When you deposit money, the interest you earn is added back to your balance (compounding), so you earn interest on both your original deposit and previously earned interest, accelerating growth over time.

A “good” APY is typically well above the national average for savings accounts (0.39% as of August 2025, per FDIC). Many high-yield savings accounts offer APYs between 3% and 5%, which can significantly speed up growth.

What is APY?

Q: How is APY calculated?

Annual Percentage Yield (APY) is calculated as APY = (1 + r ÷ n)^n − 1, where r is the annual interest rate and n is the number of compounding periods per year.

Q: Why is APY important?

APY shows the real rate of return by including compounding, helping you compare financial products more accurately and choose options that can grow your money faster.

Q: What is the difference between APY and APR?

APY measures earnings on deposits and includes compounding. APR measures the cost of borrowing and does not include compounding.

Q: What is the difference between APY and interest rate?

The interest rate is the nominal rate and doesn’t include compounding, while APY includes compounding and reflects your actual annual earnings.

6 minute read

APY, or Annual Percentage Yield, is the rate that shows how much interest you can earn on a savings account, certificate of deposit (CD), or money market account over the course of a year.

Unlike a simple interest rate, APY accounts for compounding, meaning the interest you earn is added back to your balance and begins earning interest.

A higher APY allows your money to grow more quickly.

How does APY work?

1. Deposit money:
You put money into a savings account, and the bank pays you interest.

2. Compounding interest:
Instead of being paid out, the interest you earn is added back into your account.

3. Balance grows:
Your new, larger balance earns interest too, so you make money on both your original deposit and the interest already added.

4. Cycle continues:
This repeating cycle of compounding helps your savings grow faster over time.

How is APY calculated?

Annual Percentage Yield (APY) is calculated with the formula:

APY = (1 + r ÷ n)^{^}n – 1

In this formula, r is the annual interest rate and n is the number of times the interest compounds in a year.

The formula shows the power of compounding, where the interest you earn is added back into your balance and then begins earning interest itself.

No need to calculate APY by hand; online APY calculators make the process easier.

Enter the interest rate, your balance, and how often interest compounds, and the calculator will show you the APY automatically.

Click here to go to our APY calculator.

Why is APY important?

APY is important because it shows the real rate of return on your savings or investment by including the effect of compounding.

This helps you compare financial products more accurately and choose the option that will grow your money the fastest.

What is a good APY?

A “good” APY is usually much higher than the national average for savings accounts, which, according to the FDIC, is 0.39% as of August 2025.

Many high-yield savings accounts offer APYs between 3% and 5%, which can significantly affect how quickly your money grows.

What counts as good can also depend on the economy and your personal financial goals.

Choose high-yield options
High-yield savings accounts (HYSAs) generally provide stronger APYs compared to traditional savings accounts, making them a good place to start.
Check against the average
Since the national average for savings APYs is low, a good APY is one that stands out well above the average.
Target 4% or more
As of late 2025, APYs of 4% or more are generally considered competitive and a strong option for savers.

Axos One^® Checking and Savings

Earn more with a competitive APY.

With Axos One, you can make the most of your money by taking advantage of a strong APY that helps your savings grow faster. Open an account today to manage your money with ease and watch your balance grow through the power of compounding.

Get StartedLearn More

What is the difference between APY and APR?

APY and APR are both expressed as percentages, but they measure two very different things.

APY is about growth, showing how much you can earn on your money. APR is about cost, showing how much you pay when you borrow money.

APY (Annual Percentage Yield)

APY shows how much you can earn on deposits, such as in a savings account or CD. It includes the effect of compounding, which means you earn interest on both your original deposit and the interest that has already been added.

APR (Annual Percentage Rate)

APR shows how much you will pay to borrow money, such as with a credit card, mortgage, or personal loan. Unlike APY, APR usually does not include compounding. Instead, it reflects the cost of borrowing, including fees or other charges the lender may apply.

What is the difference between APY and interest rate?

The interest rate tells you the basic rate at which your money earns interest. It shows the starting point but does not reflect compounding.

APY, on the other hand, gives you a clearer picture of how much interest you will actually earn over the course of a year because it includes the effect of compounding.

Key takeaways

APY is one of the most important numbers to understand when choosing where to keep your savings. It reflects the effect of compounding and accurately shows how quickly your money can grow.

Why it matters: A higher APY means faster growth and stronger protection for your savings over time.

Good APYs: Anything well above the national average is considered good. In late 2025, APYs of 4% or more are competitive.

APY vs. APR: APY shows what you can earn on deposits, while APR shows what you pay to borrow money.

APY vs. interest rate: APY includes compounding, while a basic interest rate does not.

By understanding APY, you can compare accounts more effectively and choose the best option to help your savings grow.