Updated: Mar 19, 2024

APY Interest Calculator Tool: Calculate Your Earnings

Use this APY calculator to determine how much interest you'll earn in your deposit accounts (e.g., savings) based on the annual percentage yield (APY).
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Discover your potential interest earnings effortlessly with our APY (Annual Percentage Yield) Calculator. Simply input the APY rate, your initial deposit, any monthly contributions, and the investment duration in years. This tool provides a comprehensive projection of your savings growth, helping you plan your financial future precisely. Ideal for savers and investors seeking to maximize their returns.

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There are different reasons for opening a bank or credit union deposit account.

You might want to open a savings account for emergency funds, for example. Or you may want to set up a CD ladder to save for a home.

One key question you might have is how much interest you stand to earn on the money you save. And that's where it's important to understand APY and how it works.

What Does APY Stand For?

APY is short for annual percentage yield.

When discussing savings accounts, money market accounts and certificate of deposit accounts, APY reflects the amount of interest earned over the course of a year.

So, when you compare a savings account, you may see an interest rate and an APY mentioned.

It's worth noting that APY is sometimes confused with APR, but they're two different things.

Again, APY refers to interest earned on a deposit account at a bank or credit union. APR, on the other hand, stands for annual percentage rate.

This refers to the rate of interest paid to a credit card or loan annualized over the course of a year. APR includes both the interest rate for a loan or line of credit and any fees the lender charges.

Here's another way to put the two terms in perspective:

  • A higher APY is good because it means you're earning more interest
  • A higher APR is bad because it means you're paying more in interest

That's a basic APY definition. But digging a little deeper can help you understand why APY matters for savers.

How is APY Calculated?

APY is used to measure how interest compounds over time. Compounding happens when interest is earned on the principal balance in a deposit account and on the interest itself.

Compound interest is different from simple interest.

Simple interest is calculated only based on the account principal. So it doesn't take into account the time factor the way compounding does.

With deposit accounts, compounding can happen daily or monthly. Accounts that compound daily can grow and earn more interest than those that compound monthly.

Having some basic knowledge of compounding interest can help with understanding how to calculate APY. Annual percentage yield follows a mathematical formula.

The formula for APY looks like this:

  • APY= (1 + r/n )^n – 1

In this formula, r equals the interest rate a deposit account pays, while n equals the number of compounding periods.

If you want to calculate APY for a deposit account, you first need to know the interest rate and the compounding rate.

You could then find APY manually using this equation or a spreadsheet. You can create the formulas and plug in the numbers to find APY using the interest rate and number of compounding periods.

Of course, the easiest way to calculate APY is to use our savings calculator. You can use the calculator to estimate your savings growth based on:

  • Initial deposit
  • Additional monthly contribution
  • Investment term
  • Interest rate
  • State

For example, say you want to open a high-yield savings account with $5,000. You plan to deposit $200 into it each month for the next five years.

Your bank offers an interest rate of 0.75%, and you live in New York. Over five years, your money would grow to $17,414, according to the calculator.

APY calculators are easy to use for estimating interest earnings. They can also be helpful because you can play around with the numbers to see different outcomes.

For example, you can see how a higher or lower interest rate or different monthly deposit might impact your savings. This can be useful for planning out your savings goals and budget.

Why APY Matters for Savers

Understanding APY and its calculation is important for gauging how much your money will grow.

Again, the higher your APY is, the more interest you can earn.

In terms of what affects APY, there's a connection between savings rates and the Federal Reserve.

When the Fed raises interest rates, banks can follow suit and raise APYs on deposit accounts. However, if the Fed cuts rates, banks can reduce the interest rates paid to savers.

In terms of the types of accounts that can be affected by rate increases or cuts, they include:

  • Traditional savings accounts
  • High-yield savings accounts
  • Money market accounts
  • Christmas Club accounts
  • Certificate of deposit accounts
  • Interest checking accounts

It's important to know that APYs aren't the same across all deposit accounts.

A traditional savings account, for example, may pay an APY as low as 0.01%. High-yield savings accounts, on the other hand, can offer an APY that's 10 to 25 times higher than the national average.

Money market accounts can offer APYs that are higher than traditional savings accounts as well. But there are some interest checking accounts that may offer APYs far above what you could get with a money market account or high-yield savings account.

With CDs, APYs can vary based on the minimum deposit required and the CD term.

Generally, you can earn a higher rate with longer-term CDs. But the trade-off is having to wait longer to withdraw your money. Jumbo CDs can also pay a higher rate but you may need $10,000 or more to open one.

The bottom line:

It's important to compare APYs if you're looking for a new place to keep your savings. Look at both traditional banks and online banks to see which one offers the best combination of high APY and low fees.

Power of Compounding

As mentioned, the APY formula assumes that interest on a savings account compounds. How often interest compounds can determine how fast your money grows.

With daily compounding, interest earnings are calculated every day. If interest compounds monthly, it's only calculated once per month.

In terms of how the math works out, you will see a difference in interest earned between daily and monthly compounding.

Between the two, daily compounding gives you a slight edge. But what may matter more for growing your savings is making new deposits consistently and keeping fees in check.

How Fees Affect Interest

Bank fees can affect how much interest you earn, regardless of APY.

For example, it's not uncommon to pay a monthly maintenance fee with a traditional bank account. It's possible the fee could outweigh the interest earned.

Say you have a savings account that earns $5 per month in interest. It also has a $5 monthly maintenance fee.

You've effectively canceled the fee with the interest you earned.

That's why it's so important to shop around for the right savings account. Again, the goal is to find one that pays the highest APY while charging the fewest fees.

You could also get hit with fees if you're using CDs to save.

Banks can charge an early withdrawal penalty for taking money out of a CD before it matures. This penalty can be equal to some or all of the interest earned.

If you have to tap into a CD early in an emergency, you could end up forfeiting most or all of your interest.

Checking into no-penalty CDs is one option. But you can also minimize the risk of fees eating away at your interest by keeping your emergency savings in a high-yield account instead.

Savings Accounts and Taxes

Interest earned on a savings account may be taxable.

If you have to report the interest on your taxes, your bank should send you a Form 1099-INT.

You'll need to report savings interest on your Form 1040 when you file. It's important to report this information accurately.

The IRS also gets a copy of your Form 1099-INT from the bank. So if the information you provide doesn't match up, that could cause a delay in the processing of your return.

FDIC Insurance and Savings Accounts

The Federal Deposit Insurance Corporation provides insurance protection for banks and their customers.

If a bank is FDIC-insured and it goes under, your money is protected up to certain limits. That includes money in savings accounts, money market accounts, and CDs.

The current FDIC protection limit is $250,000 per depositor, per FDIC-insured bank, per account ownership type. Any deposits held in different ownership categories are insured separately, up to at least $250,000. That rule applies even if they're held at the same bank.

So, what does that mean for you and your savings accounts?

Simply it pays to know your protection coverage limits. If you have a savings account that pays a high APY, for example, the interest you earn could put you over the limits.

A simple solution is opening accounts at different banks.

For example, you might keep a $1000 emergency fund in a traditional savings account at a brick-and-mortar bank. But you might keep a larger emergency stash in a high-yield account at an online bank.

Spreading money across different accounts can help you stay within FDIC limits. And you also have a better shot at getting the best APY and interest rates while you're at it.

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