APY

APY is the actual annual return you earn on a deposit or investment once compounding is factored in, making it the correct figure for comparing accounts with different compounding schedules. A nominal interest rate alone doesn't tell the full story, since compounding more frequently at the same nominal rate produces a higher effective return.

This is why two savings accounts advertising the same "interest rate" can pay out differently over a year, one compounding daily will produce a slightly higher APY than one compounding monthly. The Compound Interest Calculator shows this effect directly when comparing different compounding frequencies.

APY = (1 + r/n)^n − 1

Where r is the nominal annual interest rate and n is the number of compounding periods per year.

A savings account offers a 5% nominal annual rate, compounded monthly (n = 12):

• APY = (1 + 0.05/12)^12 − 1 ≈ 5.116%

Compare that to the same 5% nominal rate compounded annually (n = 1), which gives an APY of exactly 5%. The monthly compounding version pays out slightly more over the year, purely from compounding frequency.

• Always compare APY, not the nominal rate, across accounts. The nominal rate alone hides the effect of compounding frequency, which is exactly what APY corrects for.
• More frequent compounding always produces a higher or equal APY. Daily compounding beats monthly, which beats annual, at the same nominal rate, though the differences shrink at typical savings rates.
• APY assumes funds stay in the account for the full year. Withdrawing early or adding funds mid-year changes your actual realized return away from the stated APY.
• Fixed vs variable APY matters for planning. A CD locks in its APY for the full term, a regular savings account's APY can move with broader rate changes at any time.
• Fees can erode APY's real-world value. A high APY account with monthly maintenance fees can underperform a lower APY, no-fee account for smaller balances.