APY (Annual Percentage Yield)

What is APY?

APY, or annual percentage yield, is the total amount of interest an account earns over one year, including the effect of compounding, shown as a percentage of the balance. It is the number banks and credit unions use to describe what savings accounts, money market accounts, and CDs pay. Because it includes compounding, APY lets you compare accounts that compound interest on different schedules.

Key takeaways

• APY reflects both the interest rate and how often interest compounds.
• The more often interest compounds, the higher the APY compared with the stated interest rate.
• APY is used for money you earn on deposits. APR is typically used for money you pay on loans and credit cards.
• A higher APY means more earnings on the same balance, assuming the rate stays the same.

How APY works

A bank sets a base interest rate, then pays interest on a schedule, such as daily or monthly. Each time interest is added, the next round of interest is calculated on the new, slightly larger balance. That is compound interest, and APY captures it in one yearly figure.

Formula:

APY = (1 + r ÷ n)^n minus 1

Here, r is the annual interest rate written as a decimal and n is the number of times interest compounds per year.

Hypothetical example: An account has a 5% annual interest rate that compounds monthly. That is (1 + 0.05 ÷ 12)^12 minus 1, which is about 0.0512, or an APY of about 5.12%. On a $10,000 balance held for a year with no deposits or withdrawals, you would earn about $512 instead of the $500 you would get with no compounding.

The gap between the rate and APY is small at low rates and grows as rates and compounding frequency rise. For most savings accounts, the practical takeaway is simple: compare the APY, not the base rate.

Keep in mind that savings account APYs are usually variable. The bank can change the rate at any time, so today's APY is not a guarantee for the full year. CDs usually lock in a rate for a set term. US banks are required to disclose APY on deposit accounts, and the Consumer Financial Protection Bureau explains these disclosures at consumerfinance.gov. For current rates, see our guide to the best high-yield savings accounts, and use the compound interest calculator to project growth at any APY.

Why it matters for your Money Type

Priceless Tay uses four Money Types: Spender, Saver, Scrambler, and Strategist. APY is most useful to the Strategist.

A Strategist already has a working plan and is looking for smart upgrades. Cash is one of the easiest places to optimize. Moving an emergency fund or sinking funds from a low-APY account to a higher one is a low-effort change that adds earnings without adding risk. APY gives a Strategist a clean way to compare savings accounts, money market accounts, and CDs side by side, and to decide whether it is worth locking in a CD rate or staying flexible.

For a Saver, who tends to keep a lot of cash, a higher APY makes that cash work harder, though the bigger step is usually deciding how much cash is enough. A Spender or Scrambler will get more benefit from building savings first, since APY matters most once there is a balance to earn on.

Common questions

What is the difference between APY and APR?

APY includes the effect of compounding and is used to show what deposit accounts earn. APR is the yearly interest rate on borrowing, and it generally does not reflect compounding within the year. When comparing savings accounts, look at APY. When comparing loans, look at APR.

Is a higher APY always better?

For the same type of account, a higher APY means more earnings. Still, check for fees, minimum balances, withdrawal limits, and deposit insurance. A slightly lower APY at an account with no fees can come out ahead.

How is APY calculated?

APY = (1 + r ÷ n)^n minus 1, where r is the annual interest rate as a decimal and n is the number of compounding periods per year. Banks do this calculation for you and disclose the result.

Does APY change?

On most savings and money market accounts, yes. The rate is variable and can move up or down. CDs usually keep the same APY until the term ends.