In this article, well explain what is APY and how to calculate APY.
What Is APY?
Another term for APY is earned annual rate, or EAR.
One exception is CDs, which typically pay a fixed rate until the CD reaches its maturity.
APYs are tied to the benchmark interest rates set by the Federal Reserve.
If the Fed raises interest rates, most banks will pay more interest to stay competitive.
But if the Fed lowers interest rates, your APY would drop.
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You deposit $10,000 and dont make any withdrawals or additional deposits for a year.
Interest is compounded monthly.
The average APY varies by the punch in of deposit account.
How to Get the Best APY
What Is Annual Percentage Rate (APR)?
Youll see APRs advertised when youre shopping for a credit card, mortgage or personal loan.
APR vs. APY
APR vs. APY: Whats the Difference?
APR and APY are two different ways of calculating an annual interest rate.
APR measures simple interest and doesnt account for compounding.
But APY includes compound interest, which is interest paid on interest.
Both APR and APY can be fixed or variable.
Variable APYs are the norm with bank accounts, but CDs often pay a fixed interest rate.
But accounts may compound monthly, weekly, daily or even continuously.
The more frequent the compounding periods, the more interest you earn.
A good APY is 0.5% or more if you have a high-yield savings account.
Nationally, the average savings account APY is just 0.45%.
Its important to read the fine print so youre aware of all the fees the bank charges.
A $10 monthly bank fee could easily eat up any interest earned and then some.
Also consider whether the account has a minimum balance and convenience.
Many bank accounts pay APY, or interest, monthly.
But remember: APY shows you the yearly interest you earn.
Most accounts have a variable interest rate, which means they can change based on market conditions.
APYs typically rise when the Fed increases interest rates and fall if the Fed cuts rates.
Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder.
She writes the Dear Penny personal finance advice column.
Send your tricky money questions to[email protected]or chat with her inThe Penny Hoarder Community.
(Can you sense my millennial sarcasm there?)
You know which ones were talking about: rent, utilities, cell phone bill, insurance, groceries…
