If you’re focused on saving this year, you probably want to know how much interest you can realistically earn. Below, we’ll explore how much $10,000 worth of savings can earn in a year and what factors affect your returns.
Before you can estimate how much interest your savings will earn, you need some key pieces of information:
APY: One of the biggest factors that determines how much interest you earn on your savings is the account’s interest rate, which represents how much you earn on your deposits, expressed as a percentage. But a more helpful measure of your earnings is APY (short for annual percentage yield). This represents the true earnings on your entire balance over one year, including principal deposits and compound interest.
Compounding frequency: This refers to the number of times per year interest is calculated and credited to your balance. Depending on the account, interest might compound annually, semiannually, quarterly, monthly, or daily. The more often your interest compounds, the faster your balance grows.
Timeline: How long does your savings have to grow? The longer your money sits in an interest-bearing account, the more time it has to accumulate interest.
Fixed vs. variable interest rate: Interest rates can be fixed or variable. A fixed interest rate stays the same for a set period, so your returns are predictable (this is common with certificates of deposit). A variable interest rate, on the other hand, can change at any time based on broader market conditions, such as changes to the federal funds rate. This means your earnings may increase when rates rise but can also decrease if rates fall, which is typical for high-yield savings accounts and money market accounts.
Say you have $10,000 to put into savings, and you’re wondering how much interest you can earn based on today’s interest rates. Here’s a look at how much interest you’d earn over one year, depending on the account type and typical APY. (Note: For simplicity, we use annual compounding and assume the APY does not change throughout the year).
ACCOUNT TYPE
EXAMPLE APY
INTEREST EARNED (1 YEAR)
ENDING BALANCE
Traditional savings account
0.05%
$5
$10,005
High-yield savings account
4%
$400
$10,400
Money market account
3%
$300
$10,300
1-year CD
3.5%
$350
$10,350
U.S. savings bond
2.5%
$250
$10,250
As you can see, interest earnings depend heavily on the type of account you choose and what rate it earns. So, if you’re deciding where to put your money, here’s a closer look at some common high-yield savings vehicles, how they work, and their pros and cons.
A high-yield savings account (HYSA) is an alternative to a traditional savings account — the only real difference is the amount of interest you can earn. Currently, the best HYSAs earn up to about 4% APY. Meanwhile, many traditional savings accounts earn just 0.01% to 0.05%.
For the most part, you can withdraw money from your HYSA whenever you want, making this a good place to store your emergency fund. However, interest rates are variable and can change at any time.
Pros:
Cons:
A certificate of deposit (CD) is a time deposit that pays fixed interest on your money over a set period of time (known as the term), which can range from a month to several years. CD and HYSA rates are usually pretty similar, though CD rates can vary widely by term.
However, unlike savings accounts — which generally let you deposit and withdraw money whenever you want — CDs are more restrictive. If you want to withdraw any of your initial deposit before the end of your CD’s term, you’ll pay an early withdrawal penalty.
As of the time of this writing, the best CDs are earning around 4% APY.
Pros:
Cons:
A money market account (MMA) combines certain features of HYSAs and checking accounts. While your MMA balance earns competitive interest like it would in an HYSA, the account is generally more accessible. For example, it may come with a debit card or checks for easy withdrawals.
A potential downside, however, is that MMAs may have higher minimum balance requirements compared to other account types.
Currently, the best MMAs are earning around 3.75% to 4% APY.
Pros:
Cons:
A bond is a short-term security sold by governments or corporations. When you buy a bond, you’re lending money to the bond issuer in exchange for regular interest payments. If you hold a bond until maturity, you get the entire principal back. Plus, interest on municipal bonds is usually exempt from federal income tax.
Unlike insured savings accounts, bonds always come with a risk of issuer default, though they’re generally considered low-risk investments. Plus, if you sell a bond before maturity, you may not receive its entire face value.
Read more: I bond vs. high-yield savings account: Which is better?
Bond rates vary by type. As of the time of this writing, Series EE bonds earn 2.5% and Series I bonds earn 4.03%.
Pros:
Interest may be exempt from certain taxes
Predictable, regular interest payments
Cons:
Treasury bills (T-bills) are a type of bond issued by the U.S. government. Rather than paying interest on a regular basis, you buy a T-bill at a discount and receive its face value when it matures. Terms range from four to 52 weeks.
Similar to a CD, T-bond rates are fixed, so you know exactly what return you’ll get when you purchase a T-bill. And because these bonds are issued by the federal government, they’re generally very safe investments.
Read more: CDs vs. Treasury bills: Which is better for maximizing your savings?
T-bills’ returns are based on the difference between the purchase price and face value. Your earnings also depend on the T-bill’s term and whether or not you hold it to maturity.
Pros:
Predictable earnings
Extremely low-risk
Cons:
