What does a savings account really earn?

A savings account is the simplest financial product most people own and it is still routinely misread — usually because the rate is compared and the two things that actually decide the outcome are not.

APY is the number, not the rate

A quoted interest rate does not tell you what a year of holding will produce, because it does not say how often interest is credited. Annual percentage yield does — it already includes the compounding.

A 5% nominal rate compounded monthly is an APY of about 5.12%. Compounded daily it is about 5.13%. The differences are real and small.

Compare APYs and ignore compounding frequency. Any bank comparing its rate against another bank's APY is not making an honest comparison.

The number that decides whether you actually gained

Here is the part that changes the answer entirely: inflation.

Put $20,000 in an account paying 4.5% APY. After a year you have $20,900. You earned $900.

If prices rose 3% over that year, the $20,000 you started with would need to be $20,600 to buy the same basket of goods. So your real gain is about $300, not $900 — roughly a 1.5% real return.

At 2% APY against 3% inflation, you earned $400 and lost purchasing power. The balance went up and the money is worth less. Both statements are true at once, and only one of them appears on the statement.

This is the single most useful adjustment to make, and the savings APY calculator shows the inflation-adjusted line alongside the nominal one so the gap is visible rather than theoretical.

Safe and stable are not the same thing

Deposits at an FDIC-insured bank are insured to at least $250,000 at each insured bank. That is a genuine guarantee, and it is a guarantee about the dollars — you will not lose the number.

It says nothing about what those dollars buy. Over long periods, cash has been the reliable way to lose purchasing power slowly while never losing a dollar of principal.

Why your rate may be much worse than the advertised one

Two things catch people:

• The advertised rate is often for a new-money or promotional tier, and reverts. Check what your account is paying today rather than what it paid when you opened it. Rates on existing accounts are frequently adjusted downward without any announcement you would notice.
• Large national banks and online banks can differ by several percentage points on an identical product. This is not a small edge. On $20,000, the difference between 0.40% and 4.50% is about $820 a year for the same money in the same kind of insured account.

What to do with this

1. Look up your current APY, not the one you remember. It takes two minutes and it is the highest-value two minutes in this guide.
2. Subtract inflation before deciding whether you are happy with it.
3. Keep the emergency fund here anyway. A real return slightly below zero is the correct price for money that must be available on the day you need it — see how big an emergency fund should be.
4. Move long-horizon money elsewhere. Money you will not touch for a decade is not being kept safe in cash; it is being kept still while prices move.
5. Check the insured limit if a balance is approaching $250,000 at one bank.

The right question is not "what does my savings account earn". It is "what does it earn after inflation, and is this money that needs to be here at all".

Sources: FDIC, deposit insurance for the insured amount. Yield and inflation figures computed with this site's own code.