What is Annual Percentage Yield (APY)?


APY is short for “Annual Percentage Yield”, which is a number that indicates how much interest a bank account, such as a certificate of deposit, earns in a year. The higher the APY, the more you earn.

What does APY mean?

APY is a key feature to consider when buying a place to store your savings. Some checking accounts also pay interest.

An APY includes the effect of compound interest, which is when your principal and accrued interest earn interest. Compounding helps your cash flow grow faster than simple interest, which only earns interest on the principal.

Interest on an account can be compounded annually, monthly, quarterly or daily. Accounts that accrue more frequently generally earn more because interest is calculated and added to your account more often.

That’s why it’s important to consider the APY — not just the interest rate — when looking for a bank account. APY Comparison helps you see how accounts compare to each other.

What is a typical APY?

Account APYs can differ significantly, depending on the financial institution and product. For instance:

  • Checking accounts with the highest yields pay over 1% APY, while other checking accounts pay zero nominal interest.
  • The national average for a savings account is only 0.1% APY, but the best savings accounts pay at least 1% APY.
  • The average APY on a 1-year CD recently jumped 10 basis points to 0.52%, the biggest increase since October 2008. But if you shop around, you can find 1-year CDs that pay 2 % APY or more.

Your product choice can make a difference in your income. Let’s say you put $5,000 into a one-year CD that pays the national average APY (0.52%). You will earn $26 in interest that year. But if you put that money into a one-year CD that pays 2.5% APY, you’ll earn $100 in interest.

You can use Bankrate’s CD Calculator to compare earnings.

How do I find an account’s APY?

Through a federal law called the Truth in Savings Act (Federal Reserve Regulation DD), financial institutions must disclose to customers the APY account and dialing frequency, among other details.

This information can usually be found on bank websites.

If you want to know how much you could earn on an account given its APY, you can use Bankrate’s Savings Calculator. Say you want to deposit $1,000 in a savings account that pays 1.25% APY, and you plan to contribute $200 per month for two years. You will earn $82.77 in interest and have a balance of $5,882.77 after two years.

APY vs APR: the difference between the two

While the APY represents the amount of interest you will earn on an account, the APR, which stands for “annual percentage rate”, represents the annual cost to borrow money.

APR is an important consideration when purchasing home loans, personal loans, auto loans, or credit cards.

For example, when you buy a house, the lender may offer an attractive mortgage rate, but it’s the APR that will tell you the true cost of the loan, because that percentage includes interest, plus points and fees that the lender might charge.

So basically APY and APR are opposites because APY tells how much you will earn by saving money but APR tells how much you will pay to borrow money.

Is the APY variable?

APYs can be fixed or variable, depending on the type of account you open. For example, a typical CD account pays a fixed rate for a specific term, such as one year or five years.

But savings and checking accounts pay variable APYs, which means the rate can fluctuate. The rate you get when you sign up can go up and down over time.

A key factor affecting APYs – and APRs – is what the Federal Reserve does with the federal funds rate. The Fed raised this rate quite aggressively in 2022 in an effort to curb inflation.

While this is discouraging news for people trying to get a low APR on a credit card or other loan, fed funds rate hikes are generally good news for savers, as banks typically raise their APY when the Fed raises the benchmark rate.

At the end of the line

The APY in your bank or investment account tells you how much interest you will earn, taking into account the compounding frequency. The power of compound interest is that you don’t just earn interest on the money you deposit; you earn interest on accrued interest, which can increase your balance exponentially.

APY is not the only factor to consider when purchasing a new account. Ask about fees, such as monthly maintenance fees and administrative fees, as these can erode your revenue.

Make sure you know the APY and read the fine print on the account to understand the total cost of the product before signing up.

– Freelance writer Taylor Medine contributed to an earlier version of this article.


Comments are closed.