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What Is APY? A Complete Guide by Beem

Over a year, APY calculates how much interest an account has earned. Here’s everything you need to know about calculating APY in the USA.
APY
What Is APY? A Complete Guide by Beem
In this article
APY is a valuable tool for making financial projections over more extended periods, particularly those that involve long-term changes. Let's understand the APY calculation process and the importance of APY for your savings.

When managing your finances, it’s crucial to understand the terms and concepts that can influence your earnings or costs. One such term that often comes up in savings accounts, investment opportunities, and loans is APY or Annual Percentage Yield.

In this comprehensive guide, Beem—the #1 Smart Wallet App—will help you understand APY, how it’s calculated, and why it’s important in personal finance.

A savings account and a certificate of deposit (CD) are classified as interest-bearing accounts. Interest rate and annual percentage yield (APY) refer to these accounts interchangeably. Knowing the difference between the two is essential to determine your deposit’s return rate.

Based on the compounding frequency and an account’s interest rate, an Annual Percentage Yield (APY) measures the interest earned over a year. It is a valuable tool for making financial projections over more extended periods, particularly those that involve long-term changes. The APY calculation process and the importance of APY will be explained in this article.

What is APY (Annual Percentage Yield)?

What is APY

APY stands for Annual Percentage Yield, a metric that reflects the real return on savings or investments over a year, accounting for the effects of compounding interest. Unlike a simple interest rate, APY includes compounding, which means it considers how often interest is applied to the balance throughout the year.

APY or Annual Percentage Yield is a standardized way to represent the interest rate you earn on a savings account or investment over a full year, taking into account the effect of compounding interest.

An interest rate measures the return within an interest period, and simple interest accounts pay interest on the original principal. Meanwhile, compound interest accounts pay interest not just on the principal but also on any interest already accrued. Therefore, an account with 1% interest that compounds monthly earns less than an account with 1% interest that compounds annually. This is taken into account in APY.

For instance, a savings account with a 2% annual interest rate compounded monthly will have a slightly higher APY than one compounded yearly, resulting in more money earned over time.

How Is APY Different from APR?

Both APY and APR (Annual Percentage Rate) are financial metrics, but they serve different purposes:

FeatureAPYAPR
DefinitionReflects earnings with compoundingReflects cost without compounding
Used ForSavings, investmentsLoans, credit cards
CompoundingIncludes compounding effectExcludes compounding effect

While APR focuses on the cost of borrowing, APY highlights the earnings or returns on your savings.

How Does APY Work?

Over a year, APY calculates how much interest an account has earned. Compound interest is what you make on your principal amount plus interest on your earnings plus your interest rate.

Because interest is compounded more frequently on one-year term accounts than on two-year term accounts, a savings account held for one year at a lower interest rate may have more interest earned. Consumers can compare APYs since they annualize the investment, even if they hold for different periods and the interest is compounded differently, like quarterly or monthly.

Savings, checking, CDs, and money market accounts pay APY. Each of these is a deposit-type investment account.

How To Calculate APY?

There’s a formula to calculate APY. You’ll need to know the interest rate for the account in question to use the formula. Here is a calculator that can be used to estimate how much your money might grow. It’s essential to save for something specific if you’re saving for it.

StepsFormula
1. Substitute the period rate and the compounding period number in the formula. It is compounded monthly in this case, so the compound period is 12.(1 + 0.05 ÷ 12)12 – 1
2. Use parentheses to solve the operation.(1.0041666666667)12 – 1
3. Give the parentheses a power of 12 by raising the quantity in parentheses.1.05116 – 1
4. Calculate APY by subtracting by 1.5.12%
5. Take APY and multiply it by the amount you deposited into the account. Based on this, you will find out how much interest you have earned overall.$1,000 x 5.116% = $51.16
6. Subtract the original deposit from the interest earned to calculate the interest earned. Your account balance at the end of the year will be determined by this calculation.$1,000 + $51.16 = $1,051.16

APY Formula

Mentioned below is the formula to calculate APY:

APY = (1 + r/n)n + 1

There are n periods over which interest compounds, while r is the interest rate you earn on a deposit account. Many people run these numbers on spreadsheets, but an APY calculator is often the easiest way.

The APY is something your bank or credit union usually provides, so you will only need to calculate it occasionally.

Why Is APY Important?

APY is essential because it provides a clear picture of your potential earnings or costs, helping you make informed financial decisions.

For Savings Accounts

When comparing savings accounts, a higher APY indicates better returns on your deposits. Always choose accounts with competitive APYs to maximize your savings.

For Investments

In investment portfolios, APY helps you evaluate the profitability of fixed-income instruments like bonds or certificates of deposit (CDs).

For Loans or Credit Cards

Understanding APY can also help you avoid confusing it with APR. For example, some credit card companies may advertise low APRs, but the actual cost (with compounding) may be higher.

Real-Life Examples of APY

High-Yield Savings Accounts

Let’s say Beem users deposit $5,000 into a high-yield savings account offering 4% APY. After one year, the account balance will grow to approximately $5,200, thanks to compounding.

Certificates of Deposit (CDs)

A 12-month CD with a 3.5% APY means that for every $10,000 you invest, you’ll earn $350 in interest after a year.

Credit Cards

Some credit cards may advertise a 15% APR but, with compounding, the actual cost (APY) could exceed 16%. This is why understanding APY is critical to managing credit responsibly.

Beem’s Tips for Leveraging APY

Beem empowers users to stay on top of their finances with tools to maximize APY earnings and minimize costs.

Here’s how Beem can help:

1. Compare APYs

Beem simplifies the process of comparing APYs on savings accounts, CDs, or other financial products, ensuring you choose the best options for your goals.

2. Automate Savings

With Beem’s budgeting and savings features, you can set aside funds in high-APY accounts automatically, helping you grow your money faster.

3. Avoid Debt Traps

Beem’s credit monitoring tools help you avoid high-APY debts, like credit cards with compounding interest, by alerting you to better alternatives.

How Beem Can Be Your APY Expert

Beem isn’t just a smart wallet app—it’s your ultimate financial partner. With Beem, you can:

  • Compare and select the best high-APY savings options.
  • Automate savings and investments to maximize returns.
  • Track your financial health with credit monitoring and budgeting tools.

Why Choose Beem?
Beem is the #1 Smart Wallet App, offering tools to file taxes, send money, manage budgets, and even get instant cash without interest through Everdraft™. Whether you’re growing savings or managing spending, Beem has the resources you need to make every financial decision count.

What Is a Good APY Rate?

There are often fluctuations in APY rates, and a reasonable rate may not be a reasonable rate anymore because of macroeconomic changes. The APY on savings accounts tends to rise when the Federal Reserve raises interest rates.

So when monetary policy is tight or tightening, APY rates on savings accounts are usually better. Furthermore, there are often low-cost, high-yield savings accounts with competitive yields.

How To Find the Best APY?

You should find the best APY savings account to grow your savings over time. The key to getting the highest APY is to compare different banks and bank accounts beforehand.

A Guide to Finding the Best APY on Savings Accounts

Knowing where to look when searching for the best APY savings account is essential. To open a savings account, you must choose a bank, credit union, or online bank.

Online banks generally offer higher APYs than brick-and-mortar banks because their overhead costs are lower. Additionally, credit unions tend to offer their members competitive annual percentage rates.

Compare Savings Account APYs at Online Banks by Considering the following:

  • Your needs and how that account fits them
  • What type of APY is offered: flat or tiered
  • Expenses you’ll incur

Banks can offer a single APY on savings accounts regardless of account balance. If you have $1,000 in your account, you’ll get the same APY as someone with $100,000.

Some banks reward customers with higher balances with a higher interest rate through a tiered-earning structure. In addition, some banks offer higher interest rates on balances below certain thresholds.

Considering bank fees can also help you evaluate whether any trade-offs are being made. A steep maintenance fee could negate your interest if you earn a higher APY.

Another thing to keep in mind is introductory APYs. The bank may offer an increased promotional APY during the first year of opening your account, then reduced after that. Be sure to check whether the APY offered by a savings account is ongoing or temporary before enrolling.

A Guide to Finding the Highest APY on Checking Accounts

When earning interest on your checking account, you should do some digging. The number of high-yield checking accounts is smaller than that of high-yield savings accounts. Generally, these are available only to customers with considerable balances or willing to pay more.

Consider checking out online banks’ high-yield checking options. As a result, you will not be able to access your checking account at a branch, but you may earn the highest APY by banking online, and you may also pay fewer fees or have lower minimum balance requirements.

Besides checking account annual percentage yields, you should also consider the daily withdrawal and deposit limits, check-writing limits, mobile banking access, and ATM access when comparing checking account APYs.

It might not make sense in the long run to sacrifice convenience to earn a higher APY, as it may not make sense in the short run.

APY

Special Considerations

Compound Interest

A compound is made over a set period, usually daily or monthly. Compounding interest daily gives you more money than compounding interest monthly.

The difference is manageable unless you’re dealing with large amounts, but every little bit counts.

A high annual percentage yield (APY) should be a priority when shopping for a savings account or CD. You can expect your cash to grow faster if the rate is higher. It is also essential to check how often this rate is compounded – some accounts compound daily rather than monthly, allowing you to earn more. 

How Does Compound Interest Work?

Interest compounded over time is what you call compound interest.

Put, it’s interest paid on both the principal (your deposits into the account) and the interest you earn. It is possible to build wealth over a long period by investing with compounding. Unlike compound interest, the principal deposit is the only thing that earns interest with simple interest.

Different periods can be used to compound interest. Depending on the compounding method, this could occur every day, every month, every quarter, or every year.

You can calculate the compound interest rate of your money using a compound interest calculator. Using a compound interest calculator can be complicated, so here are a few things to keep in mind:

Risk

Investment yields are usually higher for investors who take on more risk or sacrifice more. You can say the same about checking, savings, and CD APYs.

Consumers who keep money in their checking accounts want to have their money available on demand to pay for expenses. Sometimes, consumers must pull out their debit cards, buy groceries, and draw from their checking accounts at short notice. Because checking accounts don’t require any risk or sacrifice from the consumer, they often have the lowest APY.

Savings accounts are suitable for holding money you don’t need right now. Before using the money, the consumer might have to transfer the money to their checking account before using it. Normal savings accounts don’t let you write checks. Since savings accounts have higher limits, they usually have higher APYs than checking accounts.

APR vs. APY: What’s the Difference?

You owe interest on borrowed funds based on the annual percentage rate, or APR. When you borrow money, you will know exactly how much you’ll have to pay via the APR, just like with an APY.

You can calculate your interest income over time using APY, which applies to savings and CD accounts. The difference between APR and APY is how much you owe and earn.

APY vs. Interest Rate

An account’s APY is how much interest you earn on money over a year, whereas an interest rate is how much interest you might earn on a savings account or investment. A bank account’s interest rate is only one component of its APY, determining how often your interest compounds. You can measure how much money you’ll make in a year by the APY of a deposit account (like a high-yield savings account).

Dividend Rate vs. APY

Rather than paying interest to members, credit unions return earnings as dividends.

Here’s the formula for calculating dividend earnings:

A = P (1 + rt)

A = interest-bearing money after n years

P = You will be responsible for paying the principal amount (your first deposit or the first credit card bill).

r = the annual dividend rate (as a decimal)

t = the number of years (time) the amount is deposited for

In the case of a credit card, the principal amount is the first payment due. Look something like this:

$10,001 = $10,000 (1 + 0.0001*1)

Dividend earnings are calculated based on the dividend rate and compounding frequency over a year.

Find out the difference between the Annual Percentage Yield and Dividend Rate.

Frequently Asked Questions About APY

What’s a Good APY for a Savings Account?

A good APY typically ranges from 3% to 5% for high-yield savings accounts, though rates may vary based on market conditions.

How Does APY Impact Investments?

APY helps investors understand the compounding effect on returns, making it easier to compare different investment options.

Is APY Fixed or Variable?

It can be either. Fixed APY remains constant over the term, while variable APY fluctuates with market conditions.

Why Is APY Higher Than the Stated Interest Rate?

APY accounts for compounding interest, which increases the effective rate of return over time.

Does Beem Offer High-APY Accounts?

Beem helps users find high-APY accounts and provides tools to optimize savings and financial growth.

How Often Should Interest Be Compounded for Better APY?

The more frequent the compounding (daily or monthly), the higher the APY.

Is APY Relevant for Loans?

APY is not directly used for loans; APR is the standard metric. However, understanding APY can help assess total costs when compounding applies.

How Can Beem Help Maximize My APY?

Beem provides smart budgeting, savings automation, and real-time financial insights to ensure you make the most of APY-earning opportunities.

Is 3% APY high?

Some financial institutions’ annual percentage yields – APYs – now exceed 3%. This kind of interest rate was unheard of earlier this year when some online banks raised APYs from 0.5% to 0.6%.

How good is 5% APY?

Yes, a 5% APY is the highest interest rate you can get on the market.

Which bank gives 7% interest on savings accounts in the USA?

Landmark Credit Union and Alpena Alcona Credit Union.

What does 5.00% APY mean?

You earn 5% interest on your money if your APY is 5%.

Who has the highest APY rate?

The following have the highest APY rates:

1. BluPeak Credit Union
2. TotalDirectBank
3. Milli
4. Newtek Bank 
5. UFB Direct 
6. Valley Direct
7. Evergreen Bank Group
8. Popular Direct

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Author

Picture of Allan Moses

Allan Moses

An editor and wordsmith by day, a singer and musician by night, Allan loves putting the fine in finesse with content curation. When he's not making dad jokes or having fun with puns, he's constantly looking to tell stories out of everything.

Editor

This page is purely informational. Beem does not provide financial, legal or accounting advice. This article has been prepared for informational purposes only. It is not intended to provide financial, legal or accounting advice and should not be relied on for the same. Please consult your own financial, legal and accounting advisors before engaging in any transactions.

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