What is APY?

If you're saving for the future, APY, or annual percentage yield, is an acronym worth knowing. Understanding how APY works can give you a good idea of what your money can earn in a year.

A feature of most savings accounts and certificates of deposit (CDs), APY will help you compare potential accounts.

What does APY mean?

Your APY simply shows the amount of interest you earn on your money in an account over one year, accounting for compound interest. APY assumes the interest rate doesn't change for an entire year and no additional deposits, fees or withdrawals occur with your account. Compound interest is the interest you earn both on the total amount of your principal plus any interest you've accumulated over time. When interest compounds, it's added to your total savings. Interest typically can compound daily, monthly or annually.

How APY is calculated

The formula for APY may look more complicated than it is.

APY = (1+r/n)n - 1

In this case:

r = interest rate

n = number of compounding periods per year (If a bank compounds monthly, for example, there are 12 compounding periods per year. If a bank compounds daily, there are 365 compounding periods per year.)

For example:

r = 0.0202 (2.02% interest rate)*

n = 12 (12 compounding periods per year)

APY is 2.04%* = (1+(0.0202/12))12 - 1

Now that we know the APY is 2.04%*, we can look at an example. If you invested $5,000 with that APY of 2.04%* and monthly compounding (with no additional deposits/withdrawals), you would have $5,101.94 in a year. If you'd like to calculate the interest yourself, here's the formula you would use:

A = P(1+r/n)nt

A = the future value of the investment, including interest
P = the principal investment amount (the initial deposit)
r = the annual interest rate (in decimal form)
n = the number of times that interest is compounded per unit
t = the time the money is invested

This formula shows how the initial deposit of $5,000 becomes $5,101.94:
APY is 2.04%* = $5,000 (1+0.0202/12)(12*1) = $5,101.94

APY vs. interest rate

It's important to understand the difference between APY and interest rates. While the APY tells you how much you can earn annually when your interest compounds, the interest rate is the annual rate of interest paid on an account, which does not reflect compounding. When you begin to compare rates, you may see these terms regularly.

Is APY different for savings accounts and CDs?

Savings accounts and CDs both offer the ability to earn interest on your deposits. However, savings accounts usually have a variable APY, meaning the interest rate could change over time. CDs usually have a fixed APY, meaning once the CD account is opened, the interest rate does not change and remains fixed for a certain length of time, called the CD term. CD accounts require you to keep your funds in the account for the term of the CD or a penalty for early withdrawal may apply. Citi offers No Penalty CDs with a fixed APY. These CDs offer more flexibility and access to your savings by allowing you to withdraw your full balance without penalty, beginning 7 days after the no-penalty CD is funded.

APY and saving money

APY is your friend when it comes to saving for the future. Small differences in rates can add up quickly. You can use APY to better understand how one savings account may help you reach your financial goals versus another.

While a high APY is important when you’re saving, it shouldn't be your only criterion for opening an account. You will also want to be on the lookout for fees or minimum opening deposits, minimum balance requirements, ease of access to savings and fund transfers, bank services and other benefits.

Take the time to examine various savings accounts and CD accounts to ensure you select the best account for your needs. The APY and amount you can make on your depsoits can vary based on several factors, including:

  • Interest rate
  • Frequency of compounding periods
  • Amount of your initial deposit
  • Additional deposits you might make
  • Withdrawals on the account
  • How long you've had funds in the account
  • Fees, if any

Citi offers a variety of savings account options. You can check out and compare the latest APY rates for various accounts online.

*Rates provided is for illustrative purposes only.

This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.

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