What is an APY?
APY stands for annual percentage yield, which is determined by calculating the rate, amount and frequency of compounding, and which can be used to estimate how much money a person can earn on their interest-bearing account over the course of a year. The compounding interest is interest that is reinvested to the account and compounds, so basically you are earning interest on interest. The APY is an estimate based on 365 days, so you can use it to estimate what you could earn if you reinvest the paid interest for a year.
APY vs APR
APY and APR may look similar, but they’re quite different: The former relates to money owed to you, such as interest in a savings account, while the latter relates to money that you owe, such as a bank loan, a credit card payment, an auto loan and so on.
An Annual Percentage Rate used for loans and lines of credit, often includes additional fees, like administration costs, but it’s misleading in some ways because it doesn’t take compounding into account. For instance, if your credit card has a 20% APR and you carry a balance of $1000 for the entire year, you may think you’ll owe $200 in interest. In actuality, you’ll owe an additional $21.34, thanks to compounding interest.
APYs are generally assigned to savings products so financial institutions can give you an accurate estimate of how much you could earn on your account by year’s end. Keep in mind, you’ll likely earn a bit more than the advertised rate over the course of 12 months; how much more depends on how the financial institution pays out interest.
How Does An APY Work?
To understand APY, you need to understand compound interest, which Albert Einstein reportedly said was the “most powerful force in the universe.”
Compounding is when you earn interest on the interest you’ve already earned. For example, if you put $10,000 into an account with a 2% interest rate that pays your interest once a year. By the end of the year you would have earned an extra $200 on your savings.
If your bank pays interest daily, which is what most financial institutions do when it comes to their savings accounts, you’d still earn $200 in interest, but you’d also earn an additional $2.01 on the interest you’ve been paid for a total of $202.01. Your APY, then, would be about 2.0201. If you save regularly and for the long term, those extra payments can add up.
You can see how much you would earn by using one of the many calculators online or the North Trust Finance Online Savings and Online CD calculators available on this site.
How Does APY Work with a Savings Account?
Here’s an estimation of how much you could have after one year, five years and 10 years based on investment amounts of $10,000 and $100,000. For simplicity, we’ll use sample APYs and assume that you are reinvesting your paid interest (not transferring it out of the account).
Starting Amount
|
Years Saved
|
Interest Rate
|
APY
|
Estimated Interest Earned
|
Amount At End Of Term
|
$10,000
|
1
|
2.13%
|
2.15%
|
$215
|
$10,215
|
| $10,000 |
5
|
2.13% |
2.15% |
$1,124
|
$11,124
|
| $10,000 |
10
|
2.13% |
2.15% |
$2,375
|
$12,375 |
| $100,000 |
1
|
2.13% |
2.15% |
$2,105
|
$102,105
|
| $100,000 |
5
|
2.13% |
2.15% |
$11,243
|
$111,243
|
| $100,000 |
10
|
2.13% |
2.15% |
$23,759
|
$123,759
|
As you can see, you can earn quite a bit if you save more and for the long term. You can view the North Trust Finance Online Savings APYs on this site.
How Does APY Work with a Certificate of Deposit?
The APY on a certificate of deposit (CD) works like it does with a savings account. The difference is that CDs are savings products where you can lock in money for a set period of time, usually between six and 60 months. Generally, the longer the term, the higher the APY.
Here’s an estimation of what you could earn with sample APYs and term lengths.
CD Term
|
Initial Deposit
|
Interest Rate
|
APY
|
Estimated Interest Earned
|
Amount At End Of Term
|
6 months
|
$10,000 |
1.69%
|
1.70%
|
£82
|
$10,082
|
| 12 months |
$10,000 |
2.23%
|
2.25%
|
$225
|
$10,225
|
| 24 months |
$10,000 |
2.27%
|
2.30%
|
£465
|
$10,465
|
| 36 months |
$10,000 |
2.37%
|
2.40%
|
£737
|
$10,737
|
| 48 months |
$10,000 |
2.42%
|
2.45%
|
$1,011
|
$11,011
|
| 60 months |
$10,000 |
2.47%
|
2.50%
|
$1,309
|
$11,309 |
You can view the North Trust Finance Online CD terms and APYs on this site.
Why APY Matters
Once you understand how APY works, you can more easily compare rates with other institutions. Since APY takes into account compounding, and frequency of interest payments – such as daily, monthly or annual payment periods – you can easily tell if you’ll earn more in one account than another.
As the data shows, the more you save and the longer you save for, the more money you can earn. With North Trust’s range of CD options, highly competitive APYs and easy-to-fund savings solutions, you’ll have no problem reaching your long-term goals.
