
What is APY, and how does it affect kids’ and teens’ money goals?

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Key takeaways:
- APY stands for Annual Percentage Yield. It shows how much interest your money can earn in a year, including compound interest.
- A higher APY means your savings can grow faster over time.
- You’ll find APY on savings accounts, CDs, and other interest-earning accounts.
Financial well-being is a learning journey filled with acronyms and jargon that can overwhelm you. One such term is APY, which is short for Annual Percentage Yield. If you need to know what an APY is, stick around and find out why this number matters and how it can affect your money goals.
What is APY?
APY is the total amount of interest you earn in a year through compound interest. Compound interest is the combination of interest earned on a principal amount plus any additional interest accumulated in the process. In other words, it’s interest earned on interest.
You have a new total amount when you add the accrued interest you’ve earned to the amount you started with (the principal balance). This new total then earns additional interest, leading to exponential growth over time. The key here is that the interest compounds, meaning it builds upon itself. For example, if you had $1 and earned a daily compounding interest of one cent today, you'll earn interest on $1.01 tomorrow.
How is APY calculated?
In math terms, the equation for calculating APY is the following formula:
APY = (1+r/n)^n - 1
In this formula, 'r' represents the annual interest rate, and 'n' represents the number of compounding periods in a year. For example, if your savings account compounds monthly, 'n' would be equal to 12.
Basically, it means that the more frequently your account compounds, the higher your APY will be. This is why high-yield savings accounts often compound daily and have a higher APY than traditional savings accounts. But don’t worry, you don’t have to memorize the formula. Just know that more compounding = more growth.
Why does APY matter for savings accounts?
APY helps you see how much you’ll earn just by keeping money in a savings account. The higher it is, the more your balance can grow on its own.
If you’re putting money away for something down the road (like a new phone, college, or just a rainy day), accounts with a solid APY can help you get there faster. It’s one of the easiest ways to compare where to save.
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APY vs. APR: What’s the difference?
APY and APR (Annual Percentage Rate) are often used interchangeably, but they are not the same thing. APR is the annual interest rate that you pay on a loan or credit card. APY is the annual interest rate that you earn on a deposit or investment. The key difference between the two is that APY takes into account compound interest, while APR does not.
What types of accounts offer APY?
If you're looking to grow your savings, certain types of accounts offer APY to help your money earn more over time. These accounts pay you interest just for keeping your money there—and the amount can vary depending on the account type and the bank.
You’ll typically see APY offered on:
Savings accounts
High-yield savings accounts (HYSAs)
Certificates of Deposit (CDs)
Some checking accounts and cash management accounts
APY rates can vary a lot, so it’s a good idea to compare options and watch out for fees that might cut into your earnings.
How to make the most of your APY
Here are a few tips to help you make the most of your APY and reach your money goals:
Shop around for accounts with competitive APYs. Keep in mind that online banks often offer higher APYs than traditional brick-and-mortar banks.
Consider opening a high-yield savings account, which typically offers a higher APY than a regular savings account.
Take advantage of compound interest by leaving your money in the account for as long as possible, allowing it to grow over time.
Compare APYs when choosing between different investment options to make the most informed decision.
FAQ
Can APY change over time?
Yes, banks can adjust the APY at their discretion, which means it can increase or decrease over time.
Does a higher APY mean more money?
Yes. The higher the APY, the more your money earns.
What influences the APY rate?
Market conditions, the Federal Reserve's policies, and competition between banks can influence the APY rate.
Does every bank offer APY?
Most do, especially for savings accounts. Some even show APY on checking accounts.
How can I find the APY of a savings account?
You can usually find the APY in the fine print of a financial product.
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