What Is APY? Here's How to Score the Highest Rates
What is APY? Annual Percentage Yield, or APY, is an important factor in how much your savings could earn in a year.
What is APY? Simply put, annual percentage yield (APY) is the amount of interest earned on a savings account in one year. It takes into account compounding interest — when both your principal balance and any garnered interest earn interest. Since simple interest only pays on the principal, accounts with a high APY can help you accumulate more cash on deposits.
And the longer you keep money in an account with a high APY, the more you'll earn, which is why long-term CDs are particularly attractive right now. Currently, both high-yield savings accounts and CD accounts are offering healthy APYs, in many cases around 4%.
Here's what you need to know about APY and how to score the best rates available.
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How APY and compound interest work in your savings account
Opening an account with compound interest can be an easy way to maximize your savings. If you open a savings account with compound interest, you’ll earn interest on your savings (the principal balance) as well as on any interest you've accrued over the months. Depending on the account, interest can be "compounded" daily, monthly, quarterly or annually.
For example, if you put $2,000 into an account that pays 3% annual interest, you’ll earn $60 in interest after a year if it compounded annually. If it compounded daily, like many savings accounts typically do, you'd earn slightly more — $60.91 by the end of the year — because interest payments are being added to your balance over the year and you're now earning interest on those earnings as well.
Try our savings calculator to determine how much you'll save over time.
Use the tool below, powered by Bankrate, to find the top high-yield savings accounts available right now:
Opening a top-earning account to make APY work for you
APY is the biggest factor to consider when deciding where to deposit your savings. Both high-yield savings accounts and CDs usually offer higher APYs than traditional savings accounts, making them attractive savings vehicles for individuals looking for a fixed, predictable rate of return on their savings.
To score the highest rates possible, you'll need to compare several other factors besides APY between accounts, including minimum opening deposits and monthly fees. If you're opening a CD account, you'll need to carefully choose a maturity date that works for you financially.
Here's an example of how much you'd earn over time, depending on changes in your account's APY.
If you invested $1,000 five years ago, here's how much you would have today at different APYs (assuming your interest compounded daily):
APY | Total Interest Earned After 5 Years | Total Balance |
|---|---|---|
4.00% | $221.39 | $1,221.39 |
3.50% | $191.24 | $1,191.24 |
3.00% | $161.83 | $1,161.83 |
As you can see, even a half-percentage point difference can result in a noticeable decrease in earnings on your cash.
Use the Bankrate tool below to compare rates across Certificate of Deposit (CD) accounts today:
Variable vs. fixed APY
The APY of an account can either be fixed or variable.
Variable APYs fluctuate with the market and are usually associated with savings and checking accounts. On the other hand, savings rates on accounts with fixed APYs won't fluctuate.
CD accounts have fixed APYs, so rates remain the same until the CD matures, which can happen in as little as three months or as long as five years, depending on the terms you choose.
The advantage of a variable APY is that it can increase when the federal funds rate rises. But that also means it will dip lower when rates drop. With a fixed APY, you know exactly how much your savings will earn over the fixed rate time period.
In reality, you usually want a mix of both. For savings you need access to, like an emergency fund, keep the cash in a HYSA with a variable APY. Your earnings will fluctuate, but you'll have immediate access to your funds whenever you need it.
For longer-term savings, like next year's vacation or saving up for a down payment, a CD account with a fixed APY allows you to lock in a rate today and know exactly how much you'll have the day that account matures.
APY vs. APR
APY and APR are sort of like two sides of a coin. As mentioned earlier, APY is the interest rate you earn on deposits. It compounds as your balance grows.
APR, or annual percentage rate, on the other hand, refers to the money you borrow rather than the money you save. It's the sum of the interest and any other fees you pay to borrow money.
APY example
You can calculate how much you'd earn in a savings account based on its APY by using the following formula:
APY = (1 + r/n)ⁿ – 1, where r= interest rate and n= the number of times the interest is compounded per year.
So, if you deposited $100 for one year at 5% interest compounded quarterly, the APY would be (1 + .05/4) * 4 - 1 = .05095 = 5.095%.
At the end of the year, you’d have $105.09.
Or, for an easier way to calculate how much you’ll earn, try our savings calculator.
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