Savings Account APY Calculator
Your Savings Account APY
Understanding Your Savings Account's Annual Percentage Yield (APY)
When you deposit money into a savings account, you expect it to grow over time. The primary way this growth happens is through interest. However, not all interest rates are presented equally, and the way your interest is calculated and added to your account can significantly impact your actual earnings. This is where the Annual Percentage Yield (APY) becomes crucial.
What is APY?
APY represents the real rate of return earned on a savings deposit, taking into account the effect of compounding interest. Compounding means that the interest you earn is added to your principal, and then the next interest calculation is based on this new, larger balance. The more frequently your interest compounds (e.g., daily, monthly, quarterly), the greater the effect of compounding.
APY vs. Stated Interest Rate
The stated annual interest rate (often called the nominal rate) doesn't reflect the impact of compounding. For example, a savings account might offer a 5% stated annual interest rate, but if it compounds monthly, your actual annual return will be slightly higher than 5%. The APY is designed to provide a standardized way to compare different savings accounts by showing the effective yield after compounding.
How the APY Calculator Works
Our APY calculator helps you understand the true return on your savings. You provide:
- Initial Deposit: The starting amount of money in your savings account.
- Stated Annual Interest Rate: The advertised interest rate for the account, before considering compounding.
- Times Compounded Per Year: How often the interest is calculated and added to your principal (e.g., 1 for annually, 2 for semi-annually, 12 for monthly, 365 for daily).
The calculator then uses the following formula to determine the APY:
APY = (1 + (Stated Annual Interest Rate / Compounding Frequency))^Compounding Frequency – 1
The result shows you the effective annual rate of return, enabling you to make informed decisions about where to keep your savings. A higher APY generally means your money will grow faster.
Example:
Let's say you deposit $1,000 into a savings account with a stated annual interest rate of 5% that compounds monthly (12 times per year).
- Initial Deposit: $1,000
- Stated Annual Interest Rate: 5%
- Times Compounded Per Year: 12
Using the formula:
APY = (1 + (0.05 / 12))^12 – 1
APY ≈ (1 + 0.00416667)^12 – 1
APY ≈ (1.00416667)^12 – 1
APY ≈ 1.05116 – 1
APY ≈ 0.05116 or 5.116%
This means that although the stated rate is 5%, your effective annual yield is approximately 5.116% due to monthly compounding. Our calculator will display this APY for you instantly.