How to calculate APY

If you don't yet know how to calculate APY, that's OK. This powerful yet simple calculation could help you better compare savings products and help you find an account that earns you more money.

An account's annual percentage yield (APY) is the total interest earned over a year, including compound interest. To calculate it, you only need two pieces of information. From there, you can run the numbers or use an online calculator to get the answer.

What is APY, and when is it used?

Annual percentage yield, or APY, is a figure that shows how much you could earn on a deposit account over a one-year term. An account's APY is expressed as a percentage. Banks use this number to show customers how much interest their savings will earn. A variety of different accounts come with APYs, including savings accounts, money market accounts and certificates of deposit (CDs). A few checking accounts come with APYs as well.

Your APY includes compound interest, as opposed to simple interest. Simple interest is the amount of interest you earn on your initial deposit. Compound interest is the total interest you earn on your principal and previous interest earned.

For example, say you deposit $1,000 in a 24-month CD with a 4% APY. At the end of one year, you'll earn $40 in interest — which is simple interest — and your new CD balance is $1,040. The following year, however, you'll earn 4% APY on your initial $1,000 deposit plus the $40 in interest you already earned. Over time, compound interest can accelerate your earnings and help your savings grow far more than simple interest alone.

APY vs. APR: What's the difference?

While APY and APR sound similar, they're the opposite in terms of money flow. APY is all about how much interest you earn on your savings, including compound interest. On the other hand, the annual percentage rate (APR) is the interest you pay when you borrow money using credit or loans.

In short, APY helps grow your savings, and APR is the cost you pay to borrow money.

How is APY calculated?

To calculate APY, you'll need two numbers: the account's simple interest rate and compounding frequency. And don't worry if doing math by hand isn't your speed, or if your calculator doesn't have the necessary functions to complete the equation. An online APY calculator can help you quickly crunch the numbers and compare accounts.

No matter which method you use to calculate APY, here's the formula:

(1+ r/n)ⁿ - 1 = APY

r = Your account's annual simple interest rate (expressed as a decimal)

n = How often your bank compounds interest

The more often your bank compounds interest — say, monthly instead of yearly — the more often you're earning interest on the interest already built up. For instance, it could help to think of your initial savings deposit as a snowball rolling down a 500-foot hill. You'll end up with a bigger snowball (your principal) at the bottom of the hill if it picks up more snow (interest) every 10 feet than every 100 feet.

How to calculate APY: An example

It's time to see an APY calculation in action. First, we start with the APY formula.

(1+ r/n)ⁿ – 1 = APY

Let's use a $1,000 deposit to open a savings account with a 3% interest rate compounded monthly. Here:

• r = 0.03 (3% expressed as a decimal)
• n = 12 (since there are 12 months in a year)

So, the formula now looks like this.

(1+ 0.03/12)¹² - 1 = APY

Now, we do the math.

(1+ 0.03/12)¹² - 1 = 0.0304

Then, we convert the decimal back to a percentage.

(1+ 0.03/12)¹² - 1 = 0.0304 = 3.04% APY

Now, we apply this APY to the initial $1,000 deposit.

$1,000 x 0.0304 = $30.41

Your total balance at the end of one year would be $1,030.41. If you don't add to your initial deposit and simply let your $1,000 grow at the same APY for 5 years, your total balance would be $1,161.53. Without compound interest, your balance would only be $1,150.

Find a savings account that works for you

Knowing how to calculate APY can help you compare savings products and choose the ones that will help your savings grow — thanks to the power of compound interest. This is one of those cases where a little knowledge truly pays off, especially when it comes to funding the goals most important to you.

Find your ideal savings match today from Citizens.