APY is short for "annual percentage yield." Almost all savings accounts, and some checking accounts, have one. The higher it is, the faster your money grows.
It’s an important term to know for anyone focused on saving more money.
What does APY mean?
APY refers to the amount of money, or interest, you earn on a bank account over one year. Of note, this includes compound interest. An interest rate is similar to APY except it doesn’t factor in compounding.
“APY is the amount of interest you earn on a bank account in one year.”
Simple interest doesn't compound, so you earn the same amount of interest every month. Compound interest, meanwhile, is the interest earned on both the money you put into the account and the interest you receive over time.
The higher a savings account’s APY, the better. Many online banks offer APYs around 1%. (You can read more about some of NerdWallet's favorite high-yield accounts here.) The national average is just 0.06%.
If you're willing to lock away some of your savings for a set period of time, consider a certificate of deposit, or CD. Some online banks have CD rates around 1%. (See NerdWallet’s list of the best CD rates.)
» Cash management accounts: See our top picks for these high-APY checking-savings hybrids
How compounding works
Compounding occurs in a set period, usually daily or monthly. Interest compounded daily leads to more money than interest compounded monthly.
“Finding a high APY should be a priority.”
But it’s generally too small to worry about unless you’re dealing with large amounts — and even then, it won't make a significant difference. For example, $100,000 in an account with a 2% APY earns only $2 more in one year when compounded daily instead of monthly. (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.
Is APY variable?
That depends on the savings product. If you have a 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 is typically the rate you’ll receive throughout your term. But if you sign up for another CD later, you may receive a different rate.
When the Federal Reserve increases its benchmark interest rate, the APYs on savings accounts and new CDs tend to increase as well. But when the Fed cuts its benchmark rate, as it did twice in March 2020, those same APYs tend to decrease.
Online banks generally offer the best available APYs regardless of the benchmark rate — even though these institutions tend to cut their APYs when rates are down, they also increase them when rates are up.
The key thing to remember is this: Because online banks offer the best rates on savings accounts, they can help you grow your money faster than traditional brick-and-mortar banks.