APY

APY (Annual Percentage Yield)

APY, or Annual Percentage Yield, is the total amount of interest you earn on a deposit account over one year, expressed as a percentage. Unlike a simple interest rate, APY typically accounts for the effects of compounding, which means you can earn interest not just on your original deposit but also on the interest you have already earned. This generally makes APY a more complete picture of what your money will actually earn in a year.

In most cases, you will see APY listed on savings accounts, money market accounts, and certificates of deposit (CDs). Federal law requires banks and credit unions to display APY on deposit products, so consumers can compare accounts more easily and accurately.

Why It Matters

APY allows you to make fair, apples-to-apples comparisons between accounts at different financial institutions. Because compounding frequency can vary, two accounts with the same stated interest rate can produce different earnings over a year. An account that compounds interest daily will generally produce a higher APY than one that compounds monthly, even if both advertise the same base rate. Checking the APY instead of just the interest rate helps you see exactly how much you can expect to earn.

It is also worth noting that APY applies to money you deposit and earn interest on. When you see APR, or Annual Percentage Rate, that figure typically describes the cost of borrowing money, such as on a loan or credit card. The two terms are related but serve opposite purposes in your financial life.

Example

Suppose you deposit $5,000 into a high-yield savings account with a 4.50% APY. After one full year, you would typically earn approximately $225 in interest, bringing your balance to around $5,225. If you had compared two accounts and chosen one with a 4.00% APY instead, you would have earned only about $200 in that same period. Over several years, that difference can become meaningful, especially when compounding continues to build on your growing balance.

Related Terms

• APR (Annual Percentage Rate): The yearly cost of borrowing money, expressed as a percentage, generally used for loans and credit cards.
• Compound Interest: Interest calculated on both your original principal and any interest already earned.
• Simple Interest: Interest calculated only on your original principal, without factoring in previously earned interest.
• High-Yield Savings Account: A savings account that typically offers a higher APY than a standard savings account.
• Certificate of Deposit (CD): A time-based deposit account that generally offers a fixed APY in exchange for keeping your funds on deposit for a set term.