What is Annual Percentage Yield (APY)?

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APY — short for annual percentage yield — tells you exactly how much interest your savings will earn in a year. Unlike a simple interest rate, APY factors in compound interest, which is when you earn interest not just on your initial deposit but also on the interest you’ve already accumulated.

This matters because two accounts with the same interest rate can pay you different amounts depending on how often they compound. An account that compounds daily will earn you more than one that compounds monthly, even with identical interest rates. Here’s what you need to know to maximize your savings.

What does APY mean?

APY is the total amount of interest you’ll earn in one year, expressed as a percentage. It’s the most important number to look at when comparing savings accounts or certificates of deposit (CDs).

The magic of APY lies in compound interest. When your account compounds interest, you start earning returns on your returns. If you have $10,000 earning 5% APY with monthly compounding, you don’t just earn $500— you earn $512 because each month’s interest gets added to your balance and starts earning interest too.

Banks are required by federal law to disclose APY, making it easy to compare accounts apples-to-apples.

Ready to maximize your savings? Compare today’s best savings rates to see which accounts pay the most.

What’s a typical APY?

APY varies dramatically based on where you save.

That difference between 0.61% and 4.20% is massive. On a $10,000 balance, you’d earn $61 per year at the national average versus $420 at a top rate — that’s over $350 left on the table.

The lesson? Shop around. Don’t settle for your brick-and-mortar bank’s rate when online banks pay six times more.

How APY and compounding work together

Here’s why APY matters more than interest rate: compounding frequency changes your actual earnings. Look at three accounts with identical 4% interest rates but different compounding:

Daily compounding earns you an extra $8 per year on this balance. Over five years, that gap widens to nearly $50. This is why you should always compare APY, not interest rates. APY already includes compounding, so you’re seeing the true earning power.

Want to see how much you could earn? Use Bankrate’s savings calculator to run your numbers.

APY vs. APR: Know the difference

APY shows what you earn on savings. APR (annual percentage rate) shows what you pay on loans. When you’re saving money, you want the highest APY possible. When you’re borrowing money — for a mortgage, personal loan, or credit card — you want the lowest APR possible. Learn more about APY vs. APR.

For loans, APR includes both the interest rate and fees, giving you the total cost of borrowing. That’s why a mortgage might advertise a 6.5% interest rate but have a 6.75% APR once you factor in closing costs and fees.

Is APY variable or fixed?

It depends on the account.

You’ll find fixed APYs on accounts like CDs, which lock in your rate for the entire term (6 months, 1 year, 5 years, etc.). Your rate won’t change even if market rates drop.

You’ll find variable APYs on savings accounts and checking accounts, which means they have rates that fluctuate. Banks will adjust rates based on Federal Reserve policy and competition.

The Federal Reserve’s benchmark rate directly impacts APYs. When the Fed raises rates, banks typically increase savings APYs to attract deposits. When the Fed cuts rates, savings APYs usually fall too.

This is why it’s smart to lock in high CD rates when they’re available — you’re protecting yourself from future rate cuts.

How to find an account’s APY

By law, banks must display APY prominently. You’ll find it:

• On bank websites and account comparison pages
• In account disclosures and fine print
• On monthly statements

Don’t just look at interest rate — that doesn’t tell the full story. The APY is what actually matters for your bottom line. If you’re comparing accounts, Bankrate’s rate tables make it easy to see which banks pay the most, updated daily.

Bottom line

APY is the single most important number when choosing where to save. It tells you exactly what you’ll earn, accounting for both the interest rate and how often that interest compounds.

With top savings accounts paying over six times the national average, shopping around isn’t optional — it’s leaving money on the table. The difference between a 0.61% APY and 4.20% APY is hundreds or thousands of dollars in your pocket each year.

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