The interest you earn depends on the bank's rate and how much money you keep in the account
The amount of interest you earn on a savings account is determined by two things: the annual percentage yield (APY) the bank offers, and the balance you maintain. A bank might offer 4.50% APY, for example, which means if you keep $1,000 in the account for a full year without adding or withdrawing, you would earn $45 in interest. If you keep $10,000, you would earn $450.
The catch is that most banks don't pay interest once a year—they calculate and deposit it monthly or daily. This means your interest starts earning interest too, which is called compounding. A bank that compounds daily will pay you slightly more than one that compounds monthly, even at the same APY rate, because your growing balance earns interest more frequently.
Interest rates change constantly. The rate a bank offers today may be different next month. When you open an account, the bank will tell you the current APY, but that rate is not locked in for the life of the account—the bank can lower it whenever it chooses. Some banks raise rates to attract new customers, then lower them after a few months.
Key Takeaways
- Your interest earnings equal the APY rate multiplied by your account balance, divided by 12 if you want a monthly estimate.
- Banks compound interest daily, weekly, or monthly, meaning your interest earns interest, so the actual amount you receive is slightly higher than a simple calculation.
- The APY rate you see when you open an account can change at any time, and most banks lower rates after a promotional period ends.
- Online banks typically offer higher APY rates than brick-and-mortar banks because they have lower operating costs.
How to calculate what you'll earn
The simplest way to estimate your earnings is to multiply your balance by the APY and divide by 12. If you have $5,000 and the APY is 4.50%, you would earn roughly $18.75 per month ($5,000 × 0.045 ÷ 12). Over a year, that's about $225.
This is an estimate because it assumes your balance stays the same all year and ignores compounding. In reality, if you add money to the account, you'll earn interest on those additions too. If you withdraw money, you'll earn less. The bank's system tracks this daily and compounds the interest automatically, so you don't have to calculate anything yourself—the bank does it and deposits the interest into your account.
Most banks show you the projected interest earnings when you're comparing accounts online. You enter your expected balance, and the calculator shows you what you'd earn in a year at that bank's current rate. These calculators are useful for comparing banks, but remember that the rate itself may change.
Why rates vary so much between banks
Online banks almost always offer higher APY rates than traditional banks with physical branches. A brick-and-mortar bank might offer 0.01% APY while an online bank offers 4.50% APY on the same type of account. The difference is cost: online banks don't pay for buildings, tellers, or branch staff, so they can pass those savings to customers in the form of higher interest rates.
Credit unions sometimes offer competitive rates too, though not always higher than online banks. The rate depends on the individual credit union's business model and how much they're trying to attract deposits at that moment.
Banks also offer different rates for different account types. A money market account might pay more than a basic savings account. A certificate of deposit (CD) typically pays more than either, because you agree to lock your money away for a set period—three months, one year, five years, or longer. The longer you lock it away, the higher the rate usually is.
What happens when rates drop
If you open a savings account at 4.50% APY and the bank later drops the rate to 3.00%, your money doesn't automatically move to a different account. You keep earning 3.00% on whatever balance you have. You won't see a notice or a warning—the rate just changes, and your next interest deposit will be smaller.
This is why some people move their money to a different bank when rates drop. If you find a bank offering 4.50% and your current bank has dropped to 3.00%, moving your balance to the new bank means you'll earn more interest going forward. The process is usually simple: open the new account, transfer your money, and close the old one.
CDs work differently. When you open a CD, the rate is locked in for the entire term. If you open a one-year CD at 4.50%, you'll earn 4.50% for the full year, even if the bank's rate drops to 2.00% after three months. This is the trade-off for locking your money away—you get a may provide rate.
How interest compounds and why it matters
Compounding means interest earns interest. If your bank compounds daily, it calculates how much interest you've earned that day, adds it to your balance, and then uses that new balance to calculate the next day's interest. Over time, this creates a small but real difference in how much you earn.
The difference between daily and monthly compounding is usually small—a few dollars a year on a typical balance. But on larger balances or over many years, it adds up. A bank advertising "daily compounding" is usually offering a slightly better deal than one that compounds monthly, all else being equal.
You don't have to do anything to make compounding happen. The bank's system handles it automatically. You just watch your balance grow as interest deposits appear in your account.
Comparing rates across different banks
The best way to find the highest rate is to check comparison websites that list current APY rates from multiple banks. These sites update frequently and let you filter by account type—savings account, money market, CD, and so on. You can see which banks are offering the highest rates right now.
When you compare, look at the APY, not just the interest rate. APY includes the effect of compounding, so it's the true number that matters. Also check whether the rate is promotional—some banks offer a high rate for the first three months, then drop it. The fine print usually says how long the rate lasts.
Consider the bank's other features too. Some online banks charge fees for things like wire transfers or paper statements. Some require a minimum balance to earn the advertised rate. A slightly lower rate at a bank with no fees might be better than a slightly higher rate at a bank that charges.
What you need to know about FDIC protection
The interest you earn is separate from the protection the Federal Deposit Insurance Corporation (FDIC) provides. FDIC insurance protects your deposits up to $250,000 per account type at each bank. The interest you earn is added to your balance and is also protected up to that $250,000 limit.
This means if you have $200,000 in a savings account earning interest, both your original deposit and the interest you've earned are protected. If the bank fails, the FDIC will return your money plus all the interest you've earned up to the $250,000 limit.
Online banks are FDIC-insured just like traditional banks. The fact that a bank operates only online doesn't change its insurance status. You can check whether a specific bank is FDIC-insured by searching the FDIC's bank database on their website.
Frequently Asked Questions
Do I have to do anything to earn interest?
No. Once you open a savings account, the bank automatically calculates and deposits interest based on your balance. You don't need to take any action. The interest appears in your account on a schedule set by the bank—usually monthly.
Can a bank lower my interest rate without telling me?
Yes. Banks can change savings account rates whenever they want without notifying you in advance. You may receive notice after the change, but you won't get a warning beforehand. This is why it's worth checking your bank's current rates periodically and comparing them to other banks.
Is the APY rate may provide?
No, not for savings accounts. The APY can change at any time. CDs are different—when you open a CD, the rate is locked in for the entire term, whether the rate goes up or down during that period.
What's the difference between APY and APR?
APY (annual percentage yield) includes compounding and is what you'll actually earn on a savings account. APR (annual percentage rate) does not include compounding and is typically used for loans and credit cards. Always look for APY when comparing savings accounts.
If I withdraw money mid-month, do I lose all the interest?
No. Interest is calculated based on your daily balance. If you withdraw money on the 15th of the month, you'll earn interest on the full balance for the first 15 days, then a lower amount for the rest of the month. You don't forfeit interest you've already earned.