What Is APY? Annual Percentage Yield Definition and How It Works

An annual percentage yield, or APY, is the rate of return on money in a bank account.
Spencer Tierney
By Spencer Tierney 
Edited by Sara Clarke Reviewed by Kathleen Burns Kingsbury

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Nerdy takeaways
  • Annual percentage yield, or APY, is a percentage that reflects the amount of money, or interest, you earn on money in a bank account over one year.

  • APY includes compound interest.

  • You can use a compound interest calculator to quickly see what you’ll earn with a given APY.

APY is short for "annual percentage yield," which is the interest you earn by putting your money into an account. Almost all savings accounts, and some checking accounts, have an APY. The higher it is, the faster your money grows.

APY is an important term to know for anyone focused on earning a return on their money.

What does APY mean?

APY refers to the amount of money, or interest, you earn on a bank account over one year. There are two types of interest that people often refer to and they can be confused for one another: simple interest and compound interest.

Simple interest doesn't build on itself, so you earn the same amount of interest every period.

Compound interest is the interest earned on both the money you put into the account and the interest you receive over time.

APY includes compound interest. And interest can be compounded daily, monthly or annually, depending on the account.

» Learn more about APY vs. interest rate

The higher a savings account’s APY, the more you’ll earn on your money over time, especially as the interest compounds. Many online banks offer APYs around 4% and higher. (You can read more about some of NerdWallet's favorite high-yield savings accounts here.) The national savings average is just 0.45%

Federal Deposit Insurance Corporation. National Rates and Rate Caps. Accessed Nov 16, 2023.

🤓Nerdy Tip

Online banks save on overhead costs associated with branches and pass on the savings to customers in the form of higher APYs, helping them grow their money faster than traditional brick-and-mortar banks do.

If you're willing to lock away some of your savings for a set period of time, consider a certificate of deposit, or CD. These accounts lock in an APY that can sometimes be higher than some high-yield savings accounts for the tradeoff of leaving your money deposited for a certain time. (See NerdWallet’s list of the best CD rates.)

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How to calculate APY

You can use a formula to manually calculate APY if you know your account’s interest rate:

APY = (1 + r/n)^n – 1

In which:

r = interest rate n = number of compounding periods (if interest is compounded monthly, this would be 12)

Your bank or credit union can also provide you with your APY.

If you know your APY, you can quickly see what you’ll earn in a certain period of time with our compound interest calculator. You can simply plug in your starting balance, the amount you’d add each month, the amount of time, and the APY.

APR vs. APY: What’s the difference?

Generally, APY refers to interest you’ll earn, and APR refers to interest you’ll pay.

APY is the percentage rate of the total amount of interest earned on a deposit account or an investment, based on the interest rate and the compounding frequency for one year.

APR (annual percentage rate) is the percentage rate reflecting the cost of credit for a year, that is, what you pay each year to borrow money. This cost is usually divided by 12 to reflect monthly interest payments.

Look for deposit accounts with high APYs to earn more interest on your money, and look for low APRs when it comes to loans, credit cards and other borrowed money. (Read more about APRs and personal loans.)

How compound interest works

Compounding occurs in a set period, usually daily or monthly. Interest compounded daily leads to more money than interest compounded monthly.

The difference is generally too small to worry about unless you’re dealing with large amounts, but every little bit adds up. For example, in one year, $100,000 in an account with a 2.00% APY earns $2,020.08 when interest is compounded daily, $2,018.44 when interest is compounded monthly and $2,000 when interest is compounded annually. (Read more in our compound interest explainer.)

When shopping around for a new savings account or CD, finding a high APY should be a priority. The higher the rate, the faster your cash will grow. And you may want to check how frequently that rate is compounded — some accounts will help you earn just that little bit more because they compound daily rather than monthly.

» How much could you earn annually? See the interest you’d earn on $100, $1K or $10K

Is APY variable?

That depends on the type of savings account you have. If you have a regular savings account, your APY is variable, and may increase or decrease based on market conditions. If you have a CD, the rate you have when you sign up will be locked in throughout your term. But if you sign up for another CD later, you may receive a different rate.

When the Federal Reserve decreases its benchmark interest rate, the APYs on savings accounts and new CDs tend to decrease as well. But when the Fed increases its benchmark rate, as it’s done multiple times in 2023 alone

Board of Governors of the Federal Reserve System Policy Tools. Open Market Operations. Accessed Nov 16, 2023.
, those same APYs tend to increase.

Online banks generally offer the best available APYs regardless of the benchmark rate.

» Checking, savings and CD accounts with strong rates: Check out our favorite high-interest accounts

Frequently asked questions

The national average savings rate is 0.45% APY, but you can find rates higher than that. Some of the best savings rates come from online banks and are around 4.00% or higher.

The formula to calculate APY accounts for the interest rate and the number of compounding periods there are in a year.

If you know your APY and want to quickly see the amount of interest you’ll earn on your balance at that rate, you can use an online tool such as our compound interest calculator.

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