What is APY on a savings account?

Earning interest is one of the main benefits of savings accounts. When you’re reviewing different savings account options, you may notice a percentage rate described as the APY. This rate can help you understand how much you'll earn on your savings and guide you when choosing a new account.

What is APY?

Wondering, "What is APY?" APY stands for annual percentage yield. This percentage rate tells you how much money you'll earn from a savings account with compounding interest. You earn interest on the money you deposit and on the interest you previously earned in the savings account. This phenomenon, known as compounding, lets you build up your savings more quickly.

How do you calculate APY?

To calculate a savings account's APY, you need to know the interest rate and compounding frequency. If your bank pays interest monthly, you'll calculate the APY as follows:

APY = (1 + r/n)n – 1

In the APY formula, "r" equals the interest rate, and "n" represents the number of compounding periods. For example, if your savings account earns 5% interest, you can calculate the APY by inserting the following numbers into the equation:

APY = (1 + .05/12)12 – 1

APY = (1.004167)12 – 1

APY = 1.0512 – 1

APY = .0512, or 5.12%

If you deposited $100 in this account on January 1, your year-end balance will be $105.12.

TIP: If you receive a lump sum of cash, such as an annual bonus or inheritance, ask about upgrading your current savings account to a higher rate option that requires a larger minimum balance.

How to use APY to compare investments

You can also use APY to compare investment alternatives. For example, you may have the opportunity to invest a larger amount of cash in an account with a lower APY for a short amount of time. But what if you need some of the cash soon to buy a car or as a down payment on a house? You could place some money in a different investment or savings account earning a higher APY and decide to hold the smaller amount over a longer period.

APY vs APR: What's the difference?

Annual percentage rate (APR) and APY both refer to interest calculations, but they aren't interchangeable. You may come across APR and APY when researching various financial products, so it's helpful to understand the difference between the two.

Tip: If you have money to put away for a longer term, you may want to investigate deposit accounts with more restrictions that offer higher interest rates. A high-yield money market account or a CD account may make sense for a portion of your increased savings.

What's a good APY for a savings account?

Banks determine annual interest rates for savings and other interest-bearing accounts based on their analysis of economic factors. Savings products' interest rates are often derived from a base rate, such as the federal funds rate set by the US Federal Reserve.

The type of savings account may also influence the APY offered. Banks may compensate customers who agree to maintain a higher balance in an account with a higher APY. Time-restricted accounts, such as certificates of deposit, may also earn higher rates of return as long as the customer doesn't remove their money before the term ends.

You can find the current national average interest rate for savings accounts through the FDIC.