APY is the yearly interest rate your bank pays you, shown as a percentage of your balance

APY stands for Annual Percentage Yield. It tells you how much interest you'll earn in a year if you deposit money and leave it untouched. If your savings account has a 4.50% APY and you keep $1,000 in it for a full year without adding or withdrawing anything, you'll earn $45 in interest (before any fees reduce it). The bank calculates this daily or monthly, depending on the account, but the APY number itself is always an annual figure.

APY includes the effect of compounding—the process where interest you've already earned starts earning interest too. This is why APY is higher than the simple interest rate (called the APR). The more often the bank compounds your interest, the more you earn, and the APY reflects that compounding built in. You don't have to do anything to make compounding happen; the bank handles it automatically.

The APY your bank offers changes based on what the Federal Reserve does with interest rates. When the Fed raises rates, banks typically raise APY on savings accounts to attract deposits. When the Fed cuts rates, APY falls. This means the rate you see today may not be the rate you earn six months from now.

Key Takeaways

  • APY is the percentage of your balance you earn in interest over one year, and it already includes the effect of compounding.
  • The bank calculates interest daily or monthly, but APY always expresses the result as a yearly percentage.
  • APY changes when the Federal Reserve changes interest rates, so the rate you lock in today may drop later.
  • High-yield savings accounts typically offer 4% to 5% APY, while traditional bank savings accounts often offer less than 1%.
  • Your actual earnings depend on how long you keep money in the account—leaving it for only six months at 4.50% APY earns roughly half the annual amount.

How the bank calculates your interest using APY

Banks use a formula to turn the APY into a daily or monthly interest calculation. If your account compounds daily (the most common method), the bank divides the APY by 365, then multiplies that daily rate by your balance each day. At the end of the month or quarter, those daily interest amounts are added to your account. If your account compounds monthly, the bank divides the APY by 12 instead.

Here's a concrete example: a $10,000 balance at 4.50% APY compounded daily. The daily rate is 4.50% ÷ 365 = 0.0123% per day. On day one, you earn $10,000 × 0.000123 = $1.23. On day two, if you haven't withdrawn anything, you earn interest on $10,001.23, not just $10,000—that's compounding. By the end of the year, you've earned roughly $461 instead of $450, because each day's interest earned a tiny bit of interest itself.

The bank sends you a statement each month showing how much interest was added. Some banks show the interest as a separate line item; others roll it directly into your balance. Either way, the money is yours to keep, and it will start earning interest immediately.

Why different banks offer different APY rates

Banks set their own APY within limits set by the Federal Reserve. Online banks and credit unions typically offer higher APY than traditional brick-and-mortar banks because they have lower overhead costs—no physical branches to maintain. A traditional bank might offer 0.01% APY on a regular savings account, while an online bank offers 4.50% on the same type of account.

Banks also use APY as a tool to attract deposits. When a bank needs more customer money, it raises APY to make saving there more attractive. When deposits are plentiful, the bank may lower APY. This is why you see APY rates change frequently, sometimes weekly.

The Federal Reserve's interest rate (called the federal funds rate) sets a ceiling and floor for what banks can offer. When the Fed raised rates sharply between 2022 and 2023, high-yield savings accounts jumped from under 1% to over 4% APY. When the Fed paused rate increases in 2024, APY growth slowed. The Fed's next moves will determine whether APY rises, falls, or stays flat.

The difference between APY and the interest rate your bank advertises

Banks sometimes advertise an APR (Annual Percentage Rate) instead of APY, or they show both. APR does not include compounding, so it's always lower than APY. If a bank shows you 4.40% APR and 4.50% APY, the 0.10% difference is the benefit of compounding over the year. For savings accounts, APY is the number that matters because it shows what you'll actually earn.

Some banks advertise a promotional APY for a limited time—for example, 5.00% APY for the first three months, then 4.50% after that. Read the fine print to see when the rate drops and whether there are minimum balance requirements to earn the advertised rate. If you don't meet the minimum, you may earn a much lower rate.

How long you keep money in the account affects your total earnings

APY is always expressed as a yearly rate, but you earn interest proportionally for however long you keep the money there. If you deposit $5,000 at 4.50% APY for six months, you earn roughly $112.50 (half of the annual $225). If you withdraw the money after three months, you earn roughly $56.25. The bank calculates this automatically—you don't need to do anything.

Some savings accounts have withdrawal limits or penalties if you take money out too often. Traditional savings accounts may limit you to six withdrawals per month; exceeding that limit can trigger a fee or close the account. High-yield savings accounts typically have no withdrawal limits, but some banks charge a fee if you make more than a certain number of transfers to external accounts. Check your account's terms before opening it.

If you move money between accounts at the same bank, that usually doesn't count as a withdrawal and doesn't affect your APY. Moving money to a different bank does count as a withdrawal and ends the interest-earning period for that money at your original bank.

What happens to your APY when the Federal Reserve changes rates

The Federal Reserve meets eight times a year to set the federal funds rate, which is the interest rate banks charge each other for overnight loans. When the Fed raises this rate, banks typically raise APY on savings accounts within days or weeks. When the Fed cuts rates, banks usually cut APY on savings accounts quickly too—sometimes within 24 hours.

Your existing balance continues to earn at the old rate until the bank officially changes your APY. Once the change takes effect, all new interest is calculated at the new rate. You don't have to do anything; the bank updates it automatically. Some banks notify you by email or through your online account; others post the change only on their website.

If your bank lowers APY and you want a better rate, you can move your money to a different bank. There's no penalty for closing a savings account and opening one elsewhere. Many people move their savings to whichever bank is offering the highest APY at that moment. This is a normal practice and doesn't affect your credit score.

How to compare APY across different banks

To find the highest APY, check the websites of online banks, credit unions, and traditional banks side by side. Most banks display their current APY prominently on the savings account page. Write down the APY, any minimum balance requirement, and whether there are monthly fees. A 4.75% APY with a $25 monthly fee is worse than 4.50% APY with no fee if your balance is small.

Pay attention to whether the advertised rate is a promotional rate or the standard rate. Promotional rates expire, and your earnings drop when they do. If a bank offers 5.25% for three months then 4.50% after, calculate what you'll actually earn over a year: three months at 5.25% plus nine months at 4.50%. That's usually less attractive than a bank offering 4.60% year-round with no expiration.

Some banks offer higher APY on money market accounts or certificates of deposit (CDs) than on regular savings accounts. A CD locks your money away for a set period (three months, one year, five years) in exchange for a higher rate. If you need access to your money, a regular savings account is better even if the APY is lower. If you can leave the money untouched, a CD may earn you more.

Frequently Asked Questions

Does my APY stay the same forever?

No. Banks change APY based on what the Federal Reserve does and how much money they need. Your rate can go up or down, sometimes multiple times a year. The bank will notify you before the change takes effect, usually by email or a notice in your account.

What's the difference between APY and APR?

APY includes compounding (interest earning interest), while APR does not. For savings accounts, APY is always higher and is the number you should use to compare banks. APR is more commonly used for loans and credit cards.

If I withdraw money partway through the year, do I lose interest?

No. You earn interest proportionally for the time your money was in the account. Withdraw after six months at 4.50% APY and you earn roughly half the annual amount. The bank calculates this automatically.

Can I lock in an APY rate so it doesn't go down?

Not with a regular savings account—the rate floats and changes when the bank changes it. A certificate of deposit (CD) locks in a fixed rate for a set period, but your money is locked away too. You can't withdraw it early without paying a penalty.

Why do online banks offer higher APY than traditional banks?

Online banks have lower costs because they don't operate physical branches. They pass those savings to customers by offering higher APY. Traditional banks need to cover branch overhead, so they offer lower rates to keep costs down.