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What Is APY?

August 25, 2021

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What we’ll cover:

APY is the total amount of interest you can earn on a deposit account
APY extends beyond just the interest rate and includes how often interest compounds
There are several ways to calculate APY

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.

What is APY?

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.

APY takes into account not only interest but also the rate at which it compounds.

So, what’s the difference between APY and an interest rate?

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.

Two savings accounts with identical interest rates can end up with different APYs.

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.

Are APY and APR the same?

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).

How to calculate APY

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.

APY is variable on most savings products, so it can go up or down based on what’s going on with the market.

Use a pencil and paper and do the math yourself

To get started, use the following basic formula for APY: APY =(1+r/N)^N-1

r = Interest rate: The percentage that your bank has stated your account will earn.

N = Number of compounding periods per year or the number of days in the term of the account. You can usually put 365 since there are 365 days in a year (though some banks consider a year 360), unless the terms indicate another stated maturity, such as 6 months or 18 months.

For example, in a high interest rate environment, if you know that you will earn a 2.23% interest rate and your account compounds interest daily you can get the following: APY=(1+.0223/365)^365-1=2.25%.

Use Excel

An Excel spreadsheet can be another option. Enter in your own data, then let the program do the math for you.

To see what your APY would be, enter the following information in a new spreadsheet:

Cell A1: The interest rate in decimal format (0.02 for 2%).

Cell B1: How many times your interest compounds every year (1 for annually, 12 for monthly, and so on).

Cell C1: Copy and paste this formula, including the equals sign, =POWER((1+(A1/B1)), B1)-1.

Hit enter, and you’ve got your APY!

Utilize an APY Calculator

Perform a quick search for “APY calculator,” and choose between either a product-specific calculator or a general APY calculator to run the numbers.

If you want to know how much your money could grow with a Marcus savings account, you can use our Savings Calculator, CD Calculator or No-Penalty CD Calculator.

Generally speaking, the higher the APY, the faster your cash could grow.

What is a good APY?

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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This article is for informational purposes only and is not a substitute for individualized professional advice. Individuals should consult their own tax advisor for matters specific to their own taxes and nothing communicated to you herein should be considered tax advice. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of Goldman Sachs Bank USA, Goldman Sachs Group, Inc. or any of their affiliates, subsidiaries or division. Goldman Sachs Bank USA does not provide any financial, economic, legal, accounting, tax or other recommendation in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA or any its affiliates. Neither Goldman Sachs Bank USA nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.