What is annual percentage yield (APY)?

Core Concept - The article emphasizes the importance of Annual Percentage Yield (APY) in evaluating bank accounts, highlighting its role in determining the true earnings from interest over a year after compounding is considered [1][2]. Understanding APY - APY represents the total earnings on a bank account balance over one year, factoring in compounding interest [2]. - Unlike a simple interest rate, APY accounts for the frequency of interest compounding, which can significantly affect the total earnings [3]. Application of APY - APY is commonly quoted for various deposit accounts, including checking accounts, savings accounts, money market accounts, and certificates of deposit (CDs), making it a crucial metric for comparing different accounts [4]. - For example, a $10,000 deposit at a base rate of 1.24% with daily compounding results in an APY of 1.25%, leading to total earnings of approximately $125 over a year, illustrating the impact of compounding [5]. Calculating APY - The formula for calculating APY is provided, which is useful for comparing accounts with different compounding schedules, although banks typically calculate it for customers [6][7]. APY vs. APR - The distinction between APY and APR is clarified, with APY indicating earnings on savings and APR representing the cost of borrowing, emphasizing that a higher APY is favorable for savers while a lower APR benefits borrowers [8][9]. Types of APY - APY can be fixed or variable, depending on the account type, with many savings accounts offering variable APYs while CDs usually have fixed rates [10]. Market Comparison - The national average savings rate is approximately 0.39%, but many online banks provide significantly higher APYs, often 10 times or more, due to lower operational costs [10][11]. - Online banks and credit unions typically offer higher APYs compared to traditional banks, making them attractive options for consumers looking to maximize their savings [11].