What Is APY? Understanding Annual Percentage Yield

• APY (Annual Percentage Yield) shows your actual yearly earnings, including compounding.
• It’s more accurate than the plain interest rate.
• Helps compare savings products like high-yield accounts and CDs.
• The more frequent the compounding, the higher the APY.
• A higher APY = more money earned over time.

If you’ve ever looked at a savings account or CD offer and wondered what the “APY” number means, you’re not alone. Knowing what APY means—and how it works—can make a big difference when choosing where to put your money. APY, or Annual Percentage Yield, tells you how much interest you’ll actually earn in a year, taking compounding into account. It’s especially useful when comparing financial products like savings accounts, certificates of deposit, or other interest-earning options, because it shows the real return, not just the advertised rate.

APY (annual percentage yield) tells you how much money you'll earn in a year from your savings, with compounding included.

If your account adds interest monthly, daily, or even quarterly, APY reflects that. Unlike a flat interest rate, it shows the real return by adding up all those small increases over time. So, it's more honest in a way. Interest rates can be a bit misleading because they don't tell you what happens when your money earns interest on top of interest.

To keep it simple:
APY = actual growth of your money over 1 year
Interest rate = the starting rate, without compounding

If you want to see how much you could actually earn with your current rate and deposit, use our APY calculator 🇺🇸 — it'll give you the whole picture!

You’ll find APY in places where your money earns interest. It’s not used for loans or debts — that’s APR territory. APY is only shown for financial products where you’re the one getting paid, but if you want to research the other one, check out our APR calculator 🇺🇸.

Common places you’ll see APY:

• High-yield savings accounts;
• Money market accounts;
• Certificates of deposit (CDs); and
• Some crypto savings platforms or neobanks.

Banks use APY to give you a clearer picture of your earnings. In many countries, especially the U.S., it’s a legal requirement to show APY when advertising interest-earning accounts. Why? Because it's way more accurate than just throwing out a flat interest rate. So if you're comparing savings products and one bank is showing APY while another shows just the interest rate — go with the one that shows APY. It’s more transparent and easier to compare.

When you see APY listed on a savings account, it's telling you what your money would earn in a year, assuming:

• You leave the money in there the whole time;
• No additional deposits or withdrawals are made; and
• Interest is compounded more than once per year.

For example, let's assume you put $10,000 into a high-yield savings account with an APY of 5.00%, and interest is compounded monthly. That means you’ll earn roughly $500 in interest over the year, assuming nothing changes.

Now, compare that to a different account that advertises a 5.00% interest rate, but compounds annually. In this case, the APY would actually be 5.00%, too, since there's no compounding benefit. But if the interest rate were 5.00% compounded monthly, then the APY would be slightly higher — about 5.12%, thanks to the effect of compounding. That's the difference between APY and interest rate.

So if you’re ever comparing savings accounts, look at the APY, not just the interest rate. It reflects how the account really works over time.

APY works by taking into account:

• The base interest rate;
• How often is that interest added to your account; and
• The effect of earning interest on the interest you’ve already earned.

This is called compounding. And the more often it happens — daily vs. monthly vs. annually — the higher your final return will be.

Let’s say you have an account with:

• 4.00% annual interest rate; and
• Compounded monthly.

The APY in this case would be around 4.07%. Why? Because each month, the bank adds a bit of interest, and next month, they calculate your new interest based on the higher balance, including the interest from the month before. To learn more about this subject, check out our compound interest calculator 🇺🇸

The formula for APY is:

APY = (1 + r/n)ⁿ − 1

where:

• r — Annual interest rate; and
• n — Number of compounding periods per year.

Let's say you’ve got a savings account with a 5.00% annual interest rate, compounded monthly. You leave $10,000 in there for one full year without touching it.

Here’s how that works out:

1. Monthly compounding means the bank adds interest 12 times a year.
2. Each time, your balance grows a bit, and the next interest payment is based on that new total.
3. After 12 months, your balance would be around $10,511.62.

So your APY is roughly 5.12%, not 5.00%. That extra $11.62? It’s what you earned from compounding alone. This is exactly what APY captures, and why it’s more helpful than just looking at the flat rate.

When you're saving over the long term, APY can have a real impact on how much your money grows. That’s because it reflects not just the interest rate, but also how often that interest is added to your account. The more frequent the compounding, and the higher the APY, the faster your balance increases.

Even a small difference in APY can lead to noticeably higher earnings over time, especially if you’re consistently adding to your savings. Paying attention to APY helps you choose products that work harder for your money.

Some accounts offer a fixed APY, which means your rate won’t change for a given period (like in a certificate of deposit). Others, like most high-yield savings accounts, have a variable APY; it can go up or down depending on the market or the bank’s decisions.

Variable APY is more common, especially in online banks. It might look great one month and drop the next. That’s why it's smart to check if the rate is promotional, tied to account balance, or linked to conditions like direct deposits.

Fixed APY is more predictable. You lock in a rate, and you know what you’re getting — no surprises, but usually less flexibility.

This depends a lot on timing and inflation, but as of recent months, anything around 4% to 5.5% APY is considered pretty competitive for a savings account.

During low-interest periods, even 1.5% might be decent. But right now, with many online banks and fintechs competing for deposits, high-yield accounts with 4.50%+ APY are becoming the norm.

A "good" APY also depends on how often the interest is paid, whether the rate is variable, and if there are any conditions attached (like minimum deposits or limited withdrawals). Always check the fine print — some accounts offer high APY but only on the first few thousand dollars.

APY shows you how much money you'll really earn in a year. It includes the effect of compounding, so it's more accurate than just the interest rate. Always look at the APY when it's available while comparing savings accounts.

And if you want to explore more tools to help with your financial decisions, check out our full range of finance calculators.