What is APY (Annual Percentage Yield)?

How it works

APY captures both the stated interest rate AND how often that interest compounds (gets added to principal so it earns interest on itself). The formula:

APY = (1 + rate / n)^n − 1

Where rate is the nominal annual rate and n is the number of compounding periods per year (12 for monthly, 365 for daily).

For low rates the difference between APR and APY is small. At higher rates and frequent compounding, it grows.

US banks are required by Regulation DD (Truth in Savings Act) to publish APY for deposit accounts so consumers can compare apples to apples.

Example

Comparing two savings accounts both quoting "5%" — one as APR, one as APY:

• Account A: 5.00% APY, monthly compounding → effective $5,000 on $100k after one year
• Account B: 5.00% APR, daily compounding → APY ≈ 5.127% → $5,127 on $100k after one year

Account B is fractionally better even though both look the same in a marketing headline. Always compare APY to APY when shopping.

Why it matters

APY is the right number to optimize when picking a savings vehicle. Some practical points:

• Brick-and-mortar banks pay nothing. The average national savings rate is around 0.40% APY. Chase savings: 0.01% APY. Bank of America savings: 0.01% APY. Their checking accounts are essentially zero.
• Online savings (HYSA) pay competitively. SoFi: ~4.0%, Marcus: ~4.4%, Ally: ~3.8%, Capital One 360: ~3.7% — all FDIC-insured, all radically better than legacy big banks.
• Treasury yields are the ceiling. If a HYSA pays 5%, the underlying short-term Treasury rate is around 5%. A "12% APY savings account" is either temporary promotion or it's something other than a savings account.
• Promotional rates expire. "5.50% APY for first 6 months" reverts to 0.50% on month 7. Read the fine print.
• APY can change. Unlike a fixed CD, savings APY moves with the broader rate environment. When the Fed cuts rates, bank APYs follow.

Fed rate context (2024): the Federal Funds rate is around 4.5%, which is roughly the ceiling for normal-bank savings APYs. If the Fed cuts to 3%, expect HYSA rates to compress to 2.5–3% within months.

For comparing crypto vs traditional yield: a 5% APY on USDC at Aave looks similar to 5% APY at SoFi, but the risks are not equivalent (smart-contract risk, USDC peg risk vs FDIC backing). Same number, very different floor.