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What Is APY?

An annual percentage yield, or APY, is the rate of return on money in a bank account.
May 31, 2018
Banking, Banking Basics, Savings Accounts
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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.

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 above 1.50%. The national average is just 0.07%. Below, compare how rates at CIT Bank and Synchrony, two online banks, stack up against Chase, a bank with locations across the nation.

Rates at online banks vs. A brick-and-mortar Bank




at CIT Bank
Member, FDIC



at Synchrony
Member, FDIC



Learn more
at Chase
Member, FDIC

APY

1.55%





Monthly fee

$0





Minimum opening deposit

$100



APY

1.85%





Monthly fee

$0





Minimum opening deposit

$0



APY

0.01%*





Monthly fee

$5





Minimum opening deposit

$25

Compare high-yield savings accounts
*Effective 6/15/18; rates are variable and subject to change

For even higher returns, turn to certificates of deposit, or CDs. Some online banks have CD rates upward of 3%. (See NerdWallet’s list of the best CD rates.)

How compounding works

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

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.

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