APY, short for annual percentage yield, sits next to account offerings on bank websites.
Most types of bank accounts — high-yield savings accounts, certificates of deposit, checking accounts — display APY so that you can easily figure out how fast your money will grow.
But what is APY exactly?
What does APY mean?
The annual percentage yield of a bank account tells you how much interest you can expect to accrue one year after depositing money into the account (cha-ching!).
Not to be confused with annual percentage rate (APR), APY takes your interest rate and compound interest into account.
How does APY work?
The key differentiator of APY vs. APR is compound interest. The calculation of APY includes the interest you earn on your interest.
When you deposit $10,000 into a one-year certificate of deposit with a 2.50% interest rate, and it's compounding monthly, your APY would be 2.53%. After a year, you'll have $12,530.
The higher the APY on a bank account, the more money you'll be making year over year.
The national average APY for savings accounts sits at a measly 0.10% according to the FDIC. If you look into online banking though, like CIT Bank, you can typically find much higher rates. (CIT offers up to 2.3% APY for savings accounts.)
With one-year certificates of deposit, you can expect an average APY of 0.58%, but you'll find APY as high as 3% if you take your search online.