Please ensure Javascript is enabled for purposes of website accessibility

This device is too small

If you're on a Galaxy Fold, consider unfolding your phone or viewing it in full screen to best optimize your experience.

Skip to main content
Advertiser Disclosure Many of the offers that appear on this site are from companies from which The Motley Fool receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear) and may influence which products we write about, but our product ratings are not influenced by compensation. We do not include all companies or offers available in the marketplace.
    |    Accessibility Options

Guide to Annual Percentage Yield (APY): What Is It and How Does It Work?

Updated
Kailey Hagen
Author: Kailey Hagen
Kailey Hagen
Kailey Hagen
Writer

Kailey Hagen has been writing about small businesses and finance for almost 10 years. Articles she's written for The Motley Fool have been syndicated to USA Today, MSN, and Yahoo! Finance. She specializes in personal and business bank accounts and software for small to medium-size businesses. She lives on what's almost a farm in northern Wisconsin with her husband and three dogs.

See Full Bio

| 2 others [ + ]
Cole Tretheway
Reviewer: Cole Tretheway
Cole Tretheway
Cole Tretheway

Cole Tretheway is a full-time personal finance writer whose articles have been featured on Motley Fool Money and The Motley Fool. He has a degree in English with a Certificate in Professional and Technical Communication from California Polytechnic University, SLO.

See Full Bio

Ashley Maready
Fact Checked: Ashley Maready
Ashley Maready
Ashley Maready
Writer and Editor

Ashley Maready is a former history museum professional who made the leap to digital content writing and editing in 2021. She has a BA in History and Philosophy from Hood College and an MA in Applied History from Shippensburg University. Ashley loves creating content for the public and learning new things so she can teach others, whether it's information about salt mining, canal mules, or personal finance.

See Full Bio

Many or all of the products here are from our partners that compensate us. It’s how we make money. But our editorial integrity ensures that our product ratings are not influenced by compensation. Terms may apply to offers listed on this page. APY = Annual Percentage Yield. APYs are subject to change at any time without notice.

You've probably heard the term APY when opening up a savings account, interest-bearing checking account, money market account, or a certificate of deposit (CD). It's common knowledge that a higher APY is better than a lower one, but when asked "What is APY?", most people draw a blank.

It's actually pretty simple. Here's a short primer on APY and how it boosts your bank accounts.

What is annual percentage yield (APY) in banking?

APY stands for annual percentage yield, or how much your balance grows each year. It's the standard way for a financial institution to describe the returns you can earn on your savings, CD, or interest-bearing checking account.

Example: Say you have a $1,000 savings account balance with a 1% APY. In one year, it will grow by $10. This assumes your APY and your balance remain steady, which isn't always the case. But APY gives you a basic understanding of how much you could earn in one year.

APY vs. interest rate

People often use APY and interest rate interchangeably, but they're different. Interest rate is a part of the APY formula, but APY also takes into account how often your savings compounds. The formula for calculating APY is this:

APY = (1 + Interest Rate/Compounding Period)^Compounding Period − 1

Interest rate: The annual interest rate, usually as a decimal.

Compounding period: The number of times the interest is compounded per year.

If you have an account with a 1% interest rate that compounds monthly, the APY would actually be about 1.005%. APYs are usually slightly higher than interest rates, but they're typically close.

When advertising, banks use APY instead of interest rates because APY gives you a more accurate idea of how much you'll earn over time.

Let's say you're lucky enough to find two savings accounts that both offer 5% interest rates. One compounds monthly: its APY is about 5.12%. But if the other compounds daily: its APY is about 5.13%. If you deposited $1,000 into each account, you'd earn about $0.10 more with the one that compounds daily, even though they both have the same interest rate.

The long-term compounding power of APY

APY and compound interest aren't going to turn pocket change into thousands of dollars overnight. But with enough time, they crank up the value of your savings.

Let's say you open a $10,000 CD with a five-year term and a 4% APY. Here's how your account balance would grow over time:

Year Starting Balance Interest Earned Ending Balance
1 $10,000.00 $400.00 $10,400.00
2 $10,400.00 $416.00 $10,816.00
3 $10,816.00 $432.64 $11,248.64
4 $11,248.64 $449.95 $11,698.59
5 $11,698.59 $467.94 $12,166.53
Data source: Author's calculations.

Each year, your APY is applied to a larger balance. That helps you grow your savings by 21.7% total over five years. Not a bad haul.

Motley Fool Money's best savings accounts

Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Motley Fool Money's top savings account picks can earn you more than 10x the national average savings account rate.

Best Savings Accounts

How savings account APY changes over time

Growth estimates assume your APY remains steady. That's the case with most CDs, which lock in your rate for the full term. But savings accounts and interest-bearing checking accounts may change their APY on the fly.

APY changes based on other benchmarks, like the prime rate. When the prime rate falls, bank account APYs tend to fall, too. When the prime rate rises, you may see your savings account APY climb. But this is only a general rule of thumb. Banks determine their own rates.

Finding the best APY for your savings

APYs vary widely by account and by bank. Brick-and-mortar banks tend to offer much lower APYs than online savings accounts because they must spend cash on branch maintenance. Online banks don't have to do this, so they can charge you fewer fees and offer you high-yield savings accounts with better APYs.

There are other features to consider when choosing a savings account, such as customer service and easy access, but APY should definitely be one of your deciding factors. A top APY can grow your savings quickly and earn you passive income.

Compare savings rates

Make sure you're getting the best account for you by comparing savings rates and promotions. Here are some of our favorite high-yield savings accounts to consider.

Account APY Promotion Next Steps
3.80%
Rate info Circle with letter I in it. 3.80% annual percentage yield as of December 27, 2024. Terms apply.
Min. to earn: $0
N/A
Open Account for American Express® High Yield Savings

On American Express's Secure Website.

up to 4.00%²
Rate info Circle with letter I in it. You can earn the maximum APY by having Direct Deposit (no minimum amount required) or by making $5,000 or more in Qualifying Deposits every 30 days. See SoFi Checking and Savings rate sheet at: https://www.sofi.com/legal/banking-rate-sheet.
Min. to earn: $0
New customers can earn up to a $300 bonus with qualifying direct deposits!¹
3.80%
Rate info Circle with letter I in it. See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of Dec. 6, 2024. Rates are subject to change at any time before or after account opening.
Min. to earn: $0
N/A

FAQs

  • No. APR stands for annual percentage rate. Credit card companies and lenders use it to help you calculate the yearly cost of borrowing money.