What Is Annual Percentage Yield (APY), and How Is It Calculated?
Summary
APY is the amount of money you might earn each year from a savings or interest-bearing account, shown as a percentage. Learn more about APY and how it's calculated.
In this article:
Annual percentage yield (APY) is important to know, because it can help you understand the earnings you make on interest-bearing accounts like savings and certificates of deposit (CDs). Below, we'll break down what APY is, how to calculate this number and how you might use it to choose the right savings account, CD or other interest-bearing account.
What is APY?
APY is a percentage that shows how much interest your money will earn in a year in an interest-bearing account, like a savings account.1 APY takes into account the effect of compounding interest and reflects how often any interest is calculated and added to your account balance. For interest-bearing accounts, a higher APY means your money will grow faster.
What is compound interest?
Compound interest is the cumulative interest you earn for keeping your money in a savings or investment account. With compound interest, you earn a percentage of the principal (the amount you originally put in the account) and the interest you’ve already accrued. Interest can compound on a daily, quarterly, monthly or yearly basis.2
How do you calculate APY?
The Truth in Savings Act, also called Federal Reserve Regulation DD, is a law that sets requirements for how banks and credit unions must disclose APY and interest rates. Banks and credit unions must disclose these numbers in a standardized, uniform way for any account they offer to the public.3 In most cases, you can find the APY on the bank or credit union’s website. You may also be able to get this information on your bank statement or bank’s mobile app. However, if you want to calculate APY manually, here’s the formula you can use:
APY = (1 + r ⁄ n) n – 1
“r” = your annual interest rate in decimal form.
“n” = the number of times the interest compounds per year.
Let’s say you want to open a savings account with a 4% interest rate. The interest rate will be compounded monthly or 12 times per year. In this case, you’d plug these numbers into the formula: r=0.04, n=12. If you do the math with your calculator: (1 + .04/12)^12 – 1, you’ll get a .0407 APY, which is 4.07%.
Let’s say you deposit $300 into a high-yield savings account (HYSA) with a 5% interest rate, compounded monthly. A HYSA is a type of savings account that offers a higher interest rate than a traditional one. At first glance, you might expect to earn $15 over the course of the year. But since the interest compounds monthly, the actual return is a bit higher.
The calculation would look something like this:
(1 + 0.05/12)^12 – 1 = 0.512
The APY would come out to about 5.12%, meaning you’d have around $315.36 after one year.4
What’s considered a good APY?
Since APY rates change often, the definition of a “good APY” fluctuates. However, in 2025, a good APY may fall in the 3.50% to 4.00% or higher range.5 To determine whether a certain account offers a good APY, shop around to explore your options and find out what APYs may be available to you.6
How do you use APY to compare savings accounts?
APY is expressed in a standardized fashion so consumers can compare apples to apples when shopping for accounts to deposit their money. APY makes it easier to compare savings accounts, CDs and money market accounts across different banks and credit unions. The higher the APY, the more you’ll earn over time.
Also, the more often the interest compounds, the higher your returns will be. For example, a 3.5% APY will earn more if the interest is compounded daily (365 days a year) rather than annually (once a year).7
Here are two examples that show how higher APYs could lead to more savings over time:
Savings example #1:
- How much savings is in the account? $20,000
- How long has the money been in the account? One year
- What is the APY? 2.00%
- When is interest compounded? Daily
- Ending balance after a year: $20,408.11
- Interest earned: $408.11
Savings example #2:
- How much savings is in the account? $20,000
- How long has the money been in the account? One year
- What is the APY? 4.00%
- When is interest compounded? Daily
- Ending balance after a year: $20,833.00
- Interest earned: $833.00
By simply choosing a savings account with a 4.00% APY instead of a 2.00% APY, you could double the amount of money you earn in interest. These two examples reinforce how important it is to shop around and compare account options from different banks to make sure the account aligns with your money goals.
Make the most of your savings with APY
By understanding what APY is and how it’s calculated, you could make smart money decisions, especially when choosing where to keep your cash. Remember, even a small difference in the APY could lead to significant savings over time.
Sources:
1,2 https://www.experian.com/blogs/ask-experian/apy-vs-interest-whats-the-difference/
3 https://www.investopedia.com/terms/r/regulation-dd.asp
4,6,7 https://www.nerdwallet.com/article/banking/what-is-apy
5 https://www.bankrate.com/banking/savings/what-is-apy/
This article is for general education and informational purposes, without any express or implied warranty of any kind, including warranties of accuracy, completeness, or fitness for any purpose and is not intended to be and does not constitute financial, legal, tax, or any other advice. Parties (other than sponsored partners of OneMain Financial (OMF)) referenced in the article are not sponsors of, do not endorse, and are not otherwise affiliated with OMF.
