Apr 25, 2023
APY stands for annual percentage yield.
Most types of bank accounts — high-yield savings accounts, CDs, checking accounts — display APY so that you can easily figure out how fast your money will grow.
What is APY?
The APY, or annual percentage yield, is the amount of interest you can expect to accrue one year after depositing money into the account.
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Not to be confused with annual percentage rate (APR), the APY takes your interest rate and compound interest into account.
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How does APY work?
The calculation of APY includes the interest you earn on your interest.
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Example: Let’s say you deposit $10,000 into a two-year CD with a 0.70% interest rate, and it's compounding daily. Your APY would be 0.702%. After two years, you'll have a total of $10,140.98.
The higher the APY on a bank account, the more money you'll be making year over year.
Given current interest rates, you can find some CD products offering a decent APY. According to the FDIC, the national average APY on a two-year CD is 1.43%. But some financial institutions are offering CDs with APYs above 5% right now.
Meanwhile, the national average APY for savings accounts sits at a measly 0.39%, according to the FDIC. Compare the best savings accounts rates at multiple banks and look at high-yield savings accounts to find the best rate.
APY vs. APR
The difference between APR and APY is that APR doesn’t take compound interest into account, but APY does.
APR is the annual rate of interest, without compound interest factored in. APY builds the compounding into the rate.
A savings vehicle or loan might have an APR of 5% but an APY of 5.09% if the interest is compounded quarterly, or an APY of 5.11% if the compounding is done monthly.
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Rudro is an Editor with Moneywise. His work has appeared on Yahoo Finance, MSN, MSN Money, Apple News, Samsung News and the San Diego Union Tribune.
