You’ve probably seen the letters “APY” while shopping around for a new checking, savings or CD account. What does it mean? APY is the acronym for annual percentage yield and is a percentage that tells you what the yearly return is on a bank account or investment account.
What does APY mean?
The APY percentage shows how much an account earns per year, given how often interest on the account is compounded. Compounding interest is when both your principal and accumulated interest earns interest. The beauty of compounding interest is that it can help your cash grow faster year after year.
Interest on an account might compound yearly, monthly or even daily, but the compounding periods can vary. Accounts that compound more frequently might offer a higher return since interest is computed and added to your account more often.
That’s why it’s important to consider APY and not just the interest rate when account shopping — comparing APYs gives you a better sense of how accounts stack up against each other.
What’s a typical APY?
Account APYs can range widely depending on the financial institution and the type of product. Some checking accounts might offer no interest or nominal interest; whereas, some high-interest checking, savings and money market accounts might offer 0.10 percent APY or even higher.
Axos Bank, for example, currently offers 0.61 percent APY on its high-yield savings account and up to 1.25 percent APY on its reward checking account if you follow certain rules, such as setting up a direct deposit and using your debit card at least 15 times per month.
Ally Bank, for another, currently offers 0.60 percent APY on its online savings account and 0.50 percent APY on the money market account.
How can you find the APY for an account?
Thanks to The Truth in Savings Act (Federal Reserve Regulation DD), financial institutions must disclose the account APY and the compounding frequency to you. You should be able to dig into an account’s APY and other details, such as the fees and the minimum deposit requirement, before signing up on the bank’s website.
If you want to figure out how much you can potentially earn on an account given its APY, you can use Bankrate’s calculator. Say you want to put $1,000 into a savings account that earns 0.60 percent APY, and you plan to make $200 monthly contributions for two years. According to the calculator, you’ll earn $39.66 in interest, and you’ll have a balance of $5,839.66 at the end of those two years.
APY vs. APR: The difference between the two
APR stands for annual percentage rate, which is a percentage most often used to express the annualized cost to borrow money, including fees.
Typically, you’ll run into APRs when shopping for personal loans, car loans or credit cards. So, what you need to remember about each acronym is that APY is typically used to express how much you’ll earn for saving, while the APR is used to show how much you must pay to borrow money.
Is APY variable?
APYs might be fixed or variable depending on the type of account you open. For example, a CD account might offer you a guaranteed rate for a specific term, such as six months or as much as 10 years.
It’s typical for savings and checking accounts to offer a variable APY, which means the rate might fluctuate, and what you sign up for isn’t promised to last.
Interest rates for debt products can change based on an index that’s connected to the federal funds rate. The Federal Reserve made news in 2020 for authorizing two major Fed rate cuts.
While this was good news for people trying to snag a lower APR on their next mortgage or car loan, it was also bad news for savers since savings rates are also affected by benchmark changes.
The APY on your bank or investment account tells you how much you’ll earn factoring in the frequency of compounding. The power of compounding interest is that you’re not just earning money on the cash you deposit; you earn interest on accumulated interest, which could help your money grow exponentially.
With that said, APY isn’t the only factor you should consider when shopping around for a new account. Monthly maintenance fees and administrative fees can tally up and eat away at your earnings. Be sure to dig into the interest and fine print details to understand the full cost of the product before signing up.