Sources: IRS, SEC, Federal Reserve, U.S. Bureau of Labor Statistics & U.S. Census Bureau. See our editorial standards.
The real rate of return on savings or an investment over a year, including the effect of compounding.
Definition: The real rate of return on savings or an investment over a year, including the effect of compounding.
APY tells you how much you will actually earn in a year once compounding is factored in, making it the fairest way to compare savings accounts and CDs. Because it accounts for interest-on-interest, APY is always slightly higher than the stated nominal interest rate when compounding occurs more than once a year.
APY = (1 + r/n)^n − 1 — where r is the nominal rate and n is compounding periods per year.
A savings account with a 4.9% nominal rate compounded monthly has an APY of about 5.01%. On $10,000 that is roughly $501 in a year, versus $490 with no compounding.
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