Everyday Money

What is APY?

October 17, 2017

One of the more basic terms that you should understand when it comes to your money and banking is APY, as it is a significant term in understanding how your money grows. In this blog, you’ll find a quick overview of this term. Read on!

In a nutshell:

APYAnnual Percentage Yield.
Annual percentage yield is the number that tells you how much you’ll earn with compound interest over the course of one year.

A higher APY is generally better when you’re looking at accounts for your savings. When you’re the one paying interest, a lower APY is usually best.

You will notice that interest is always paid out as a percentage.
Why is this you ask? It’s because it’s a percentage of your account balance.

Let’s do a quick and easy example:

Let’s pretend Susan has a savings account that offers 3% interest.  She keeps $100 in this saving account. 3% of $100 is $3, which is the amount added to her balance in the form of interest. At the end of the year, Susan would have $103 in her account. (Yes, this is pretty much free money for Susan and can add up over time.)

However, interest doesn’t usually get paid out just once a year (usually the compounding frequency is monthly), which means Susan is earning interest on her collected interest. Unfortunately, Susan won’t receive 3% each month, so there is a calculation that goes along with this (sigh…math). In order to figure out how much interest she would earn each month, she would use the below calculation.

APY = (1 + r/n) n – 1

r= the stated annual interest rate
n= the number of compounding periods each year (generally if it’s monthly, this will be 12)

If compounded monthly, Susan would have earned $3.04 at the end of the year on her original $100.00 making a total of $103.04. Seems small, but that number can add up over time.

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