What You Need to Know About APY


The phrase APY, or annual percentage yield, is likely to be used when you create an account with a bank or credit union. You can find out how much interest the account will generate in a year by looking at the APY.

A number of interest-earning accounts have an APY, including checking accounts, money markets, certificates of deposit, high-yield savings accounts, and standard savings accounts. The account will earn more interest as the number increases. The APY, which includes compound interest, is the real rate of return that was earned on your account. The interest you earn on both the money you deposit and the interest you earn on that money is known as compound interest. 

Sometimes people talk about the interest rate on an account, but that’s not the same as APY. Only simple interest, or interest earned on the account’s principle, is taken into consideration when calculating the interest rate.MAs you gain interest on the money in an account, your savings increase. 

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Increase Savings

A positive feedback loop of increasing savings is created when the account balance increases and you receive more interest. A $1,000 deposit into an account with a 1% APY, for instance, would provide $10 in interest over the course of a year.  Even if you didn’t put any additional money into the account after the first year, you would still earn interest because your account balance increased to $1,010 thanks to the interest you received.

The APY also shows how frequently interest is calculated, added to the account, or compounded. The majority of CDs and savings accounts compound daily or monthly. 

Your money will increase more quickly the more often interest compounds, though this effect is often negligible unless the account has a very high balance. When comparing accounts with various APYs or compounding cycles, APY calculations might be useful. The bank or credit union will often compute the APY for you, so you won’t need to.

The APY formula is:

APY = (r/n + 1)n – 1

interest rate, r In a year, there are n compound periods. 

n = 12 if your account compounds once every month.

If your account’s interest rate is 2%, which is denoted as.02, and it compounds every month, the formula would be as follows:

APY = (1 +.02/12)^12 – 1

Your APY would be equivalent to 2% after dividing the figure by 100 to obtain a percentage. You may use a compound interest calculator to calculate how your money might increase over time if you’d rather not perform the arithmetic.

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Source: yahoo

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