What Is APY? (Clear and Simple)

What you'll learn:

➤ What Is APY?

Let’s talk about APY, which stands for Annual Percentage Yield.

It’s a big deal when it comes to your savings. APY is like the magic number that tells you how much money your savings could make in a year.

Compound Interest

To put it simply, APY is the interest your savings account earns in a year. It’s smart because it considers something called “compounding interest.”

That’s when both your starting money and the interest it earns start earning interest too.

Imagine you put $2,000 in an account that gives 1% interest each year. After one year, you’d earn $20 in interest.

But here’s the cool part. In the next year, you’d earn interest on both your $2,000 and the $20 you earned last year. So, it’s like you’re making money on your money.

High-Yield Savings Accounts

Now, when you’re hunting for the best place to stash your cash, look at APY. High-yield savings accounts and CDs (Certificates of Deposit) are your best bet.

They offer some impressive APYs, often over 4% or even 5%.

Related: Investing Glossary (From A-Z)

Fixed vs Variable APY

One thing to know is that APY can be either “fixed” or “variable.” Fixed APYs stay the same, while variable ones change with the market. CDs usually have fixed rates.

APY vs APR

Now, don’t mix up APY with APR (Annual Percentage Rate). APR is about borrowing money and doesn’t deal with compounding interest. It’s like the opposite of APY.

APY Formula

To figure out the APY on your account, you can use this formula: APY = (1 + r/n)ⁿ – 1, where r is the interest rate and n is how many times they add interest in a year.

So, if you put $100 for one year at 5% interest (compounded quarterly), you’d end up with $105.09.

For a simpler way, try our Compound Interest Calculator. It’s like your math wizard buddy for your savings.

This Is What APY Means (And How It Affects Your Money)