What a savings account earns depends on the interest rate the bank offers

A savings account makes money through interest — a small percentage the bank pays you for letting them hold your money. The amount you earn depends on three things: how much you have saved, what interest rate your bank offers, and how long the money sits there.

The interest rate varies widely. Some banks offer rates near zero percent. Others offer rates between 4 and 5 percent right now. The difference between these two is enormous — on $10,000, you might earn $0 to $500 in a year, depending on which bank you choose.

Interest rates change over time based on what the Federal Reserve does with its own rates. When the Fed raises rates, banks usually raise the rates they offer savers. When the Fed lowers rates, banks lower theirs. This means the rate you see today may not be the rate you earn six months from now.

Key Takeaways

  • Your earnings come from the interest rate your bank pays, multiplied by your balance — a $5,000 account at 4.5 percent earns roughly $225 per year, while the same amount at 0.5 percent earns roughly $25.
  • Online banks typically offer higher interest rates than brick-and-mortar banks because they have lower operating costs.
  • The interest rate you receive can change at any time, so a rate that looks good today may drop in three months.
  • Interest compounds, meaning you earn money on your interest — the longer money sits, the more this effect adds up, though the difference is small in savings accounts.

How to calculate what you will earn

The basic formula is straightforward: multiply your balance by the interest rate, then divide by 12 to get your monthly earnings.

If you have $10,000 in an account paying 4.5 percent per year, the math looks like this: $10,000 × 0.045 = $450 per year, or about $37.50 per month. If the same account paid 0.5 percent, you would earn $50 per year, or about $4 per month.

Most banks calculate and deposit interest monthly, though some do it daily or quarterly. The more often interest is calculated, the slightly more you earn, because you earn interest on your interest. This is called compounding. In a savings account, the difference is small — usually a few dollars per year — but it adds up over time.

Why interest rates differ between banks

Online banks almost always offer higher rates than banks with physical branches. An online bank has no building costs, no tellers, and no branch staff, so they can afford to pay you more of what they earn from lending your money out.

A traditional bank with branches in your town may offer 0.01 percent interest. An online bank might offer 4.5 percent for the exact same type of account. This is not because one bank is generous and one is not — it is because their business models are different.

Banks also compete for deposits. When many banks are competing for savings, rates go up. When few banks are competing, rates stay low. You will notice rates rise and fall over months and years as competition changes.

What happens to your interest rate over time

Your bank can change the interest rate it pays you at any time, with notice. Some banks notify you by email or mail. Others post the change on their website. You are not locked into a rate — if your bank lowers its rate and you do not like it, you can move your money to a different bank.

Interest rates tend to move together because they follow what the Federal Reserve does. When the Fed raises its benchmark rate, most banks raise their savings rates within weeks or months. When the Fed lowers its rate, banks lower theirs, often faster than they raised them.

This means if you opened a savings account at 4.5 percent and the Fed cuts rates, your rate might drop to 3.5 percent or lower. You do not earn the old rate forever — you earn whatever rate the bank is currently offering.

How to find banks offering the highest rates

The highest rates are almost always at online banks, not at banks with branches. You can compare rates by visiting bank websites directly or using rate-comparison sites that list current rates across multiple banks.

When you compare, look at the Annual Percentage Yield, or APY. This is the rate you will actually earn after compounding is factored in. It is always equal to or slightly higher than the base interest rate.

Also check whether the bank has any fees. Some banks charge a monthly maintenance fee, which reduces your earnings. Others charge a fee if your balance drops below a certain amount. A bank offering 4.5 percent with a $10 monthly fee is worse than a bank offering 4.0 percent with no fees.

The difference between savings accounts and other places to put money

A savings account is not the only place to earn interest. Money market accounts, certificates of deposit (CDs), and high-yield savings accounts all pay interest, often at different rates.

A certificate of deposit (CD) usually pays a higher rate than a savings account, but you agree to leave the money untouched for a set time — three months, one year, five years. If you withdraw early, you pay a penalty. A savings account lets you withdraw anytime with no penalty.

A money market account is a hybrid. It pays interest like a savings account but sometimes offers a higher rate. It may also let you write checks or use a debit card, though usually with limits on how many times per month you can withdraw.

For most people new to banking, a high-yield savings account at an online bank is the best choice — it pays good interest, has no fees, and lets you access your money whenever you need it.

Why the amount you earn might feel small

Even at a good interest rate, the money you earn from a savings account is modest. On $5,000 at 4.5 percent, you earn $225 per year. That is real money, but it is not a path to wealth.

A savings account is not meant to make you rich. It is meant to keep your money safe, let you access it when you need it, and pay you a small amount for doing so. If you are saving for an emergency fund or a goal a few years away, a savings account is the right tool. If you are trying to grow wealth over decades, you would eventually want to explore other options like retirement accounts or investments.

The important thing is that your money is earning something rather than sitting in a checking account earning nothing. Even $225 per year is $225 you did not have before.

Frequently Asked Questions

Do I have to pay taxes on the interest I earn?

Yes. Interest from a savings account is taxable income. If you earn $225 in interest during a year, you report that on your tax return. Your bank will send you a form called a 1099-INT if you earn $10 or more in interest during the year. The amount you owe in taxes depends on your overall income and tax bracket.

Can my interest rate go down while I have money in the account?

Yes. Your bank can lower the rate it pays at any time. You are not locked in. If your rate drops and you do not like it, you can move your money to a different bank that offers a better rate.

What is the difference between APR and APY?

APR is the annual percentage rate before compounding. APY is the annual percentage yield after compounding is included. For savings accounts, APY is always equal to or slightly higher than APR. When comparing accounts, use APY to see what you will actually earn.

Do I earn interest on money I just deposited?

Usually not on the day you deposit it. Most banks start calculating interest the next business day or the day after. Some banks calculate daily, so you earn interest on deposits quickly. Check with your bank about when interest starts accruing on new deposits.

Is my interest may provide?

No. Your bank can change the rate at any time. The rate you see when you open the account is not locked in forever. However, your deposits themselves are protected by federal insurance up to $250,000 per account, so you will not lose the money you put in.