Whenever someone goes to a bank. He or she faces a lot of problems because of the lack of knowledge. Most of us hardly know anything about banking products, commerce, interest, and yield. But as an active citizen, we all should have some basic idea about this. Especially when it is about our profit. Yes, you heard it right. APY is related to the profit or interest that you can earn. While opening a bank account, one should definitely look into this factor. Let’s indulge in this:
What is Ammual percentage yield (APY)?
In broader terms, APY is the rate of return earned on any investment made, here the effect of compounding interest is taken into account. Compound interest is calculated periodically unlike simple interest. Then the amount is added to the balance. With the increases in the account balance, the interest paid increases too. And with this increase in interest, the amount in the bank increases too.
For the majority, here is a simpler definition. APY is a way to measure the money or interest you earn by putting money into an account. Almost every savings account has an APY and some checking accounts too. The higher the annual percentage yield, the more amount an account holder earns. APT is based on a 365-day year and is expressed as an annualized rate. Usually, people are confused between simple and compound interest.
- Simple interest – It does not build on itself. Yearly, the same amount of interest is earned.
- Compound interest – This interest is earned not only on money in the account but on the interest earned as well. it is better and more preferred.
- Claculation and formula of APY:
Annual percentage yield is calculated by using a simple formula. Thought the holder should know the account’s interest rate. The formula is :
APY = (1 + r/n)^n – 1
Here, r = interest rate
n = the number of compounding periods
(if interest is compounded every month then it will be 12)
There are many ways to calculate this. But this formula is the ideal one. Though this information is regularly provided by the banks so no need to worry.
Is APY a variable?
Annual percentage yield can be fixed or variable. This depends on the type of deposit account a holder has.
- If the account is a money market account or a savings account, then APY is variable. It means there will be an underlying benchmark rate tied to it. As the benchmark rate changes, APY changes with it.
- For the savings account, APY changes as per the federal reserve interest rates.
- For CD, that is a time deposit account where the account holder agrees to keep money stored for a fixed period, APY is fixed. Until the CD is matured, the amount remains the same.
- Major bank account bonuses and promotional bank accounts have a fixed APY.
APR vs APY:
These both may be a little similar but not identical. When we talk about APY, it is the interest that we earn but when we talk about annual percentage rate, it is the interest that one pays while borrowing money. APR can be variable or fixed, depending on the loan and its type. For example, for credit cards, the APR is variable, and for the mortgage loan that rate is adjustable.
Just like APYs, variable APR will surely fluctuate per the benchmark rate. In the case of APR, the higher it is, the more has to be paid. It is the opposite of APY where higher interest meant more money. The APR that you pay is linked to your credit score. Those with high credit scores qualify for lower APR as they are creditworthy.
Interest rate vs APY:
Any savings account or interest-bearing account will have both APY and interest rate. But they are very different from each other. When we talk about the interest rate, it is the rate of interest earned by the account holder on his or her account. APY and interest rates can be different or the same. This is decided by the banks.
The interest rate does not consider compounding but APY contains the interest that a holder earns altogether via compounding over a year.
How to find the best APY?
This requires some research and time. Comparing different banks and their account is not the easiest task
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Highest APY for the savings accounts:
- One needs to start by understanding if one wants to open a savings account in an online bank, credit union, or traditional bank.
- Due to lower overhead costs, online banks offer higher APYs and credit unions do the same.
- Some banks offer higher APY just for one year to attract customers and then reduce it drastically. Be aware of that. Do proper research.
- Do not forget to check the bank or monthly maintenance fees. There’s no point in earning via APY if you have to pay more because of these fees.
- Some banks offer higher APY to holders with high balances and some offer it to holders with low balances. Look into this.
2. Highest APY for checking accounts:
- High-yielding checking accounts are not common so some detailed digging needs to be done.
- Some Brick-and-mortar banks offer it but they are reserved for customers with large balances.
- One can check online banks and these bank has low fees also.
- One should not sacrifice convenience for earning high APY. Always check the bank’s deposit limits, daily withdrawal, mobile banking access and check writing limits.
Understanding APY is important and critical. If you want to make the best of your account then study about APY. No one should let of such opportunities to earn money. One should worry if the APY is low, with time this gets better and even if the APY is low any holder can earn a good amount of money. So why let any opportunity go?
