APY, short for annual percentage yield, sits next to account offerings on bank websites.
Most types of bank accounts — high-yield savings accounts, certificates of deposit, checking accounts — display APY so that you can easily figure out how fast your money will grow.
But what is APY exactly?
The annual percentage yield of a bank account tells you how much interest you can expect to accrue each year (cha-ching!).
Not to be confused with annual percentage rate (APR), APY factors in both your interest rate and compound interest.
How APY works
The key differentiator of APY vs. APR is compound interest. The calculation of APY includes the interest you earn on your interest.
When you deposit $10,000 into a one-year certificate of deposit with a 2.5% interest rate, and the interest compounds monthly, your APY would be 2.53%. After a year, you'll have $12,530.
The higher the APY on a bank account, the more money you'll be making year over year.
The national average APY for savings accounts sits at a measly 0.1% according to the FDIC. But if you check online banks you can typically find much higher rates. For example, CIT Bank offers as much as 2.3% APY on savings accounts.
With one-year CDs, you can expect an average APY of 0.58%, but you'll find APY as high as 3% if you take your search online.
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