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 exceptionally high APYs, in many cases over 4%.
Here's what you need to know about APY and how to score the best rates available.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
APY and compound interest
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. 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 1% annual interest, you’ll earn $20 in interest after a year. The next year, thanks to compound interest, you’d earn on both the principal (your initial $2,000) and on the interest. That comes out to 1% on $2,020, which would give you $2,040.
Try our savings calculator to determine how much you'll save over time.
Opening a top-earning account
APY is a key 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 what you'd have now.
APY: 5.00%
Total interest earned: $276.28
Total balance: $1,276.28
APY: 4.50%
Total interest earned: $246.18
Total balance: $1,246.18
APY: 4.00%
Total interest earned: $216.65
Total balance: $1,216.65
Use our tools below to compare rates across high-yield savings accounts and CDs.
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.
APY vs. APR
APY and APR can be thought of as opposites. APY is the rate earned on deposits if interest is compounded. APR, or annual percentage rate, is the annual cost you’ll pay to borrow money and does not take into account the compounding of interest.
APY example
You can calculate the APY on an account 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.
Related Content
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Erin pairs personal experience with research and is passionate about sharing personal finance advice with others. Previously, she was a freelancer focusing on the credit card side of finance, but has branched out since then to cover other aspects of personal finance. Erin is well-versed in traditional media with reporting, interviewing and research, as well as using graphic design and video and audio storytelling to share with her readers.
-
Tax-Efficient Planning That Provides Potential Tax-Free Income
These long-term strategies may provide tax-free income year after year.
By Mario Hernandez Published
-
Six Year-End Deadlines for Retirees in 2024
Here are six key end-of-year 2024 deadlines that retirees and those saving to retire won't want to miss.
By Donna LeValley Published
-
Best Fall Travel Deals 2024
Looking for fall travel deals? Enjoy the best specials and deals on flights, hotels, and car rentals available right now.
By Kathryn Pomroy Published
-
How to Get Access to Airport Lounges
There are several different ways to get into airport lounges — at varying price points.
By Becca van Sambeck Published
-
Best Banks for Travelers 2024
Banking The best banks for travelers cut the cost of trips at home and abroad, and come with handy perks for those on the go. Read on for our top two choices.
By Lisa Gerstner Published
-
Why I'm Keeping My Amex Gold Card Even With a Higher Annual Fee
American Express increased its Gold Card fee, starting October 1, but new perks are here, too. Here's the value one editor sees in the card.
By Alexandra Svokos Last updated
-
Best Summer Travel Deals 2024
This summer, enjoy the best specials and deals on flights, hotels and car rentals from Google Flights, Delta, Costco Travel, Hyatt, Marriott, Avis, Royal Caribbean Cruise Line and more.
By Kathryn Pomroy Last updated
-
Why You Need to Open a CD Right Now
Looking to open a CD in 2024? Now's a great time to lock-in CD rates and earn interest on your cash.
By Erin Bendig Published
-
Three Best Cards for Holiday Shopping
Wells Fargo Active Cash, Prime Visa, and Chase Freedom Unlimited are the best cards for holiday shopping.
By Ellen Kennedy Published
-
The Best Walmart Cyber Monday Deals 2024
Shop Walmart Cyber Monday deals and find the hottest gifts for everyone on your list.
By Kathryn Pomroy Last updated