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.
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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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