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, you can typically find much higher rates.

With one-year certificates of deposit, you can expect an average APY of 0.58%, but you'll find APY as high as 2% if you take your search online.

About the Author

Rudro Chakrabarti

Rudro Chakrabarti

Managing Editor

Rudro is the Managing Editor of MoneyWise. His work has appeared on Yahoo Finance, MSN Money and The Financial Post. He previously served as Managing Editor of Oola, and as the Content Lead of Tickld before that. Rudro holds a Bachelor of Science in Psychology from the University of Toronto.

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