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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 |
|---|---|---|---|
|
|
5.25%
UFB Direct breaks balances into five tiers, but, currently, there is only one interest rate. |
No minimum deposit |
Open Account |
|
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0.50% - 4.60%
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 |
Open Account |
|
|
5.05%
Earn 5.05% APY on balances over $5,000. Balances of less than $5,000 earn 0.25% APY. Annual Percentage Yield is accurate as of July 27, 2023. Interest rates for the Platinum Savings account are variable and subject to change at any time without notice. |
$100 minimum deposit |
Open Account |
|
|
4.65%
Annual Percentage Yield is accurate as of July 27, 2023. Interest rates for the Savings Connect account are variable and subject to change at any time without notice. |
$100 minimum deposit |
Open Account |
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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3 Steps to Take if Your Bank Isn’t Paying You Enough Interest
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.
Related Article
8 High-Yield Savings Accounts With Over 5.00% APY
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.
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.
