APY

APY is the number a savings account, a money market account or a certificate of deposit advertises, and it answers one question: what $100 left there for a year becomes. It runs higher than the account's interest rate whenever interest is credited more than once a year, because each credit joins the balance and the next one is computed on the larger figure. A 4.00% rate credited monthly is a 4.07% APY, and the APY is the figure that predicts the year's interest, $407 on $10,000 where the rate alone predicts $400. Banks in the United States are required to state it, which is what lets two accounts with different compounding schedules be compared on one number.

In a sentence

• "The savings account pays 4.07% APY, so $10,000 left there for a year earns about $407."
• "The rate is 4.00% and the APY is 4.07%; the difference is the interest earning interest."
• "Compare savings accounts on APY, not on the rate, because the APY already counts how often each one pays."

How it's calculated

APY = (1 + rate ÷ n)^n − 1, where n is the number of times a year interest is credited

1. Divide the interest rate by the number of times a year the account credits interest. A 4.00% rate credited monthly is 0.3333% a month.
2. Apply that rate to the balance each period, including the interest already credited.
3. Read the growth over a full year as a percentage of the starting balance. That is the APY.

The gap between the rate and the APY is small at savings rates and widens with the rate and the frequency. The APY is stated as of the day it is quoted; on a savings or money market account it can change at any time, and a certificate of deposit locks it for the term. Worked backward, a 4.07% APY is a monthly rate of about 0.333%, which is the figure a calculator uses to grow a balance month by month.

An example

$10,000 in a savings account paying a 4.00% rate credited monthly, the example's assumption, held for a year with no deposits or withdrawals.

The first month's interest is $33.33, one twelfth of 4.00% on $10,000; the twelfth month's is $34.58, because it is computed on a balance that already holds eleven months of interest. The year's interest is $407.42, which is 4.07% of the starting balance, the APY. Left alone for a second year the balance reaches $10,831, and for a third $11,273; the amount over a flat $400 a year is the compounding the APY already priced in.

Why it matters

APY is the price of the money you lend the bank, and it is the only figure on which two accounts can be compared fairly, because the compounding schedule is already inside it. It also puts a number on the cost of leaving cash in the wrong place: $10,000 at 0.50% APY earns $50 in a year, and the same money at 4.00% APY earns $400. The mistake it prevents is comparing one account's rate against another's APY, or reading an APY as a rate that compounding will be added to; it is the whole yield. The mistake it does not prevent is confusing dollars with what they buy: an APY below the rate of inflation is a balance that grows in dollars and shrinks in purchasing power.

APY versus APR

APY is what you earn on a deposit, with compounding included; APR is what you pay on a loan, with compounding left out. Saving is quoted as APY, so an account's monthly compounding is already in the number you see, and borrowing is quoted as APR, so a card's daily compounding makes a carried balance cost slightly more than its APR suggests. The two are the same idea, a yearly rate, computed in opposite directions, and each is the required figure on its own kind of product. The interest rate is the third figure, the cost of the money alone, from which both are built. See APR.

Common questions

Is APY the same as the interest rate? No. The interest rate is what the account pays per period before compounding, and the APY is what the balance grows by over a year with the compounding counted. They are equal only when interest is credited once a year. A 4.00% rate credited monthly is a 4.07% APY.

What is a good APY? One near the top of what savings accounts are paying on the day you look, which moves with the wider level of rates and cannot be fixed in a number. Compare accounts against each other on the same day, and size the cost of a low one directly: on $10,000, every percentage point of APY is about $100 a year.

Does the APY include fees? No. A monthly maintenance fee comes out of the balance separately, and on a small balance it can exceed the year's interest: a $5 monthly fee is $60 a year against $40 of interest at 4.00% on $1,000. Read the fee schedule beside the APY.

How is APY calculated from a rate? Divide the rate by the number of times a year interest is credited, add one, raise the result to that number of times, and subtract one. For a 4.00% rate credited monthly that is (1 + 0.04 ÷ 12)^12 − 1, or 4.07%.

Go deeper

• The Compound interest calculator shows how a starting balance and a monthly contribution grow at a given return over the years, and how much of the final amount is interest on interest rather than money you put in.
• The Savings goal calculator works out what to set aside each month to reach a goal by a date, or how long a goal takes at what you can save now, with the account's APY counted along the way.
• How to build an emergency fund inside a monthly budget keeps the fund in a separate savings account that pays interest, and the transfer out of the month's spending.

Where it shows up in Zypper

Zypper shows the balance the APY is paid on rather than the APY itself. Checking and savings accounts, including money market accounts and CDs, connect alongside investment accounts and loans, and their balances count toward net worth, which is computed from every account and charted over time; connected accounts update every day, so a savings balance that is growing shows as a line rather than as a figure on a statement. See Supported account types and Net worth tracking for the details, or get started with Zypper to see every balance in one place.