What Is an Annual Percentage Yield (APY)?
Written by Dayana Yochim
Edited by Carolyn Kimball
Fact-checked by Andrea Coombes
The annual percentage yield, or APY, tells you how much money a bank pays you to let them hold your money in a savings account, money market account, certificate of deposit (CD) or other interest-bearing deposit account. Banks are legally required to disclose the APY and other details on any products they pitch.
Quick take: The APY is the growth mechanism for your savings. It is the key number to know when you’re comparing the best accounts for your short-term savings. Here’s what the APY is not: a synonym for “interest rate.” (Mind blown? Read on for more background.)
Tell me more! The APY calculation is much more comprehensive than it appears at first glance. It includes:
- The simple interest rate — what a bank pays on your principal (the amount you deposit).
- Compound interest — what you earn on your principal as well as the interest you accumulate as it’s added to your balance.
- How often the interest on your savings compounds — daily, monthly, semiannually, quarterly or annually. (The bank will provide this info.)
When banks spell out an account’s interest rate and APY, you’ll notice that they’re very similar. But the APY will always be at least a smidgen higher because it includes the effects of compound interest, which gives you a more accurate idea of how much you’ll earn.
Attention mathletes! This is how to calculate APY:
- APY formula: APY = 100 [(1 + interest/principal)(number of compounding periods) -1]
- APY calculation EZ button: A trustworthy compounding calculator tells you what you really want to know: how much money you’ll earn based on an account’s APY, compounding frequency, how much you save, over what timeframe, and with or without additional contributions.
Cocktail party convo filler: APY vs. APR
Toss out this riveting tidbit when there’s an awkward conversational pause: “Did you know that APY is what you earn, and APR is what you pay?”
APY expresses the rate you’ll earn on your savings over time and includes the effect of compound interest you’ll earn if you leave your money there for one year. APR — the annual percentage rate — is the cost of borrowing money (think: credit cards and loans). The APR calculation shows only the interest rate (no compounding) you’ll pay on a balance over a one-year period.
One more thing: What is a good APY? If you’re talking about a savings account, the current answer is anything above 0.42%. That’s the national average rate banks pay on savings account, according to the FDIC, which tracks national rates and rate caps on deposit accounts.
You can do one thousand percent better (we mean this literally) by swapping your regular bank savings account for a high-yield savings account, some of which are currently sporting APYs of 5% and higher. Just know that interest rates on variable-rate accounts (versus fixed-rate ones like CDs) fluctuate depending on how the Federal Reserve feels from one month to the next.
Bottom line: The annual percentage yield (APY) is the most accurate indication of how much money you’ll earn on your deposits over time because it incorporates the effect of compound interest on your savings. It makes for a good comparison point when you’re shopping for a place to park your cash.
Popular Savings Guides
- 5 Investing Concepts Everyone Should Know
- Trading vs. Investing: What You Should Know
- What Is Asset Allocation?
- Where to Invest $100, $1,000, $10,000 or More
- Best High-Yield Savings Accounts of 2024
- How Do You Open a High-Yield Savings Account?
- What Is a Robo Advisor?
- Best Way to Invest: 5 Steps to Get Started in 2024
Other Popular Guides
How Do You Open a High-Yield Savings Account?
What Is Compound Interest?
About the Editorial Team
Dayana Yochim has been writing (articles, books, podcasts, stirring speeches) about personal finance and investing for more than two decades, focusing on bringing clarity and the occasional comedic aside to what is often a murky, humorless topic. She’s written for NerdWallet, The Motley Fool, HerMoney.com, Woman’s Day, Forbes, Newsweek and others, and been a guest expert on "Today," "Good Morning America," CNN, NPR and wherever they’ll hand her a mic.
Carolyn Kimball is Managing Editor for Reink Media Group and the lead editor for content on investor.com. Carolyn has more than 20 years of writing and editing experience at major media outlets including NerdWallet, the Los Angeles Times and the San Jose Mercury News. She specializes in coverage of personal financial products and services, wielding her editing skills to clarify complex (some might say befuddling) topics to help consumers make informed decisions about their money.
Andrea Coombes has 20+ years of experience helping people reach their financial goals. Her personal finance articles have appeared in the Wall Street Journal, USA Today, MarketWatch, Forbes, and other publications, and she's shared her expertise on CBS, NPR, "Marketplace," and more. She's been a financial coach and certified consumer credit counselor, and is working on becoming a Certified Financial Planner. She knows that owning pets isn't necessarily the best financial decision; her dog and two cats would argue this point.
