What APY tells you
APY (annual percentage yield) is the real return on savings once compounding is included: APY = (1 + r ÷ n)n − 1, where r is the nominal annual rate and n is how many times interest compounds per year. A 5% nominal rate compounded monthly gives an APY of about 5.12% — so $10,000 earns roughly $512 in a year, not $500. APY is really just compounding expressed as one number, which the compound interest calculator shows year by year.
How to use this calculator
Enter your starting balance, the nominal annual rate the bank quotes, and how often interest compounds per year (12 for monthly, 4 for quarterly, 365 for daily). The result shows the APY plus the interest you would earn and your end balance after one year. To project a balance you keep adding to, switch to the savings calculator.
Why compounding frequency matters
The more often interest compounds, the higher the APY for the same nominal rate, because you earn interest on interest sooner. Here is a 5% nominal rate at different frequencies:
| Compounding | n | APY |
|---|---|---|
| Annually | 1 | 5.000% |
| Quarterly | 4 | 5.095% |
| Monthly | 12 | 5.116% |
| Daily | 365 | 5.127% |
APY vs. APR
APY is used for what you earn on savings and includes compounding. APR (annual percentage rate) is used for what you pay on loans and does not compound the rate itself. That is why APY is the right number to compare savings accounts and CDs, while APR is what you compare on a loan or mortgage.
Comparing savings accounts fairly
Always compare accounts by APY, not nominal rate, because banks may compound differently. A 4.9% rate compounded daily can beat a 5.0% rate compounded annually. APY puts every account on the same footing. This tool is for general information only and does not account for taxes on interest, fees, or rate changes.
Frequently asked questions
- How is APY calculated?
- APY = (1 + r ÷ n) raised to the power n, minus 1, where r is the nominal annual rate as a decimal and n is the number of compounding periods per year.
- What is the difference between APY and APR?
- APY includes the effect of compounding and is used for savings; APR does not compound the rate and is used for loan costs. For the same nominal rate, APY is slightly higher.
- Does compounding more often really help?
- Yes, but the gains shrink quickly. Going from annual to monthly compounding on a 5% rate adds about 0.12%; monthly to daily adds only about 0.01% more.
- What APY does 5% compounded monthly give?
- About 5.12% APY. On a $10,000 balance that is roughly $512 of interest in a year instead of $500.
- Is interest earned shown here taxable?
- Interest from most savings accounts is taxable income. This calculator shows pre-tax interest and ignores fees and rate changes.