*Personal Finance Insider writes about products, strategies, and tips to help you make informed decisions with your money. We may receive a small commission from our partners, such as American Express, but our reports and recommendations are always independent and objective.*

- APY is a metric that measures your interest rate over one year, including compounding.
- APY tells you how much you will earn on a savings or investment account balance per year.
- You can open a high yield savings account to get a higher APY than with a regular savings account.
- See Insider’s Picks For The Best High Yield Savings Accounts Â»

When you examine the savings and investment products of banks and other financial companies, you are likely to see the term APY.

APY, abbreviation of “**A**annual **P**percentage **Yes**field, â€is an important measure of interest rates that allows you to compare rates between bank accounts on an apple-to-apple basis.

Every savvy banking customer should know what APY is and how it affects their money.

## What is APY?

APY, or Annual Percentage Return, measures your interest rate over one year, including the effects of compounding. If you look

high yield savings accounts

, for example, APY tells you how much interest you will earn on your balance over the course of a year.

The APY is the most commonly used interest rate measure for savings accounts. (The APR, a similar interest rate measure, is most often applied to debt products, such as credit cards and loans.)

The APY formula is:

APY = (1 + r / n) ^ n – 1

In this formula, r is the interest rate and n is the number of compounding periods per year. If an account is compounded monthly, n is 12, for example. It works with almost all types of savings or investment accounts, including money market savings accounts.

## How APY works

To get a better idea of â€‹â€‹how APY works, let’s look at an example that uses real numbers.

This high yield savings account has an interest rate of 0.499% and an APY of 0.50%. You will see the APY rate of 0.50% in the advertisement, even though the “interest rate” paid is 0.499%. So what’s the difference? Compound.

This account pays account holders monthly interest and monthly compound interest. If you make a deposit of $ 10,000 at the start of the year and earn a simple interest rate of 0.499%, you would have $ 10,049.90 at the end of the year. But because you earn interest every month, you will earn a little more interest in the second month than the first. Each month, you earn interest on the interest you previously credited.

When you factor in the monthly compound, you actually earn 0.50% interest over the year. This is how the APY of 0.50% is calculated. If you save $ 10,000 in a 0.50% APY account, you will end up with $ 10,050.00 at the end of the year.

While in this example the difference is only 10 cents, the difference becomes larger with higher balances.

The period of composition also influences the APY. The more interest is compounded or added to the balance, the higher the APY. An account compounded daily will have a higher APY than an account compounded monthly even though it has the same interest rate. The Ally High Yield Savings Account is an example of an account that uses daily compounding.

## Variable vs fixed APY

Most accounts have an APY variable. This means that the interest rate can change at any time. CD accounts generally carry a fixed rate for the term of the CD. Savings, checking and other accounts generally have variable interest rates, and therefore a variable APY.

Accounts with a variable APY typically see rates rise and fall along with market interest rates. When the Federal Reserve raises or lowers its target interest rate, variable rate accounts usually follow.

## Put APY into action for your finances

The annual percentage return isn’t just for dinner conversations. It makes a real difference in your personal finances. Over the decades, most people save and invest until retirement, the difference between a low interest account and one with a high APY can easily be several thousand dollars.

If you’ve had the same old savings account for a while, this might be a great time to check your APY and compare it to major accounts online. While the average interest rate for savings accounts today is 0.05%, some online accounts pay up to 0.50% APY.

More money in your pocket is always a good thing. Use your knowledge of APY to get the most out of your savings.