Your interest depends on the rate your bank offers, how much you deposit, and how long you leave the money there

The amount you earn is calculated by multiplying your balance by the annual percentage yield (APY) your bank advertises, then dividing by 12 for each month the money sits in the account. If you keep $10,000 in an account paying 4.5% APY for one year without adding or withdrawing, you earn roughly $450. If you keep it for six months, you earn roughly $225. The actual number depends on whether your bank compounds interest daily, weekly, or monthly — most online banks compound daily, which means you earn a tiny amount of interest on your interest.

The rate itself varies widely. As of late 2024, online savings accounts typically pay between 4% and 5.35% APY, while brick-and-mortar banks often pay 0.01% to 0.5%. The difference matters enormously: $10,000 earning 0.01% for a year yields $1, while the same amount at 4.5% yields $450. Your bank's rate can also change at any time — it is not locked in like a certificate of deposit (CD) rate is.

Key Takeaways

  • Your earnings equal your balance multiplied by the APY rate, divided by 12 for each month the money stays in the account.
  • Online banks typically offer rates between 4% and 5.35% APY, while traditional banks often pay less than 1%.
  • Interest compounds daily at most online banks, meaning you earn small amounts on your accumulated interest.
  • Your bank can lower its rate at any time, so the rate you see today may not be what you earn next month.
  • Moving money in or out of the account changes your balance and therefore changes how much interest you earn that month.

How banks calculate your monthly earnings

Banks use this formula: (Your Balance × APY) ÷ 365 × Number of Days in That Month. If you have $5,000 at 4.5% APY in January, you earn roughly ($5,000 × 0.045) ÷ 365 × 31 = $19.11. In February with the same balance, you earn roughly $17.26 because February has fewer days. Most banks apply this calculation every single day, which is why they call it "daily compounding" — your interest from January 1 gets added to your balance on January 2, so January 2's interest calculation includes that tiny amount.

If you add money mid-month, only the new total earns interest from that day forward. If you withdraw money, your balance drops and so does your interest that month. This is why the exact amount you earn is hard to predict unless your balance stays completely flat.

Why the same $10,000 earns different amounts at different banks

A $10,000 deposit earning 4.5% APY for one year yields approximately $450. The same $10,000 at 0.5% APY yields approximately $50. The same $10,000 at 0.01% yields approximately $1. The difference comes down to what each bank decides to pay. Online banks like Marcus, Ally, and American Express Personal Savings typically offer higher rates because they have lower overhead costs than physical branches. Traditional banks with many locations often pay lower rates because they spend more on staff and real estate.

Banks can also change their rates whenever they want. If your bank cuts its rate from 4.5% to 3.5%, your earnings drop by roughly $100 per year on that $10,000. You have no lock-in period with a regular savings account — the rate is not may provide. If you want a may provide rate, you would need a CD instead.

How long you keep the money affects total earnings

Interest accrues every day, so the longer your money sits untouched, the more you earn. Six months at 4.5% APY on $10,000 yields roughly $225. One year yields roughly $450. Two years yields roughly $900. The math is straightforward, but the catch is that you can withdraw the money anytime without penalty in a savings account — unlike a CD, where early withdrawal costs you interest.

This flexibility is why savings accounts pay less than CDs. You are trading a lower rate for the ability to access your money whenever you need it. If you know you will not touch the money for two years, a two-year CD might pay 4.8% or higher, beating the 4.5% you might get in a savings account.

What happens when your bank changes its rate

Banks lower rates when the Federal Reserve cuts its benchmark rate, and they raise rates when the Fed raises its benchmark. Your bank is not required to tell you before it changes your rate — you might only notice when you check your account or read an email. Some banks lower rates gradually over weeks; others do it overnight.

If your bank cuts its rate and you want to keep earning more, you can move your money to a different bank. There is no penalty for closing a savings account and transferring your balance elsewhere. Many people move their money every few months to chase the highest available rate, though this requires checking rates regularly and doing the paperwork each time.

Comparing savings accounts to other places to keep money

A regular savings account at an online bank currently pays roughly 4% to 5.35% APY with no lock-in period. A one-year CD pays roughly 4.5% to 5.4% APY but locks your money away — you cannot withdraw without losing interest. A money market account works like a savings account but sometimes pays slightly higher rates in exchange for higher minimum balances. A regular checking account typically pays 0% to 0.1% APY.

If you need the money within a year, a savings account makes sense because you can access it anytime. If you know you will not touch the money for one to five years, a CD ladder — splitting your money across multiple CDs with different maturity dates — can lock in higher rates while giving you access to portions of your money at regular intervals.

How to estimate your earnings before you open an account

Use this simple calculation: (Your Balance × APY) ÷ 12 = Monthly Earnings. If you plan to deposit $25,000 at an account paying 4.8% APY, your monthly earnings would be roughly ($25,000 × 0.048) ÷ 12 = $100 per month, or $1,200 per year. This assumes your balance stays flat and the rate does not change.

In reality, your earnings will be slightly higher because of daily compounding, and slightly lower if your bank cuts its rate during the year. But this formula gives you a ballpark number to compare accounts. If one bank pays 4.5% and another pays 5.0%, the difference on $25,000 is roughly $125 per year — small enough that convenience or customer service might matter more, but large enough to notice if you are moving $100,000.

Frequently Asked Questions

Do I have to pay taxes on savings account interest?

Yes. Interest earned in a savings account counts as taxable income. Your bank will send you a 1099-INT form at the end of the year if you earned $10 or more in interest. You report this on your tax return. The amount you owe in taxes depends on your tax bracket — if you are in the 24% bracket and earn $450 in interest, you owe roughly $108 in federal taxes on that interest.

Can I earn more interest by opening multiple savings accounts?

Opening more accounts does not change the rate you earn — each account at the same bank earns the same APY. However, you can open accounts at different banks to spread your money across higher-paying options. Keep in mind that the Federal Deposit Insurance Corporation (FDIC) insures up to $250,000 per depositor per bank, so if you have more than $250,000, splitting it across multiple banks protects all of it.

What if I add money to my savings account every month?

Your monthly interest grows as your balance grows. If you start with $10,000 and add $500 every month at 4.5% APY, your first month earns roughly $37.50, your second month earns roughly $39.38 (because your balance is now $10,500), and so on. By the end of a year, you will have earned more total interest than if you had left the original $10,000 untouched, but calculating the exact amount requires tracking each month's balance separately.

Is there a minimum balance to earn interest?

Most online banks have no minimum balance requirement to earn the advertised APY. Some traditional banks require $500, $1,000, or more to earn their stated rate — if your balance falls below the minimum, you earn a much lower rate or no interest at all. Always check the account terms before opening to see whether a minimum applies.

What happens to my interest if I withdraw money before the end of the year?

You keep all the interest you have already earned. If you withdraw $5,000 from your account in June after earning $112 in interest, you receive $5,112 — the $5,000 plus the interest accrued to that point. You simply stop earning interest on the $5,000 once it is withdrawn. There is no penalty for early withdrawal from a savings account.