APY is short for “annual percentage yield.” Almost all savings accounts, and some checking accounts, have one. The higher it is, the faster your money grows. It’s an important term to know for anyone focused on saving more money.
What does APY mean?
APY refers to the amount of money, or interest, you earn on a bank account over one year. Of note, this includes compound interest. An interest rate is similar to APY except it doesn’t factor in compounding.
Simple interest doesn’t compound, so you earn the same amount of interest every month. Compound interest, meanwhile, is the interest earned on both the money you put into the account and the interest you receive over time.
The higher a savings account’s APY, the better. If you’re willing to lock away some of your savings for a set period of time, consider a certificate of deposit, or CD.
How to calculate APY
You can use a formula to manually calculate APY, if you know your account’s interest rate:
APY= (1 + r/n )^n – 1,
In which: r = interest rate n = number of compounding periods (if interest is compounded monthly, this would be 12)
AllCom Credit Union, or any other credit union or bank, will provide you with your APY.
If you know your interest rate, you can quickly see what you’ll earn in a certain period of time with our savings calculator. You can simply plug in your starting balance, the amount you’d add each month, the amount of time and the rate.
How compound interest works
Compounding occurs in a set period, usually daily or monthly. Interest compounded daily leads to more money than interest compounded monthly.
But it’s generally too small to worry about unless you’re dealing with large amounts — and even then, it won’t make a significant difference. For example, $100,000 in an account with a 0.50% APY earns only $0.10 more in one year when compounded daily instead of monthly.
Is APY variable?
That depends on the savings product. If you have a savings account, your APY is variable, and may increase or decrease based on market conditions. If you have a CD, the rate you have when you sign up is typically the rate you’ll receive throughout your term. If you sign up for another CD later, you may receive a different rate.
When the Federal Reserve increases its benchmark interest rate, the APYs on savings accounts and new CDs tend to increase as well.