How to Calculate APY and Maximize Savings: A Step‑by‑Step Guide

An annual percentage yield or APY calculator can be a very useful tool when you want to know an accurate rate of return for a savings account, certificate of deposit, and other interest-bearing asset. Interest rates don’t always provide the full picture due to the compounding frequency. That frequency indicates how often your interest gets added to the principal so it too can earn interest. By factoring in compounding, you can gain a better understanding of how quickly your balance grows over the course of one year.

An APY calculator, like the one below, can give you crucial information to determine the account’s profitability, without your having to do a lot of math. Within seconds, this tool can show you how an account performs, enabling you to make an informed decision about what is best for your needs.

What Is APY?

As mentioned above, the APY (or Annual Percentage Yield), is a standardized measure that reflects the total amount of interest earned on an investment, savings account, or CD over one year. To add a little more detail:

•   It demonstrates the outcome of compounding interest after holding the account for one year.

•   It is expressed as a percentage and provides a more accurate representation of the potential 

Return on investment than the interest rate, which expresses the percentage multiplier per compounding period.

Because it involves multiple factors interacting over one year, calculating APY can be challenging. In fact, those who are not fans of math may be really reluctant to delve into APYs too deeply.

Fortunately, an APY calculator makes understanding your account’s potential growth as easy as punching in some numbers.

How Do You Calculate APY?

For those who are not math-phobic and actually enjoy some good, complex calculations, yes, you can calculate APY.

Here’s the formula:

APY = [1 + (i / n)]n – 1

You plug in your interest (i) and compounding frequency (n). Then, you follow the order of operations to get your rate.

Here’s an example showing how:

Suppose you find a CD with a 5% interest rate compounding monthly. You use the APY formula to calculate your annual rate of return:

Formula: APY = [1 + (i / n)]n – 1

Step 1: [1+(.05/12)]12 – 1

Step 2: [1+.00416667]12 – 1

Step 3: 1.0041666712 – 1

Step 4: 1.05116 – 1 = 0.05116, or 5.116%

Therefore, your APY is 5.116%. This number is slightly higher than the 5% interest rate thanks to the monthly compounding frequency.

FAQ

Is APY compounded daily, monthly, or yearly?

APY measures your interest rate per year, taking into account the frequency of compounding. Whether your account compounds daily or monthly, the APY indicates the annual rate at which your account will grow. You can read the fine print on an account to learn what the compounding frequency is.

What’s the difference between APY and APR?

APY, or annual percentage yield, expresses the rate of interest an asset would earn over a full year, thanks to compounding interest. APR (annual percentage rate), on the other hand, is the total rate of interest you would pay on a loan or a credit card, taking into account the interest rate and any other fees.

What is 5% APY on $1000?

An account holding $1,000 with a 5% APY will yield different amounts based on the compounding period. For example, an account that compounds monthly will yield $50.00 at the end of the year for a total balance of $1,050.00.