APY (Annual Percentage Yield) represents the interest earned on funds deposited into an account over one year. Nearly all savings accounts—and some checking accounts—feature an APY. A higher APY accelerates your money's growth, provided you avoid withdrawals.
Understanding APY is essential for anyone aiming to maximize returns on their savings.
What Does APY Mean?
APY measures the interest earned on a bank account annually. It accounts for compound interest, which differs from simple interest:
- Simple Interest: Earns a fixed amount per period without growth.
- Compound Interest: Earns interest on both the principal and accumulated interest, compounding periodically (daily, monthly, or annually).
Online banks often offer APYs exceeding 4% on high-yield accounts, whereas the national average hovers at 0.38%.
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Key Differences: APR vs. APY
- APY: Reflects interest earned (e.g., savings accounts).
- APR: Reflects interest paid (e.g., loans, credit cards).
| Feature | APY | APR |
|-----------------|-----------------------------------|-----------------------------------|
| Purpose | Earnings on deposits | Cost of borrowing |
| Compounding| Included | Not included |
How to Calculate APY
Use this formula:
APY = (1 + r/n)^n – 1 - r: Interest rate
- n: Compounding periods per year
Example:
- 2.00% APY compounded daily on $100,000 = **$2,020.08** annually.
Compound Interest Explained
- Daily Compounding: Yields marginally more than monthly.
- Variable APYs: Common in savings accounts; CD rates are fixed.
FAQ Section
1. What’s a good APY for savings accounts?
Rates above 4.00% are competitive, far surpassing the national average of 0.38%.
2. How does compounding frequency affect APY?
More frequent compounding (e.g., daily) increases earnings slightly over time.
3. Are APYs guaranteed?
Only for CDs; savings account APYs fluctuate with market conditions.
4. Where can I find the best APYs?
Online banks typically offer the highest rates due to lower overhead costs.
For more tools, use our compound interest calculator.