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A Guide to APY

If you're focused on saving money for the short or long term, APY, or annual percentage yield, is an acronym worth knowing and understanding because it gives you a good idea of what your money can earn in a year.

A feature of most savings accounts and some checking accounts, APY will help you compare potential accounts when you're looking to open a new one.

What is APY? A definition

Your APY simply shows the amount of interest you earn on your money in a bank account over one year, including compound interest. Compound interest is the interest you earn both on the total amount of your principal plus any interest you've accumulated over time. Interest typically can compound daily, monthly or annually, then it's added to your total savings.

The higher the APY, the better for your savings efforts. It definitely benefits you to pay attention to your bank's APY. The highest APY savings account can help you save for goals like a new car, trip or down payment on a home.

How APY is calculated

The formula for APY looks scarier than it actually is.

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

In this case:

r = interest rate

n = number of compounding periods per year (If a bank compounds monthly, for example, there are 12 compounding periods per year. If a bank compounds daily, there are 365 compounding periods per year.)

For example:

r = 0.0202 (2.02% interest rate)*

n = 12 (12 compounding periods per year)

APY is 2.04%* = (1+(0.0202/12))12 - 1

Now that we know the APY is 2.04%*, we can bring this to life. If you invested $5,000 with that APY of 2.04%* and monthly compounding (with no additional deposits/withdrawals), you would have $5,101.94 in a year. If you'd like to calculate the interest yourself, here's the formula you would use:

A = P(1+r/n)nt

A = the future value of the investment, including interest
P = the principal investment amount (the initial deposit)
r = the annual interest rate (in decimal form)
n = the number of times that interest is compounded per unit
t = the time the money is invested

This formula shows how the initial deposit of $5,000 becomes $5,101.94:
APY is 2.04%* = $5,000 (1+0.0202/12)(12*1) = $5,101.94

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APY vs. Interest Rate

It's important to understand the difference between the APY and interest rate. While APY includes compound interest in its calculation in the context of savings, the interest rate is simply the interest paid on savings. It does not factor in compound interest. When you begin to compare rates, you may see these terms regularly.

The more often the compounding frequency, the greater the difference between APY and interest rate. While you earn more money as your interest compounds with APY, the interest rate does not work the same way.

For instance, if you deposit $10,000 into a savings account with an interest rate of 5%*, you would earn $500 in interest after one year. However, if compound interest is applied to that same account daily, you would earn closer to $512, which will continue to grow year over year.

APY and saving money

APY is your friend when it comes to saving for the future. Small differences in rates can add up quickly, so even a few hundredths of a percentage point can be meaningful in the long run. You can use APY to better understand how one savings account may help you reach your financial goals versus another.

While a high APY is important, it shouldn't be your only criteria for opening an account. You will also want to be on the lookout for fees or minimum opening deposits, ease of access to savings and fund transfers, bank services and other product benefits, features and offers.

Take the time to examine various savings accounts to ensure you select the best APY savings account for your needs. The amount you can make on your savings will vary based on several factors, including:

  • The financial institution
  • Frequency of compounding periods
  • The size of your initial deposit
  • Any additional deposits
  • Fees, if any

If you can add to your savings accounts - even a small amount each week or month - then your APY will be even more powerful when it comes to growing your savings.

As you can see, when you understand the compounding power of APY, you can better plan how to grow your savings. Then you can let your savings carry you faster towards your financial goals.

Citi offers competitive savings rates and a variety of account options. You can check out and compare the latest rates for various accounts online.

*Rate provided is for illustrative purposes only.

The article content provides general information about banking products, however consumers should refer to the terms and conditions financial institutions provide for various products.

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