When it comes to saving money, you have options. Some of the most common are high-yield savings accounts or Certificates of Deposit (CD). How do you decide which account is best? All banks invest your savings in certain ventures and in return, you are paid interest. Interest rates fluctuate depending on the actions of the Federal Reserve. Annual Percentage Yield (APY) takes into account not only the interest that you’ll earn, but the rate at which it compounds over time. The higher the APY, the more return you gain from your initial deposit. APY reflects how much interest you will earn on a deposit with compound interest over the period of one year. When you are comparing deposit accounts, you can use the APY to determine which account will earn the most interest.
Let’s look at an example. At age 35, Kyle has managed to stash away $50,000 in his emergency fund and is looking to earn a risk-free return on his savings. He decides to open a savings account with a rate of 1.70% APY. After one year of interest compounded daily, he estimates he will earn $850, taking his total emergency fund to $50,850. Not too shabby. See how much you could be earning on your cash with our savings calculator.
Time and interest rates determine the amount of money you will earn in savings or owe on debt. In the past, financial institutions used complicated jargon and fees to make their interest rates seem more appealing. Now, all banks are required to disclose rates in the same way.
When shopping for loans, you can compare the Annual Percentage Rate (APR) which factors in the interest rate and all the different costs and fees associated with a loan over a year. Using APR, you can compare apples to apples when evaluating different offers.
So, what’s the difference between APR and APY? Compounding interest is excellent when saving money but not so great when you are in debt. To earn the most for your money, look for savings accounts that offer a higher APY. When you are borrowing money, the lower the APR, the less you will pay over the life of your loan.
It’s important to know how to compare accounts so that you can meet your financial goals. Live Oak Bank offers High Yield Savings accounts that are compounded daily. Learn more about Business Savings.