Savings Account Interest Rates: How Banks Calculate Your Earnings

How Savings Account Interest Works

Savings account interest is the payment your bank provides in exchange for the privilege of using your deposited money. When you place funds in a savings account, the bank doesn't simply store that cash in a vault with your name on it. Instead, it uses your deposits (along with those of millions of other customers) to fund loans, mortgages, credit cards, and other interest-generating activities. The interest you earn is your share of the profit the bank generates from lending your money.

The mechanics of interest calculation involve several components working together. First, there's the principal — your initial deposit and any subsequent additions. Second, there's the interest rate — the annual percentage the bank pays on your balance. Third, there's the compounding frequency — how often earned interest gets added to your principal to start earning interest itself. According to the Federal Reserve, banks are required to disclose these terms under Truth in Savings regulations.

The relationship between you and your bank is essentially a loan in reverse. When you take out a car loan, you pay interest to the bank for using their money. With a savings account, the bank pays interest to you for using your money. This is why savings rates tend to move in the same direction as loan rates — when it becomes more expensive to borrow, banks can afford to pay more to depositors. For a deeper understanding of how this daily accrual process works, see our guide to daily compound interest.

The amount you earn depends on maintaining a balance over time. Interest calculations typically use your average daily balance or daily balance method, meaning deposits made mid-month start earning immediately, and withdrawals reduce your earning balance from the day they're processed. This is why consistent saving — even in small amounts — can meaningfully increase your interest earnings over time.

How Banks Calculate Savings Interest

Understanding the mechanics of savings interest starts with three concepts: the nominal rate, the accrual method, and the crediting frequency.

Daily accrual is the standard at most banks. Each day, the bank takes your account balance, divides the annual interest rate by 365 (or 366 in a leap year), and multiplies by your balance. This daily interest amount is added to an internal accrual ledger but is not yet deposited into your account.

For example, if you have $10,000 in an account earning 5.00% APY, the daily interest calculation looks like this: $10,000 × 0.05 ÷ 365 = $1.37 per day. Over a 30-day month, that accrues to about $41.10. When the bank credits this interest to your account (typically on the last day of the month), that $41.10 becomes part of your balance and begins earning interest itself the very next day. This is the compounding mechanism in action.

As the Consumer Financial Protection Bureau explains, banks are required to disclose both the interest rate and the APY on savings accounts, allowing consumers to make apples-to-apples comparisons. Our daily compound interest guide provides additional detail on how daily accrual accelerates growth compared to less frequent compounding methods.

High-Yield Savings vs. Traditional Bank Rates

The difference between high-yield savings accounts (HYSAs) and traditional bank savings accounts represents one of the most significant gaps in consumer finance. While both account types function identically from a user perspective — deposit money, earn interest, withdraw when needed — the returns differ by a factor of 50 to 500 times.

Traditional banks like Chase, Bank of America, Wells Fargo, and Citibank typically offer savings rates between 0.01% and 0.10% APY. These rates have remained stubbornly low even as the Federal Reserve has raised benchmark interest rates dramatically. The reason is primarily about incentives: these banks have captive customer bases with existing checking accounts, mortgages, and credit cards, so they don't need to compete aggressively on savings rates to attract deposits.

High-yield savings accounts, offered primarily by online banks like Marcus, Ally, American Express, and Discover, compete fiercely for deposits because they lack branch networks and relationship-based customer acquisition. Their business model relies on attracting deposits through superior rates. As a result, HYSAs consistently offer rates 50-100 times higher than traditional banks.

The practical impact is enormous. On a $25,000 emergency fund, the difference between 0.01% APY and 5.00% APY amounts to $1,250 per year in interest — money you're effectively leaving on the table by keeping funds in a traditional savings account. Over a decade, that's $12,500+ in lost earnings (more with compounding). This is why financial advisors universally recommend moving idle cash to a high-yield account. Use our savings account calculator to see the exact difference for your balance.

Daily Compounding in Savings Accounts

Daily compounding is the engine that powers savings account growth beyond simple interest. While the concept might seem like a minor technical detail, understanding how it works reveals why leaving money untouched in a savings account generates accelerating returns over time.

With daily compounding, your bank calculates interest on your balance every single day. The formula used is straightforward: Daily Interest = Balance × (Annual Rate / 365). However, here's where the magic happens: when that interest is credited to your account (typically monthly), it becomes part of your principal and starts earning interest itself. This means tomorrow's interest calculation includes yesterday's interest — interest earning interest.

To illustrate the power of daily compounding, consider a $10,000 deposit at 5.00% APY held for five years with no additional deposits or withdrawals:

Notice how the interest earned increases each year even though the APY remains constant at 5.00%. In Year 1, you earn $512.67. By Year 5, you're earning $626.64 — a 22% increase in annual interest with no additional effort on your part. This is compound interest at work, and it's why Albert Einstein allegedly called it the eighth wonder of the world.

The difference between daily and monthly compounding is small but measurable. At 5.00% APY with daily compounding, $10,000 grows to $12,841.69 in five years. With monthly compounding at the same rate, it would grow to $12,833.59 — a difference of about $8. While this seems trivial, on larger balances and longer time horizons, daily compounding adds up. Learn more in our comprehensive daily compound interest guide.

Current Savings Account Rate Landscape

The disparity between savings account rates across different institutions is enormous. Below is a snapshot of the rate landscape as of early 2026, based on data from the FDIC’s national rate survey:

The difference is staggering. On a $50,000 balance, a high-yield savings account earning 5.00% APY generates $2,500 per year, while a traditional big bank account at 0.01% earns just $5 — literally 500 times less. This is why switching to a high-rate account is one of the simplest and most impactful financial moves you can make.

High-Yield Savings vs. Traditional Savings

High-yield savings accounts (HYSAs) are offered primarily by online banks and fintech companies. Because these institutions have no physical branch networks to maintain, their operating costs are drastically lower, which allows them to pass the savings on to depositors in the form of higher interest rates.

The primary trade-off is convenience. Traditional savings accounts at brick-and-mortar banks offer same-day branch access and instant transfers to linked checking accounts. HYSAs typically require 1–2 business days for external transfers. For an emergency fund, many people maintain a small buffer in a traditional account for immediate access while keeping the bulk of their savings in a HYSA earning 50–500 times more interest. As Investopedia’s HYSA comparison notes, the best accounts combine high rates with no fees and no minimum balance requirements.

FDIC Insurance and Safety of Your Savings

One of the most important features of savings accounts is the protection provided by the Federal Deposit Insurance Corporation (FDIC). This government agency, created in 1933 during the Great Depression, guarantees that your deposits are protected up to $250,000 per depositor, per insured bank, per ownership category. Since its inception, no depositor has ever lost a penny of FDIC-insured funds.

Understanding FDIC coverage limits is crucial for anyone with significant savings. The $250,000 limit applies to the total of all your deposits at a single institution across all covered account types — savings, checking, CDs, and money market accounts. However, different ownership categories are insured separately. This means a single person could have $250,000 coverage as an individual, another $250,000 in a joint account, and yet another $250,000 in an IRA at the same bank — for a total of $750,000 in coverage.

For those with deposits exceeding FDIC limits, several strategies exist to maximize protection. You can spread deposits across multiple FDIC-insured banks, use different ownership categories at the same bank, or utilize deposit networks that automatically spread your money across multiple institutions. Some high-yield savings accounts partner with networks of banks to provide coverage well beyond $250,000 through a single account interface.

The safety of online banks is identical to traditional banks as long as they're FDIC-insured. You can verify any bank's insurance status using the FDIC's BankFind tool. Whether you're banking with a century-old institution or a startup fintech, the same federal guarantee protects your deposits. This makes high-yield savings accounts an extremely safe choice for emergency funds and short-term savings goals. Compare your options with our CD calculator if you're considering locking in rates for longer terms.

Maximizing Your Savings Account Returns

Getting the most from your savings requires more than just opening a high-yield account. Strategic decisions about where, when, and how you save can significantly boost your returns over time. Here are proven strategies for maximizing your savings account interest.

1. Regularly compare rates and switch when necessary. The high-yield savings market is highly competitive, and rates change frequently. The bank offering the best rate today might not be the leader six months from now. Review your options quarterly using resources like our best compound interest rates guide, and don't hesitate to move your money to capture higher yields. Most transfers between banks are free and complete within 2-3 business days.

2. Automate your savings. Set up automatic transfers from your checking account to your savings account on each payday. Automating removes the temptation to spend money before saving it and ensures consistent balance growth. Even small automatic deposits of $50-100 per paycheck compound significantly over years.

3. Keep your money working, not sitting. Many people inadvertently leave money idle in low-yield checking accounts. Aim to keep only 1-2 months of expenses in checking, moving the rest to your high-yield savings. Every dollar sitting in a 0.01% checking account could be earning 5.00% instead.

4. Consider CD laddering for rate optimization. If you have savings you won't need for 6-12+ months, certificates of deposit sometimes offer higher rates than savings accounts with the tradeoff of locked-in terms. A CD ladder spreads your money across multiple maturity dates, combining higher yields with regular access to portions of your funds.

5. Understand promotional rates. Some banks offer promotional APYs for new customers or limited-time rate boosts. These can be valuable, but read the fine print: promotional rates often expire after 3-6 months, dropping to a lower ongoing rate. Calculate whether the promotional period justifies the effort of opening a new account.

6. Watch for rate-tier thresholds. Some banks offer higher APYs on balances up to a certain amount (e.g., 5.00% on the first $10,000, then 4.00% on additional funds). If you have large savings, splitting between multiple banks might earn more than consolidating everything in one account.

Understanding APY on Savings Accounts

APY — Annual Percentage Yield — is the single most important number when comparing savings accounts. Unlike a simple interest rate, APY factors in how often interest compounds, giving you the true annual return on your deposit. Our APY vs. APR guide covers the distinction in full detail.

The formula for APY is: APY = (1 + r/n)ⁿ − 1, where r is the nominal annual rate and n is the number of compounding periods per year. For a savings account that compounds daily at a 5.00% nominal rate, the APY works out to: (1 + 0.05/365)³⁶⁵ − 1 = 5.127%. That extra 0.127% comes entirely from the compounding effect — interest earned on interest.

When banks advertise a “5.00% APY,” the compounding effect is already baked in. The underlying nominal rate is actually slightly lower (about 4.88% for daily compounding). What matters to you as a depositor is the APY, because that tells you exactly what percentage your balance will grow by in one year, assuming you make no deposits or withdrawals.

Be cautious of promotional or introductory APY rates. Some banks offer elevated rates for the first 3–6 months to attract new customers, then drop to a lower ongoing rate. Always check the non-promotional rate to understand your long-term earnings.

Savings Account Growth at Different APY Rates

Understanding how different APY rates affect your savings over time can help you appreciate the importance of seeking the best rates available. The table below illustrates how a $10,000 initial deposit grows over various time periods at different APY rates, assuming monthly compounding and no additional deposits:

The numbers are stark: at 0.01% APY (typical big bank rate), $10,000 earns just $10 over an entire decade. At 5.00% APY (achievable with today's high-yield accounts), that same deposit earns $6,470 — a 647x difference. For larger balances like $50,000 or $100,000, multiply these figures accordingly. Calculate your exact potential with our compound interest calculator.

Savings Interest vs. Inflation

Earning 5% APY on your savings may sound impressive, but the real question is: does it beat inflation? The real return on your savings is the nominal rate minus the inflation rate. If your savings account earns 5.00% and inflation is running at 3.00%, your real return is approximately 2.00% — meaning your purchasing power is growing, but only by 2% per year.

Historical context matters here. During the 2010–2021 era of near-zero interest rates, savings accounts often earned 0.01–0.10% while inflation averaged 1.5–2.0%, resulting in a negative real return. Savers were effectively losing purchasing power by keeping money in the bank. The current environment of 4–5% savings rates with 2.5–3.5% inflation is much healthier for savers, providing a modest but positive real return. The Federal Reserve’s CPI data on FRED provides the latest inflation figures.

For long-term wealth building, savings accounts should not be your primary growth vehicle — that role belongs to investments like stocks and bonds that historically outpace inflation by wider margins. Savings accounts are best used for emergency funds (3–6 months of expenses), short-term goals (1–3 years), and cash reserves. For longer time horizons, explore compounding in investment accounts using our compound interest calculator.

FDIC Insurance and Safety

One of the biggest advantages of savings accounts over other financial vehicles is FDIC (Federal Deposit Insurance Corporation) insurance. This government-backed protection guarantees your deposits up to $250,000 per depositor, per insured bank, per ownership category. If your bank fails, the FDIC reimburses you — typically within two business days.

For depositors with more than $250,000, you can extend coverage by using multiple banks, different ownership categories (individual, joint, trust, retirement), or certificates of deposit at separate institutions. Some fintech platforms also spread deposits across multiple partner banks, effectively providing coverage well beyond $250,000 through a single account interface.

This safety guarantee is why savings accounts are the foundation of any financial plan. Before investing in stocks, bonds, or real estate — all of which carry some risk of loss — building a fully funded emergency fund in an FDIC-insured savings account gives you a secure base from which to take calculated investment risks.

How the Fed Funds Rate Affects Savings Rates

The Federal Reserve’s federal funds rate is the primary driver of savings account yields. When the Fed raises rates (as it did aggressively in 2022–2023), banks earn more on their lending activities and can afford to pay depositors more. When the Fed cuts rates, savings yields drop in tandem — often within weeks.

The relationship is not perfectly direct, however. Big banks tend to be slow to raise deposit rates (and quick to cut them), while online banks and HYSAs more closely track Fed rate changes. This creates a persistent gap where online banks offer significantly more than traditional banks even in the same rate environment.

As of early 2026, the Fed funds rate sits in the 4.25–4.50% range, supporting the elevated savings yields we currently see. If the Fed begins cutting rates more aggressively, expect HYSA yields to decline over the following months. This is why locking in a competitive rate through a certificate of deposit can sometimes make sense when rate cuts are anticipated — a CD guarantees your rate for its full term regardless of what the Fed does next. You can track current Federal Reserve policy decisions on the Federal Reserve's website.