APY (Annual Percentage Yield)
The real annual return you earn on a deposit or investment after compounding is factored in—basically, what you'll actually take home when interest earns interest over the year.
APY shows you what you'll really earn on a savings account, CD, or other deposit once compounding does its thing. Unlike APR (the simple interest rate), APY accounts for the fact that your interest earns its own interest throughout the year—so it's a more honest number.
The math behind it: APY = (1 + r/n)^n - 1, where r is the stated annual rate and n is how many times interest compounds per year. In plain terms, a savings account advertising 5.00% APR that compounds daily actually yields 5.13% APY. That extra 0.13% is free money from daily compounding.
Banks are required by the Truth in Savings Act to show you the APY on deposit products, which makes comparison shopping straightforward. When you're looking at high-yield savings accounts, always compare APY—not APR. Banks will naturally advertise whichever number looks better for them.
As of 2025, the best high-yield savings accounts offer 4-5% APY, a huge jump from the 0.01-0.50% that was normal during the low-rate era of 2009-2022. Online banks usually pay the most because they skip the cost of running physical branches.
If you're in crypto, you'll see APY used for staking rewards and DeFi yields too. Just know that crypto APY comes with very different risks—no FDIC insurance, rates that can change overnight, and price swings on the underlying asset that can easily overshadow whatever yield you earned.
Frequently Asked Questions
▸What's the difference between APY and APR?
APR is the raw annual interest rate before compounding. APY includes the effect of compounding, so it shows your true annual return. For savings and CDs, APY is always equal to or higher than APR—the gap grows with more frequent compounding. Always compare APY when shopping for savings accounts.
▸What's a good APY for a savings account?
In 2025, competitive high-yield savings accounts pay 4-5% APY. Traditional big banks may offer as little as 0.01%. Online banks consistently offer the best rates because they don't have branch overhead—so start your search there.
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