What is APY?
APY is the Annual Percentage Yield on a bank’s accounts. It’s calculated by taking the interest rate and adding it to the number of periods in a year. APY comes in handy when comparing banks’ interest rates and fees so you can find the best account that fits your needs.
As the APY of a given bank account can tell you the amount of interest you can earn on your initial deposit before any interest is compounded.
However, one needs to be very cautious not to base their choice on which bank account to open purely on APY. Doing so can be deceptive, especially if you don’t factor in other fees the bank might charge on opening and maintaining the account.
In a nutshell, APY should be just one of the multiple considerations; not the only consideration.
How to Calculate APY?
To calculate APY, use this formula: (1+R)100 =APY. For example:
if you invest $340 in an account that pays 5% interest APY, in 10 months you will earn (1.05)10=2.3958 $43.
How does this APY Calculator Work?
The APY Calculator uses an interpolation technique to predict the future value of your savings. By filling in the APY you received at the time you opened your account, and the number of months since you opened your account, we can show what the future value of your account will be.
The compound monthly setting allows the calculator to factor in a varying interest rate during each month. Each month is assumed to be 12% higher than the previous month.
Note that this calculation does not factor in any fees the bank might have charged on opening or maintaining the account.
What is a Good APY Rate?
A good APY rate should be at least 1.25% and even better if it is above 1.25%. Most banks pay an interest rate of less than 1%. However, local credit unions and online banks typically offer a high-interest rate of 2% or more on savings account deposits.
Difference Between APY and APR
APR stands for Annual Percentage Rate, the yearly price you will pay for a credit card or loan. APY stands for Annual Percentage Yield and is a more accurate reflection of the true rate of an investment.
For example, let’s assume an investment has an APR of 10% and you are investing $10,000, after one year you would have earned $1,000 from that investment. That would seem good until you realized that every dollar you earned was actually costing you $1.11 due to compounding interest!
Our example clearly shows the importance of looking at the APY instead of just the APR in order to get a better understanding of how much money your investments are really earning over time.
FAQs
How do I calculate APY?
APY is the interest rate that you would earn in a one-year, one-time deposit with no withdrawals. APY is expressed as a percentage, calculated with decimal places. For example, if $1,000 was deposited in a savings account with an APY of 8%, the customer would earn $8 interest in the first year.
Is 1% a good APY?
Yes, 1% is a good APY. It’s right in line with online banks and traditional banks. For example, Wells Fargo’s highest current APY is 1.25% but requires a minimum balance of $5,000 to earn it. Synchrony Bank offers a 1.15% APY on balances between $2,000 and $4,999 with no minimum balance requirement.
Can APY be used on loans and investments?
Yes. Even though APY is generally associated with savings and checking accounts, it can also be used to describe loans, dividends, and other interest-earning investments. Different lending institutions base their rates on different factors.
What does APY stand for?
APY stands for Annual Percentage Yield and is the amount of interest earned on an account over a period of a year. For example, if you put $100 in a savings account that pays 5% APY and leaves it there for one year, in the end you will have earned $5 in interest, which means you have achieved the APY on your account balance.
