What is APY?
Here on Money Market Rates 101 we often talk about APY, annual percentage yield. Since we through this word around a lot, I thought that it would be good to define APY so that you understand why understanding APY is important for find the best money market rates. So, what is APY?
Why is annual percentage yield important?
Understanding annual percentage yield helps you to evaluate money market accounts and determine how much interest your principal balance will earn over a year. By knowing what is APY you can compare various money market accounts to find the highest money market rates or comparing the money market APY with the APY you can earn with other investment alternatives. You want to find the highest APY with the right risk profile to suit your needs.
What is APY?
APY stands for annual percentage yield. Put in its simplest terms, APY tells you how much interest your money will earn over a year.
Why you should look at APY over the interest rate?
Unlike the stated interest rate, APY tells you how much your money will earn over the year taking into account compounding interest. Compounding interest means that if your principal balance in you money market account is getting daily interest added every day, your balance keeps growing. This means that every day you have more money to earn interest on. This is the value of compounding interest.
What affects APY?
As mentioned above the frequency that interest gets added to you account is one of two things that affects APY. If your money market account adds interest daily the APY you earn will be higher than the APY of a money market account that adds interest to your account monthly.
The second factor that affects APY are the money market rates that you are earning. If you are earning a higher rate of interest on your money market account then your APY will be higher. That is why we help you to find the best money market rates.
How to calculate APY?
The formula for calculating APY is not easy. However, here is the easiest formula of how to calculate APY.
APY = (1 + r/n )n – 1
In the formula above, “r” equals the interest rate and “n” equaIs number of times per year interest is compounded on your account.
Understanding APY is absolutely vital if you want to find the best money market rates. If you have any questions about What is APY? please ask them in the comments below.