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What Is an APY and Why It Matters

What Is an APY and Why It Matters Blog Image
What Is an APY and Why It Matters Blog
By: Laura Baron
When it comes to your savings goals, APY matters. But first, what is APY?

APY, or annual percentage yield, is the real rate of return on money in a bank account and includes how often interest compounds1 or gets added to your balance over time. APY reflects the amount you actually stand to earn in a year on an account that pays interest. With each period going forward, the account balance gets bigger, so the interest paid also increases. The higher the APY on your account, the more money you can earn.

Almost all savings accounts, and even some checking accounts, have APYs. For example, a 4.00% APY means your money earns 4% interest per year. If you deposited $100 in an account that compounds annually, you would have $104 at the end of a year. But most savings accounts compound monthly or even daily. The more frequently interest compounds on your account, the faster your investment grows.

So, who determines how often interest gets compounded? The financial institution sets the frequency of compounding interest, such as daily, monthly, or quarterly. Certificate accounts typically pay compound interest, and some compound daily, giving you an even higher yield.

Why the APY Matters

If you would like to save more money, knowing the APY on your deposit accounts is helpful. When it comes to savings, you have a ton of options. Next time you are considering different savings accounts, take note of the APY and how often the interest compounds. The higher the APY and the more frequent the interest compounds, the higher your rate of return will be.

For example, with Affinity’s SmartStart Savings,2 which compounds interest monthly based on the average daily balance, you can earn up to 4.00% APY on the first $10,000—that's $400 in dividends per year. Another competitive savings account from Affinity is MoreSavings,3 which offers up to 2.25% APY depending on your balance and also compounds interest daily based on the average daily balance.

Affinity Certificates4 all have daily compounding interest. Certificates allow you to lock in your rate with terms ranging from one month to five years, and an APY up to 4.50%. So, if you can afford to stash some money away in a certificate for a set amount of time, you may be rewarded with a higher APY for the trade-off of leaving your money there for a while.

When it comes to APY, here are the key takeaways:

  • Compounding interest helps you earn more on your savings
  • A higher APY means a higher rate of return
  • You can ask your financial institution for the APY on their deposit accounts before you decide

Compounding is the main reason your APY—or actual return—is greater than the simple interest rate on your account, according to Experian5. Think of APY as a tool to help you better understand what you are earning on your savings. The national average savings rate is 0.37% APY6, but you can find higher APYs than that. You have many ways to make an APY work for you and your savings goals. Which are you going to choose?


How to Calculate APY7

You can manually calculate the APY on your deposit account or investment if you know the interest rate. If r is the interest rate and n is the number of compounding periods in a year (if interest is compounded monthly, this would be 12), then:

APY=(1+r/n)n - 1

Remember, you don’t have to do the math yourself to find out your APY. Your financial institution can give you the APY. And you can check the rates and yields on Affinity accounts and certificates here.8

This information is for informational purposes only and is intended to provide general guidance, and does not constitute legal, tax, or financial advice. Each person’s circumstances are different and may not apply to the specific information provided. You should seek the advice of a financial professional, tax consultant, and/or legal counsel to discuss your specific needs before making any financial or other commitments regarding the matters related to your condition.

1. Experian
2. Affinity SmartStart Savings
3. Affinity MoreSavings
4. Affinity Certificates
5. Experian
6. Federal Deposit Insurance Corporation. As of March 27, 2023.
7. How Do You Calculate APY
8. Affinity Rates and Yields