Annual Percentage Yield (APY) reveals the true earning power of your savings by accounting for compound interest. This calculator shows you exactly how much your money earns when interest compounds on interest throughout the year.
How This Calculator Works
This calculator determines your effective annual yield:
- Interest Rate (APR): The stated nominal annual interest rate
- Compounding Frequency: How often interest is added to your balance
- APY: The effective annual yield including compounding effects
- Comparison: See the difference between APR and APY
The Formula Explained
APY = (1 + r/n)^n - 1
Where:
- APY = Annual Percentage Yield (effective rate)
- r = Nominal annual interest rate (as a decimal)
- n = Number of compounding periods per year
Example: 5% APR compounded monthly: APY = (1 + 0.05/12)^12 - 1 = 5.116%
Step-by-Step Example
Comparing Savings Accounts
You're comparing two savings accounts offering 5% interest:
| Account | APR | Compounding | APY | Earnings on $10,000 |
| Bank A | 5% | Annually | 5.00% | $500.00 |
| Bank B | 5% | Monthly | 5.116% | $511.62 |
| Bank C | 5% | Daily | 5.127% | $512.67 |
Bank C earns $12.67 more per year—which compounds further over time!
Frequently Asked Questions
What is APY and why does it matter?
APY (Annual Percentage Yield) is the effective annual return on your money, including the effect of compound interest. Unlike the stated interest rate (APR), APY shows what you actually earn. When comparing savings accounts, always compare APY, not the advertised interest rate.
How is APY different from APR?
APR (Annual Percentage Rate) is the base rate without compounding. APY includes compounding effects, making it higher. A 5% APR compounded daily equals a 5.127% APY. For savings, you want high APY. For loans, you want low APR (though lenders must disclose APY on savings products).
Why does compounding frequency matter?
More frequent compounding means interest is added to your balance more often, so you earn interest on that new interest sooner. Daily compounding earns more than monthly, which earns more than annually—though differences are small at lower rates and short time periods.
What's considered a good APY for savings?
High-yield savings accounts typically offer 4-5% APY (as of 2024-2025), while traditional bank accounts may offer only 0.01-0.1%. Online banks often provide higher rates due to lower overhead. Money market accounts and CDs may offer even higher APY for larger deposits or longer terms.
How do I calculate monthly interest from APY?
To find monthly equivalent: Monthly Rate = (1 + APY)^(1/12) - 1. For a 5% APY: Monthly = (1.05)^(1/12) - 1 = 0.407%. On a $10,000 balance, that's about $40.70 in the first month.
Does APY apply to investments and stocks?
APY is typically used for guaranteed-return products like savings accounts, CDs, and money market accounts. Stock market returns are expressed differently because they're not guaranteed and fluctuate. When investment ads mention APY, be cautious—it may be marketing a specific period rather than a guaranteed rate.
What is the APY on CDs vs savings accounts?
CDs (Certificates of Deposit) often offer higher APY than savings accounts because you lock your money for a fixed term. The tradeoff is reduced liquidity. A 12-month CD might offer 0.25-0.5% higher APY than a high-yield savings account, but you can't withdraw early without penalty.
How does inflation affect real APY?
Your real return is APY minus inflation. If your savings account earns 5% APY but inflation is 3%, your real purchasing power only grows by 2%. During high inflation periods, even "high-yield" savings may barely keep pace with rising prices.
Key Points to Remember
- Compare APY, not APR: APY is what you actually earn
- Frequency matters: Daily compounding beats monthly beats annually
- Small differences add up: 0.1% APY difference compounds over years
- Watch for intro rates: Some accounts advertise promotional APY
- Consider inflation: Real return = APY - inflation rate