhere in between: it usually pays more than a savings account but less than a CD, and it lets you make a limited number of withdrawals per month.

Don't chase the absolute highest rate if it comes with strings attached. Some banks offer promotional rates that drop after a few months. Others require a large minimum balance or charge monthly fees that eat into your earnings. A 5.0% rate on an account with a $25,000 minimum and a $10 monthly fee might earn you less than a 4.5% rate with no minimum and no fees.

What to watch out for

Banks can lower rates without warning. They're not required to give you advance notice, though many do. If your bank drops the rate, you can move your money to another bank—there's no penalty for switching savings accounts. The FDIC insures deposits up to $250,000 per account type per bank, so your money is safe during the transfer.

Some accounts have monthly fees that reduce your earnings. A $5 monthly fee on an account earning $10 per month in interest means you're actually losing money. Read the account terms carefully and ask about fees before you open an account.

Promotional rates are real money, but they're temporary. A bank might offer 5.0% APY for the first three months, then drop it to 0.5%. If you're counting on that 5.0% rate to continue, you'll be disappointed. Look at what the bank's regular rate is after the promotion ends, not just the headline number.

Frequently Asked Questions

How often does the bank pay interest into my account?

Most banks pay interest monthly or quarterly, though some pay daily or annually. The frequency doesn't change how much you earn in a year—4.5% APY is 4.5% whether it's paid monthly or quarterly. Check your account statement or the bank's website to see when your interest posts.

If I withdraw money mid-month, do I lose all the interest I earned that month?

No. Banks calculate interest daily, so you earn interest on your balance for each day the money sits in the account. If you have $10,000 for 20 days of a month and $5,000 for 10 days, you earn interest on both amounts for the time they were there. The exact calculation depends on the bank's method, but you don't lose everything.

Is the interest I earn taxable?

Yes. Interest earned in a savings account is taxable income. If you earn $500 in interest during a year, you report that on your tax return. The bank will send you a 1099-INT form if you earn $10 or more in interest. This is separate from income tax withholding—the bank doesn't automatically take taxes out of your interest.

Why do some banks offer such low rates?

Large national banks often offer low rates because they have many customers and don't need to compete aggressively for deposits. They make money from loans and other services, not just from paying low interest on savings. Online banks and credit unions compete on rate because deposits are their main source of funding.

Can I earn more by moving my money to a different account type?

Possibly. Money market accounts and CDs often pay more than regular savings accounts. A CD might pay 5.0% while a savings account pays 4.5%, but your money is locked away for the CD's term. A money market account might pay 4.75% with limited withdrawals. The best choice depends on when you need access to the money.