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If you've ever opened a savings account or invested money, you may have come across the term Annual Percentage Yield (APY). But what exactly is APY and how does it affect your finances? In this guide, we'll break down the basics of APY and why you should compare this percentage across multiple banks when shopping for places to store your money.

What is APY?

APY is the total amount of interest you will earn on an investment over a year, expressed as a percentage. The higher the APY, the more you earn. APY interest rates are compounding, making it a more accurate measure of the total return on your investment.

Recommended High-Yield Savings Accounts

Bank Account APY Features Learn More

BrioDirect High-Yield Savings Account

5.35% More Info

*Annual Percentage Yield (APY) is accurate as of 5/1/2024. Rate is subject to certain terms and conditions. You must deposit at least $5,000 to open your account and maintain $25 to earn the disclosed APY. Rate and APY may change at any time. Fees may reduce earnings.

$5,000 min. deposit
No monthly fee

UFB Direct logo

UFB Direct Secure Savings Account

5.25% More Info

UFB Direct breaks balances into five tiers, but, currently, there is only one interest rate.

No minimum deposit
No monthly fee

SoFi Checking and Savings

0.50% - 4.60% More Info

Customers earn 4.60% APY on savings balances when they set up recurring monthly direct deposit of their paycheck or benefits provider via ACH deposit. Alternatively, deposit at least $5,000 each month to earn 4.60% APY on your savings balance. Checking balances earn 0.50% APY

No minimum deposit
No monthly fee

CIT Bank logo

CIT Bank Platinum Savings Account

5.00% More Info

Earn 5.00% APY on balances over $5,000. Balances of less than $5,000 earn 0.25% APY. Annual Percentage Yield is accurate as of May 6, 2024. Interest rates for the Platinum Savings account are variable and subject to change at any time without notice.

$100 minimum deposit
No monthly fee

How is APY calculated?

APY is calculated by taking into consideration the interest rate, the compounding frequency, and the number of compounding periods per year. 

The formula for calculating APY is: 

APY = (1 + (r/n))^n - 1. 

The “r” variable is the interest rate in decimal form and the “n” variable is the number of compounding periods per year.

For example, if you have a savings account with a 4% simple interest rate, compounded monthly (12 times in a year), your formula would look like this:

APY = (1 + (0.04/12))^12 - 1

Using this formula, your APY would be 0.0407, or 4.07%.

How does compound interest work?

Compound interest is the interest earned on both the initial principal amount and the interest that has been added to it over time. This means that over time, your money can grow faster because the interest is reinvested and earns more interest.

Interest can be compounded yearly, monthly, quarterly, or daily. The more frequently your account compounds, the greater the effect.

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The Difference Between APY and APR

APR is the annual rate charged for borrowing money, such as on a credit card or loan, while APY is the annual rate of return earned on an investment.

APY takes into account the effect of compounding on an investment, while APR does not. 

What is considered a good APY?

A good APY will depend on the type of investment and the level of risk you are willing to take. Generally, a higher APY indicates a higher return on your investment, but it is important to consider the risk involved.

The best high-yield savings accounts and CD rates hover around 3% to 5%. However, it’s more common to find APYs on most traditional bank accounts in the 0.1% to 0.05% range.

APYs can be fixed or variable. A fixed APY, like one commonly attached to a CD account, pays the same rate over a specific term, such as one year or five years. Your savings or checking account, on the other hand, will typically pay a variable APY, meaning the rate will fluctuate over time.

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The Bottom Line

Understanding how APY can impact your savings and investments is important. By considering the factors that go into determining APY and the difference between APY and APR, you can make smart financial choices that will help you grow your wealth over time. Remember to compare APY rates and consider the level of risk before making any investment decisions.

SS

Slickdeals Money Staff

The Slickdeals Money editorial team is dedicated to helping readers navigate the personal finance space. We’re passionate about educating our readers on the very best financial tools & products on the market today.