How to Calculate APY
6 Min Read | Published: March 28, 2025
This article contains general information and is not intended to provide information that is specific to American Express products and services. Similar products and services offered by different companies will have different features and you should always read about product details before acquiring any financial product.
Calculating the annual percentage yield (APY) of a savings or investment account can help you to find an account that offers the best interest rates. Learn how to calculate APY.
At-A-Glance
- Annual percentage yield (APY) is a calculation to help you understand the real rate of return on a savings or investment account.
- The APY calculation can be done manually using a formula or with an APY calculator.
- When comparing savings and investment vehicles, it’s important to check whether the APY is fixed or variable since a variable APY can change, earning you more or less than originally planned.
One of the perks of setting aside money in a savings or investment account is the ability to earn interest. Interest income is a powerful tool that can help you grow your money even more quickly than adding contributions alone. While knowing an account’s interest rate makes it easy to calculate how much you can earn, it doesn’t tell the whole story.
In addition to the interest rate, you’ll also need to know how frequently the interest is earned or how often it compounds. Those two data points can help you calculate a useful value called the annual percentage yield (APY). It’s a key metric for understanding the real return on your savings and certain investments since it factors in compound interest. In this article, we’ll explore how APY is calculated, why it matters, and how to use our APY calculator to instantly understand how much you can earn based on a deposit account’s listed APY.
What Is APY?
Annual percentage yield, or APY, is a value that shows the actual yield of an investment over one year. A higher APY means a higher potential return on your investment. Unlike simple interest, which only pays money on the principal amount or what you deposit into the account, APY takes into consideration how frequently an account compounds or pays interest, whether that’s daily, monthly, quarterly, or annually.
APY is published for deposit accounts, which can include traditional savings accounts, high-yield savings accounts (HYSAs), checking accounts, certificates of deposit (CDs), and money market accounts (MMAs).
Did you know?
APY can sometimes be confused with annual percentage rate (APR), which is a way to measure the all-in costs a lender charges someone to borrow money per year. There are key differences between APR, APY, and interest rates, which are helpful to understand before you open any interest-bearing accounts.
Why Does APY Matter?
APY tells you how much money you may be able to earn each year with a particular account. Maximizing the APY on your savings and investments can lead to more growth over time and, eventually, more money in your pocket. Knowing the APY on deposit accounts can also help you forecast how much you’ll need to save to hit your savings and investment goals.
For example, say you want to save $15,000 toward your dream vacation in two years, and you have $10,000 today. By placing that money in a savings account, you can earn interest income toward your goal in addition to what you’re adding to the principal each month. By calculating the APY on the account, you’ll know exactly how much you can expect to grow your money by each year over the next two years to supplement your vacation savings goal.
How to Calculate APY
APY calculations use a variation of the formula for compound interest and show the total amount of interest your savings or investment vehicle has the potential to earn in one year.
If you want to calculate APY manually, the formula to calculate APY is:
APY = (1 + r/n)n – 1
Where r is the listed interest rate, and n is the number of compounding periods. This can be helpful if you’re given an interest rate and want to understand the actual yield when comparing across accounts.
Say you’re comparing two savings accounts where you plan to deposit your $10,000 emergency fund, one at Bank ABC, which offers a 4.5% interest rate compounding daily, and another at Bank XYZ, which offers a 4.55% interest rate compounding monthly.
Bank ABC APY = (1+.045/365)365 – 1 = .0460 = 4.6% APY
Bank XYZ APY = (1+.0455/12)12 – 1 = .0464 = 4.64% APY
So, if you were choosing between the two accounts based purely on APY, you’d know that you stand to earn more by depositing your money into the second account with Bank XYZ.
Calculating Potential Earnings Using APY
The formula to calculate your potential earnings adds another element: your initial deposit amount.
A = d(1+r/n)n
Where d is the initial deposit, r is the interest rate, and n is the number of compounding periods.
Using the same example above, let’s figure out how much interest you might earn after the first year with the account from Bank ABC and Bank XYZ. The formulas are as follows.
Amount at Bank ABC = $10,000*(1+(.045/365))365 = $10,460.25
Amount at Bank XYZ = $10,000*(1+(.0455/12))12 = $10,464.61
This means if you put your $10,000 into Bank ABC, after 12 months, you’ll have $10,460.25 in the account while your money at Bank XYZ would grow ever so slightly more to $10,464.61.
While the difference may seem minor at first glance, keep in mind that the impact of APY can be immense when you add more money to the account over time.
How to Check APY on Your Accounts
The APY of savings and investment accounts should be publicized on the website of the institution where you plan to open the account and in all advertising for those accounts, thanks to parameters within the Truth in Savings Act (TISA)1.
Even though institutions are required to display APY, it’s not necessarily a static number since APY can be fixed or variable depending on the type of account. A fixed APY guarantees you’ll receive the same rate for the designated term. You’ll often find a fixed APY on CDs. A variable APY can change as broader market conditions change, meaning your interest rate could go up or down. Variable APYs are common in checking and savings accounts, including HYSAs.
While the investment income you earn is technically yours to take out of the account and use, it can help your investments grow if you choose to let it be. By leaving interest earnings in your account, that money is then included as the new principal amount when interest compounds.
Frequently Asked Questions
APY can be calculated daily, monthly, quarterly, or annually, depending on the account and institution, but the calculation may differ from the payout frequency. For example, a bank may compound interest daily and pay it into your account once each month. Consult your financial institution to understand how APY is paid on your account.
The money you earn from a deposit account may be taxable as interest income. Consult a tax professional to discuss the implications of taxation on an account based on its APY.
The Takeaway
Calculating APY and its impact on your savings accounts requires only a simple formula or an APY calculator. Before committing to any savings or investment vehicle, be sure to check other relevant factors besides APY, like the reputation of the financial institution, its customer service, and other available products. Doing so can help create the best possible experience while growing your wealth.
1 “§ 1030.1 Authority, purpose, coverage, and effect on state laws.,” Consumer Financial Protection Bureau
Brooke Joly is a writer on a mission to unravel the mysteries of personal finance and make them accessible to the everyday reader. When she’s not behind the keyboard, you can find her enjoying the outdoors in Charleston, SC.
All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.
Related Articles
Credit Score Ranges: What is an Excellent, Good, or Poor Credit Score?
Learn about the credit score range by FICO or VantageScore and how they are classified as Excellent, Good or Poor credit score.
FICO® Score Simulator from MyCredit Guide: How It Works
American Express® MyCredit Guide gives you access to the FICO® Score Simulator and FICO® Score Planner to help you build positive credit habits that support a healthy credit score.
What Affects Your Credit Score?
There are many factors that can influence your credit score. Find out how late payments, debt, and credit history can impact your score.
The material made available for you on this website, Credit Intel, is for informational purposes only and intended for U.S. residents and is not intended to provide legal, tax or financial advice. If you have questions, please consult your own professional legal, tax and financial advisors.
