What Is APY? Annual Percentage Yield Explained
APY (annual percentage yield) is how much your money really earns in a year, with compounding included. It’s the best number for comparing savings accounts and CDs. Here’s how it works.
By Bogdan · Updated
APY stands for annual percentage yield. It tells you how much your savings will actually grow in one year, as a percentage — counting the extra you earn because interest earns interest.
Explain it like I’m 5
You put $100 in a piggy bank that pays you interest every month. In January it adds a few cents. In February it adds a few cents again — but now it also pays you on January’s cents. Every month the pile gets a tiny bit bigger, so the interest gets a tiny bit bigger too.
The interest rate is the plain number the bank starts with. The APY is what you really end up with after a whole year of this snowballing. That’s why APY is usually a little higher.
See how much your money earns at any APY with the CD calculator.
The APY formula
APY = (1 + r ÷ n)^n − 1
r= the yearly interest rate as a decimal (5% = 0.05)n= how many times per year interest is added (12 for monthly, 365 for daily)
How compounding changes a 5% rate
| Interest is added… | APY |
|---|---|
| Once a year | 5.000% |
| Every quarter | 5.095% |
| Every month | 5.116% |
| Every day | 5.127% |
The more often interest is added, the higher the APY — but the difference between monthly and daily is tiny. The rate itself matters far more.
APY vs. APR vs. interest rate
| Term | What it is | Where you see it |
|---|---|---|
| Interest rate | The basic yearly rate | Both savings and loans |
| APY | Yearly growth with compounding | Savings accounts, CDs, money market accounts |
| APR | Yearly cost of borrowing, including some fees, without compounding | Mortgages, credit cards, car loans |
A simple rule: when you’re saving, compare APY. When you’re borrowing, compare APR. US banks are required to show APY on deposit accounts, so you can compare them fairly.
What APY doesn’t tell you
- Whether the rate will last. Savings account APYs can change any time; a CD’s APY is locked for its term.
- Promotional limits. Some high APYs only apply to the first few thousand dollars or for a few months.
- Fees. A monthly fee can wipe out the interest on a small balance.
- Inflation. If prices rise 3% a year, a 4% APY grows your buying power by only about 1%.
- Taxes. Interest is taxed as ordinary income in the year you earn it.
Common mistakes
- Comparing one bank’s APY with another bank’s interest rate. Make sure both numbers are APY.
- Expecting the APY on a CD you break early. Early-withdrawal penalties can eat much of the interest.
- Chasing an extra 0.05%. On $10,000, that’s $5 a year — not worth moving banks for if the account is less convenient.
Frequently asked questions
What does APY mean?
APY stands for annual percentage yield. It’s the total interest you earn on a deposit in one year, as a percentage, including the effect of compounding (earning interest on your interest). $1,000 at 4% APY becomes $1,040 after a year.
What is the difference between APY and APR?
APR (or the interest rate) is the simple yearly rate before compounding. APY includes compounding, so it’s equal to or higher than the APR. Banks show APY on savings because it’s bigger; lenders show APR on loans because it’s smaller. For savings, compare APY.
How is APY calculated?
APY = (1 + r ÷ n)^n − 1, where r is the yearly interest rate as a decimal and n is how many times a year interest compounds. A 5% rate compounded monthly gives (1 + 0.05 ÷ 12)^12 − 1 = 5.12% APY.
How much will I earn with 4% APY?
Multiply your balance by the APY: $10,000 × 4% = $400 in one year, if the rate stays the same and you don’t add or withdraw money. On a savings account the rate can change; on a CD it’s locked.
Is APY paid monthly?
APY is a yearly figure, but interest is usually added to your account monthly (sometimes daily or quarterly). Each payment is a slice of the yearly amount, and because each one starts earning interest too, the year’s total matches the APY.
This article is for general education and is not financial, investment or tax advice. Rates, rules and limits change; check current terms with your bank or the IRS. See our disclaimer.