Chris O'Shea
The term “Annual Percentage Yield” (APY) plays an important part in your finances. APY refers to the percentage of interest, you earn on your bank or credit union accounts. Let’s take a look at what you should know about APY.
What is APY?
APY uses compound interest to calculate the return on your interest-earning accounts. Depending on the account, the interest could compound daily, monthly, or annually. Compound interest is the interest added to your principal balance. Let’s say you earn $7 on your $20,000 balance this month. Next month you’ll earn interest on $20,007.
APY vs APR
The terms APY and APR seem similar, but they are different. You can think of it this way: APY refers to the interest you earn, and APR — annual percentage rate — refers to the interest you pay.
APY Variables
Depending on what type of savings account you have, APY can vary. If you have a regular savings account, the APY will fluctuate based on the market. If you have a CD, the rate will stay the same as when you purchased it.
Why APY Matters to You
APY matters because the more money you have saved, the more money you can earn. Compound interest might seem small, but it adds up over time. So when shopping for a savings account, be sure to find the best APY available. Check online banks and credit unions, as they typically offer better APYs for their accounts than big banks.
Jean Chatzky
