Financial jargon can be confusing. Take APY for example. It’s a term you might have heard in relation to your savings account or retirement plan, and you’ve probably figured out it has something to do with your interest rate.
But what does it actually mean?
Annual percentage yield, or APY, refers to the rate of return you earn on an investment per year. While it is related to your interest rate, it’s not quite the same thing.
An interest rate tells you how much interest you’ll earn on the money you deposit into your account. But some accounts pay compound interest, which means you earn additional interest on the interest you’ve already accrued. Your APY calculates how much compound interest you’ll earn over the course of a year, taking into account both the interest rate and how often it compounds — in other words, how often you earn additional interest on the interest you’ve already earned.
Let’s look at an example from Investopedia. Say you deposit $100 at a 5% annual interest rate. If the interest isn’t compounded, you’ll have $105 at the end of the year. If the interest is compounded quarterly, however, you’ll have $105.09. Although the interest rate is the same at 5%, your APY, or the actual interest you earn in a year, is around 5.095%.
And if the interest were compounded monthly instead of quarterly, the APY would be even higher.
How APY can help you
If you’re looking for the best rate of return on your savings, APY is often more useful than the interest rate when comparing deposit accounts. That’s because it shows the effects of compound interest and gives you a more accurate picture of how much interest you’ll earn in a year.
For example, let’s say you’re comparing two deposit accounts with the same interest rate. The only difference is that one compounds monthly while the other one compounds annually. By simply glancing at the APY, you could see instantly that the account with monthly compound interest will earn you more than the one that compounds annually.
APY vs. APR
Now that we’ve cleared up what APY means, let’s look at a similar term you may have heard: APR. While the two terms may seem similar because they both refer to interest, they have a very different impact on your finances.
While annual percentage yield (APY) indicates how much interest you’ll earn on money you deposit, the annual percentage rate (APR) tells you much interest you’ll be charged on money you borrow. It comes into play whenever you take out a loan or open a credit card.
Bottom line: When you’re deciding where to deposit your savings, look for the highest possible APY. When you’re applying for a loan or credit card, look for the lowest APR.
How to find the best APY
The more interest you earn each year, the faster your money will grow. To earn the most possible interest on your savings, look for an account with compound interest and a higher APY.
OCCU has a range of deposit accounts with competitive interest rates to meet your needs. Start with our Ignite Savings account, which earns a jaw-dropping 5.25% APY4 on the first $500 you deposit.
Member tip: Try our Ignite Savings calculator to see how much interest you could be earning on your savings.
As your money grows, consider a higher-yield investment such as a certificate of deposit or money market account. You can even earn interest on your checking account with Remarkable Checking, which pays you 2.00% APY1 on balances up to $20,000.
While it pays to shop around, a good rule of thumb is that a credit union will often offer a better APY than a private bank. That’s because we invest our profits back into our members by offering more competitive interest rates.
But don’t take our word for it. Start comparing APYs today and see for yourself.
