A savings account earns interest on the money in it, at the rate the bank pays, for the time the money stays there — and the interest it credits each month joins the balance and earns interest the following month. That last clause is compounding, and it is the whole reason a savings account out-earns simple interest over time. This guide works the monthly-compounding calculation from first principles: the formula, a complete 12-month table you can check line by line, the difference deposits make, and the five real-world reasons your credited interest can come out lower than the headline rate suggests. All rates here are illustrative examples, not current offers.

The three ingredients: balance, rate and time

Every savings-interest calculation has the same three ingredients. The balance is the money in the account. The rate is what the bank pays, quoted as an APY for deposit accounts. The time is how long the money stays in. In the simplest case — one deposit, no additions, one year — the interest is just the balance times the APY: $10,000 at an illustrative 4.00% APY earns $400.00 in a year. The calculation gets interesting when time is sliced into months, because banks credit interest monthly (some daily), and each credit increases the balance that the next credit is calculated on. That feedback loop is compounding, and the monthly version of it is what this guide works through.

One conversion must happen before any monthly table makes sense. An APY is already an effective yearly yield, so the monthly rate is not the APY divided by 12 — dividing by 12 and compounding again would double-count the compounding and overstate the year. The correct monthly rate is (1 + APY) raised to the power (1/12), minus 1. At 4.00% APY that is 0.3274% a month. Twelve months of it multiply back to exactly 1.04, which is the check that the conversion is right. Our high yield savings calculator uses exactly this conversion, month by month.

The monthly compounding formula, worked for 12 months

With the monthly rate in hand, the monthly rule is short: each month, the interest credited equals the starting balance times the monthly rate, and the new balance equals the old balance plus that interest plus any deposit made that month. Work it for a full year on a $5,000 starting deposit with $200 added each month, at an illustrative 4.00% APY (monthly rate 0.3274%). Deposits here land at the end of each month, the same assumption the HYSA calculator uses.

Two things to notice. First, the interest creeps upward — $16.37 in month 1, $24.29 in month 12 — because the balance grows every month from both deposits and credited interest. That creep is compounding, visible at kitchen-table scale. Second, the totals reconcile exactly: $5,000 of starting money plus $2,400 of deposits is $7,400.00, and the closing balance of $7,643.69 means $243.69 of interest. If your own spreadsheet lands anywhere else on these inputs, check the monthly-rate conversion first — it is the step most calculators get wrong.

What monthly deposits do to the total

Deposits dominate the result in the early years, and the table above shows why: of the $2,643.69 the balance grew in the year, $2,400.00 was deposits and only $243.69 was interest. A smaller plan tells the same story at a lower APY. Start with $2,000, add $150 a month, at an illustrative 3.50% APY (monthly rate 0.2871%): after 12 months the balance is $3,898.70 on $3,800.00 deposited, so the interest is $98.70. The rate still matters — the same deposits at 4.00% instead of 3.50% would earn a little more — but no plausible rate difference compensates for a missing deposit. This is the practical answer to “how much will my savings grow”: the deposit schedule sets the scale, the rate sets the bonus. To solve the question backwards — what monthly deposit reaches a target balance by a date — use a savings calculator with a goal input rather than working this table in reverse by hand.

Simple interest vs compound interest, on the same $10,000

Simple interest pays on the original deposit only, forever. Compound interest pays on the deposit plus everything credited so far. On $10,000 at a 4.00% nominal rate for five years, simple interest produces $2,000.00 (that is $400.00 a year, five times, on an unchanged $10,000). Compounded monthly at the same 4.00% nominal rate, the balance reaches $12,209.97 — $2,209.97 of interest, or $209.97 more than simple interest, purely from interest earning interest. Note the careful wording: a nominal rate compounded monthly is not a 4.00% APY. Run through the APY formula it becomes 4.0742% APY, and $10,000 at a true 4.00% APY for five years reaches $12,166.53 instead. The $43.44 gap between those two five-year figures is the difference between a nominal rate and an effective yield — the distinction our APY guide explains in full. Savings accounts in practice pay compound interest; simple interest survives mainly in textbook examples and some short-term lending.

Why your statement can differ from the headline math

Five real-world reasons explain most gaps between a headline calculation and a statement. First, average daily balance: many banks calculate interest on the average balance across the days of the month, not the month-end balance, so a deposit made on the 28th earns for only a few days that month. Second, deposit timing: a transfer that arrives after the bank’s daily cut-off may not start earning until the next business day. Third, tiers: an account paying an illustrative 4.50% APY up to a capped balance and less above it pays the blended rate on your actual balance, not the headline rate on all of it. Fourth, fees: a monthly maintenance fee or an excess-transaction fee is deducted from the balance, which also removes the interest that balance would have earned. Fifth, holds: a large cheque deposit may be partly held for several days before it starts earning. None of these change the formula; they change the balance the formula is applied to, and in which month. If a statement looks wrong, reconcile it month by month against the average daily balance printed on it before assuming the rate is wrong.

How much interest will you earn per month — and on $1 million

Monthly interest on any balance is approximately the balance times the monthly rate — approximately, because deposits and withdrawals during the month move the balance the rate applies to. At an illustrative 4.00% APY the monthly rate is 0.3274%, so a steady $10,000 balance earns about $32.74 in its first month and a little more each month after as credits accumulate. Scale that up and the numbers stay linear: $1,000,000 at 4.00% APY earns $40,000.00 in a year, about $3,273.74 in the first month. At the FDIC national average savings rate of 0.38% (October 2026), the same $1,000,000 earns $3,800.00 in a year — a $36,200.00 annual gap on money that in both cases just sits there. Finally, a tax note: savings interest is generally ordinary income in the year it is credited, whether or not you withdraw it, and banks report it on Form 1099-INT when it exceeds $10 for the year. Tax does not change how interest is calculated, but it changes how much of it you keep — which is why the HYSA calculator offers an optional tax-rate input.

Sources: FDIC National Rates and Rate Caps, October 2026 (national average savings rate 0.38%); IRS guidance on interest income reporting (Form 1099-INT, $10 threshold). All rates in this article are illustrative worked examples, not current offers from any bank. This article is general information, not financial or tax advice.