What does APY mean?

Here is the definition of APY and how it works.

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By Rudro Chakrabarti Mar. 04, 2021

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 the meaning of APY exactly?

Definition of APY

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.

A better, simpler way to save more

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.

Let’s say you deposit $10,000 into a two-year certificate of deposit with a 0.70% interest rate, and it's compounding daily. Your APY would be 0.702%. After two years, you'll have $10,140.98.

The higher the APY on a bank account, the more money you'll be making year over year.

To be clear, a number that high is hard to find these days. According to the FDIC, the national average APY on a two-year CD is just 0.34%. But some financial institutions like Ponce Bank have high-yield offers that are considerably better.

Similarly, the national average APY for savings accounts sits at a measly 0.07%, according to the FDIC. Compare rates at multiple banks to find the highest rate.

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About the Author

Rudro Chakrabarti

Editor

Rudro is an Editor with 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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