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What Is APY?
APY stands for Annual Percentage Yield. It is the single most important number for comparing savings accounts. Here is what it means, how it is calculated, and why the national average at 0.45% APY means your bank is keeping most of the interest that should be yours.
APY Definition
APY is the total interest your money earns in one year, expressed as a percentage of your starting balance. It includes compound interest — the interest you earn on interest already earned.
Example
You deposit $10,000 in a savings account at 5.00% APY. After one year, you have $10,500. The $500 is your annual yield. APY already accounts for compounding, so this is what you actually get — not a projection.
APY vs APR: What Is the Difference?
APY includes compounding. APR does not. For savings accounts, APY is always the right number to compare because it shows what you actually earn, not what you would earn if interest were paid once at the end of the year.
For loans and credit cards, APR is used. It shows what you pay before compounding effects. When you are borrowing, you want a low APR. When you are saving, you want a high APY.
How Compounding Works in a Savings Account
Most high yield savings accounts compound interest daily. This means every day, the bank calculates interest on your balance that day and adds it to your account.
At 5.00% APY compounded daily, the daily interest rate is 5.00% divided by 365 = 0.01370%. On a $10,000 balance, day one earns $1.37. On day two, your balance is $10,001.37, so you earn slightly more. This compounds every day for a year, ending at $10,512.67 — slightly more than the simple $10,500 you would get without daily compounding.
The difference between daily and monthly compounding is small at typical savings rates — less than $5 per year on $10,000. Focus on the APY number, not the compounding frequency.
The National Average APY Gap
The FDIC national average savings APY was 0.45% in May 2026. The best HYSA rates are 5.00% APY.
| Balance | At 0.45% (national avg) | At 5.00% (best HYSA) | Annual difference |
|---|---|---|---|
| $10,000 | $45 | $500 | $455 |
| $25,000 | $113 | $1,250 | $1,137 |
| $50,000 | $225 | $2,500 | $2,275 |
| $100,000 | $450 | $5,000 | $4,550 |
Illustrative. Based on simple annual interest. Actual results will vary with compounding and rate changes.
Frequently Asked Questions
What does APY mean?
APY stands for Annual Percentage Yield. It is the real rate your money earns over a full year, including the effect of compound interest. A 5.00% APY means $1,000 grows to $1,050 in one year when compounded daily.
What is the difference between APY and APR?
APY (Annual Percentage Yield) includes compounding. APR (Annual Percentage Rate) does not. For savings accounts, APY is the number that matters because it shows what you actually earn. For loans, APR is used because it shows what you actually pay.
Is a higher APY always better?
For savings accounts, yes. A higher APY means your money earns more. But always check fees. A 5.00% APY account with a $10 monthly fee costs you $120 per year, which wipes out the yield on small balances. The best accounts combine high APY with zero fees.
How often is APY compounded?
Most online savings accounts compound daily. This means interest is calculated on your balance every day, and that interest is added to your principal. Daily compounding is slightly better than monthly compounding at the same stated rate.
What is the national average APY for savings accounts?
The FDIC national average savings APY was 0.45% as of May 2026. The best high yield savings accounts pay between 4.25% and 5.00% APY — 10 to 11 times the national average.