Understanding APY (Annual Percentage Yield)

The Annual Percentage Yield (APY) is the real rate of return you will earn on a savings account or investment in one year, thanks to the effect of compound interest. It's often considered the most accurate measure of your potential earnings.

To see how different rates and compounding frequencies affect your balance, try our APY Calculator.

APY vs. APR: What's the Key Difference?

You'll often see two acronyms when looking at financial products: APR and APY.

• APR (Annual Percentage Rate): This is the simple, annual interest rate. It does not take compounding into account. It's the base rate used to calculate interest payments.
• APY (Annual Percentage Yield): This rate does include the effects of compounding. Compounding is the process where the interest you earn is added back to your principal, and then that new, larger principal earns interest itself.

Example: Imagine you have $1,000 in a savings account with a 10% APR.

• If it compounds annually, at the end of the year you get $100 in interest. Your APY is 10%.
• If it compounds monthly, you'll earn a little bit of interest each month. That interest starts earning its own interest. By the end of the year, you'll have earned slightly more than $100, making your APY about 10.47%.

The more frequently your investment compounds, the higher the APY will be compared to the APR.

How is APY Calculated?

The formula for APY is:

APY = (1 + r/n)ⁿ - 1

Where:

• r = the annual interest rate (APR) in decimal form
• n = the number of compounding periods per year

Our APY Calculator handles this math for you instantly.

Why APY Matters

When you are comparing savings accounts, CDs, or even some crypto staking rewards, APY is the most important number to look at. It gives you an apples-to-apples comparison of how much your money will actually grow over a year. A higher APY always means a better return, assuming all other factors (like fees) are equal.

Understanding APY is the first step to harnessing the power of compounding, which Albert Einstein famously called the "eighth wonder of the world."