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Money glossary

What Is APY? Annual Percentage Yield Explained

The number to compare when you choose where to keep your savings.

By Updated Reviewed by a finance expert

How APY works

Interest can be added to your balance daily, monthly or quarterly. Each time it is added, the next interest payment is calculated on a slightly bigger balance. APY rolls that compounding into one yearly number. Under the federal Truth in Savings Act, banks must show the APY on deposit accounts.

Example

You put $5,000 in an account paying a 4.00% interest rate, compounded daily.

  • APY = (1 + 0.04 ÷ 365)³⁶⁵ − 1 ≈ 4.08%
  • After one year you have about $5,204 — $204 of interest, a little more than the $200 that 4.00% simple interest would pay.

The gap grows with time and bigger balances. The compound interest calculator shows it year by year.

APY vs APR

  • APY — what you earn on savings, including compounding.
  • APR — what you pay to borrow, usually without compounding.

Using APY in a savings plan

When you plan a goal — an emergency fund, a trip or a down payment — the APY of your account reduces how much you need to put in yourself. Enter it in the savings goal calculator to see your monthly amount.

Frequently asked questions

Is APY or interest rate more important?
APY. Two accounts with the same interest rate can pay different amounts if they compound differently; APY already includes that, so you can compare them directly.

Can APY change?
On regular and high-yield savings accounts, yes — banks can change the rate at any time, often after the Federal Reserve changes rates. A CD locks the APY for its term.

Is APY taxed?
Interest you earn counts as taxable income in the US. Your bank sends Form 1099-INT if you earn $10 or more in a year.

Written by

Emma Whitfield

Finance Specialist & Editor, VaultlyApps

Researched against primary US sources and reviewed by a finance expert on our team. Written for US readers — general education, not financial, tax or legal advice. Editorial policy · Disclaimer

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Related terms

Money glossary

APR

APR (annual percentage rate) is the yearly cost of borrowing money, shown as a percentage. On a credit card it is the interest rate; on a loan or mortgage it also includes certain fees, so it shows the full cost of credit and lets you compare offers.

Compound interest

Compound interest is interest calculated on your original money and on the interest it has already earned. Each time interest is added, the next round is calculated on a bigger balance — so savings grow faster over time, and unpaid debt grows faster too.

Emergency fund

An emergency fund is cash you keep for unexpected essential costs or lost income — a job loss, a medical bill or an urgent car repair. A common guideline is three to six months of essential expenses, kept in an easy-to-reach savings account.

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