Definition
What money actually earns in a year once compounding is included. Use APY to compare savings accounts and CDs; it is the honest version of an interest rate.
Why it matters
Banks advertise many numbers; APY is the only one that lets you compare apples to apples, because it bakes in compounding. The gap between a big bank's APY and an online bank's APY is free money.
Example
$10,000 at 4.00% APY earns about $400 in a year. The same $10,000 at a traditional 0.40% APY earns about $40. Same money, same insurance, ten times the interest.
Put it into practice
Related terms
Annual percentage rate (APR)High-yield savings account (HYSA)Compound interestCertificate of deposit (CD)
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.