What is APY?
APY is how your bank account makes more money. That is, when it is sitting and hanging out in your savings or checking account. As the name implies, it is the amount you will earn per year, and, the higher it is the more money that you make. The difference between an interest rate and an APY is that an APY also factors in compound interest.
Simple versus compound interest
Simple interest doesn’t compound (see how simple that is?) What that means is that you will earn the same amount of interest every month, month after month. Compound interest is the interest on both the money you put into your bank account and all the interest that you receive over time. You want to keep your APY up, up, up. Many online banks have an APY of 1.50 percent while the national average is 0.07 percent.
How does compound interest work?
Compounding will occur periodically (usually on a daily, or on a monthly, basis). If you have a choice, go with daily compounding, as it earns more money than monthly compounding. Usually, however, the amount is so small that it hardly bears any consideration. But when dealing with large amounts of money, this can change, although probably not too significantly. For example, $100,000 in an account with a 2 percent annual percentage yield earns only $2 more in one year when compounded daily instead of monthly.
APY is an important term to know for those who want to save more money. Which is … everyone, mostly, right? So, when shopping around for a new bank account, a high one should be on your list of standards before you take the leap!
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