According to the FDIC, the national average interest rate on savings accounts currently stands at 0.04% APY. Now, you’re probably thinking, “Okay, cool...but what is APY?”
You may have heard the term “APY” at one point or another, especially if you’ve ever opened a simple bank account. However, between APY, APR, and the entire laundry list of other financial terms that you need to understand if you’re going to build long-term wealth, things can get confusing. We get it.
If you’re still not sure what it means, you’ve come to the right place. By the end of this article, you’ll understand what APY is and how it can help you get ahead financially.
Already know what APY is and are ready to start learning more in-depth financial lessons? Get the Wealth Stack app here to get started.
What is APY?
APY stands for annual percentage yield. It may sound intimidating, but the definition is simple:
APY represents the rate you earn on your money each year.
Whether you have cash parked in a checking or savings account, your bank pays you an annual percentage yield. APY Is expressed as an annual rate so you can easily calculate how much your money will earn over the year.
Need to calculate your APY as part of calculating your net worth? Start off with a helpful guide on How to Calculate Your Net Worth.
What’s a Good APY?
Nowadays, a good APY for a savings account is 0.55%. If that sounds low, it’s because it is. Unfortunately, interest rates have been abysmally low for several years. That’s why it’s crucial to shop around for the best offers.
The banks offering the highest APYs are typically online banks such as Ally and Marcus. However, even the highest APYs available today are still mediocre. According to BankRate.com, the average APY today is 0.50%.
To put it into perspective, when APY rates peaked in the 1980s, you could find banks that would offer you rates in the 18% range. In the 90s, rates were much lower, but you could still find rates in the 3-5% range. In general, you’ll find that online banks offer higher rates because they’re not having to offset the high operating costs that come with managing physical location and on-site employees.
APY Meaning & Is It the Same as APR?
Though they sound similar, APY and APR mean different things. Understandably, people confuse the two terms, as they have the same purpose: to calculate the interest you will earn (or pay) on a financial product. But, let’s break it down for you.
- APY: The percentage you will earn on your money in a checking or savings account.
- APR: The rate you will pay to borrow money on loans, credit cards, etc.
To put it simply, APY affects how much you earn, while APR affects how much you pay.
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Why is APY Important?
If you care about how much your money can earn or how much your debt is costing you, you should pay attention to APY. For example, say you look at your savings account statement and realize the APY is 0.01%. You can now make an informed decision to switch to a savings account with a higher APY.
Ultimately, it comes down to the fact that there is no reason for your savings to earn pennies when there are better options available. Building long-term wealth is about understanding these types of terms and financial options available to you.
Understanding what they are is the first step towards learning how to build long-term wealth, even if that means starting out small by opting for a different kind of account with a higher APY.
Really interested in learning how to build long-term wealth? Read through our guide on What is Compound Interest to understand how compound interest can help you reach your goals.
How Do I Find Out What My APY Is?
Thankfully, you don’t have to worry about how to calculate APY because banks are required to provide you with the APY on your accounts. If you review a recent bank statement, your APY should be easy enough to find.
You should also be able to locate your APY with a simple google search by looking up the name of your bank followed by “savings account APY.” Once you find your APY, you can plug the number into an online calculator and run some scenarios to see how much your money can earn over time.
The Bottom Line: You & APY
To summarize, understanding APY will allow you to make better financial decisions and optimize how much you earn and save. And, that’s obviously what we’re all about here at Wealth Stack, right? Right.
Now that you know about APY, why not continue increasing your financial knowledge? Wealth Stack is on a mission to provide high-quality, free financial education to the masses. With 50+ financial courses on our app, you’ll be a financial pro in no time.
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