If you’ve been shopping around for savings products – like a money market account, high-yield savings account or certificates of deposit – you’ve likely seen the term APY. The accounts you’re checking out probably have different APYs, so it’s possible some have a higher APY than others.
But what does this number mean, exactly? We’ll dive into that and how APY works, ahead.
Let’s start with the basics. APY, or annual percentage yield, is the total amount of interest you will earn on deposit accounts like a traditional savings account, money market account or a certificate of deposit in one year, including all compound interest.
Traditional checking accounts don’t typically earn significant interest, but there are some that let you collect more money on your money. (You may see them called high-interest or high yield checking accounts.)
You may be wondering why we’re not mentioning credit cards in this list. That’s because APY actually doesn’t apply to credit cards – but we’ll get to that soon!
APY is a good number to use when comparing savings accounts across – or even within – financial institutions.
Think about an interest rate as just one part of the APY picture. Interest rate is essentially the money you can earn on your savings account's balance, expressed as a percentage.
But it doesn’t tell you anything about how often your interest is compounded. That’s where the importance of APY comes in.
APY takes into account not only interest but also the rate at which it compounds. With compounding interest, you earn interest over set intervals of time and the interest you earn is added to the balance.
In effect, over each new compounding period you earn interest on the interest you’ve already earned. The more often your money compounds, the more you can earn.
This explains personal-loawhy two savings accounts with identical interest rates can end up with different APYs if the interest on one account compounds more often than the other. If you want to take a deeper dive, learn more about APY vs. interest rate.
Just a quick side note: If you’re looking at savings accounts and CDs, forget about APR. APR, or annual percentage rate, is the yearly cost of borrowing money.
So you’ll see APR when you take out a loan or borrow money on credit (like with a credit card).
Knowing how to calculate APY can come in handy. It can help you understand how much interest you’d earn if, for example, the rate changes.
It's important to know how to calculate interest rate on savings because interest rates could change throughout the year – not just once.
If you want to calculate how quickly your savings can grow (the fun part!), there are a few ways to do it.
Hit enter, and you’ve got your APY!
Perform a quick search for “APY calculator,” and choose between either a product-specific calculator or a general APY calculator to run the numbers.
Good question! The answer is, it depends. APY is variable on most savings products, meaning it can go up or down based on what’s going on with the market.
For example, if the Federal Reserve cuts its benchmark interest rate, APYs tend to drop as well.
One slight exception will be CDs: Many CDs have a fixed rate over the course of their term, so they won’t be affected if there’s a hypothetical rate decrease during your CD term.
However, CD rates are impacted by the Federal Reserve as well, so if you open a CD during a rate decrease, you could receive a lower APY.
Given that, a “good” APY will vary – you’ll have to do some comparison shopping to see what current rates are from bank to bank.
But generally speaking, the higher the APY, the faster your cash could grow.
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