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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