APY vs APR: How Savings Account Interest Is Calculated

When you compare savings accounts or certificates of deposit (CDs), you’ll see two terms: APR and APY. They sound alike, but they measure different things — and confusing them can make one account look better than it really is. Here’s how savings interest is calculated and how to compare accounts properly.

APR vs APY

• APR (annual percentage rate): the simple yearly interest rate, without compounding. You’ll see APR most often on loans and credit cards.
• APY (annual percentage yield): the rate you actually earn in a year once compounding is included. Banks advertise savings accounts and CDs by APY.

APY = (1 + r ÷ n)ⁿ − 1

where r is the nominal annual rate and n is the number of compounding periods per year.

Example: a 4.80% nominal rate compounded daily gives an APY of about 4.92%. Compounded monthly, it’s about 4.91%. The more often interest compounds, the higher the APY — though the differences are small at typical savings rates.

How much interest will you earn?

For a balance you leave untouched for a year, interest ≈ Balance × APY.

Example: $10,000 at 4.50% APY earns about $450 in a year. Over five years, if the rate stayed the same and you left the interest in the account, the balance would grow to about $12,462 thanks to compound interest. (Savings rates are variable and change over time.)

Adding monthly deposits

Regular contributions compound too. Model different scenarios with our compound interest calculator.

Taxes and inflation: your real return

Two things reduce what your interest is truly worth:

1. Taxes: in the US, interest is taxed as ordinary income. If you’re in the 22% bracket, a 4.50% APY becomes roughly 3.51% after federal tax.
2. Inflation: if inflation is 3%, your after-tax real return is only about 0.5%.

Real return ≈ After-tax return − Inflation

That’s why savings accounts are ideal for short-term goals and emergency funds, while long-term money usually needs to be invested. See how to protect your savings from inflation.

Types of interest-bearing accounts

• High-yield savings accounts: typically offered by online banks, with variable rates well above traditional savings accounts and full liquidity.
• Money market accounts: similar to savings, sometimes with check-writing or debit access.
• Certificates of deposit (CDs): fixed rate for a fixed term. Withdrawing early usually triggers a penalty.
• Treasury bills: short-term government debt; in the US, interest is exempt from state and local income tax.
• Money market funds: invest in short-term, high-quality debt; not FDIC-insured but generally low risk.

How to choose

When will you need the money?

Keep your emergency fund in a liquid account. Money you won’t touch for a set period can go into CDs or Treasuries for a locked-in rate.

Where are rates heading?

• If rates are expected to fall, locking in a longer CD preserves today’s yield.
• If rates are expected to rise, shorter terms keep you flexible.

Build a CD ladder

Split your savings across CDs with staggered maturities (for example 3, 6, 9 and 12 months). As each one matures, you can reinvest or use the cash — balancing yield and access.

Check the fine print

Look for minimum balances, monthly fees, introductory rates that expire and limits on withdrawals.

Deposit insurance

In the US, deposits at FDIC-insured banks (and NCUA-insured credit unions) are protected up to $250,000 per depositor, per institution, per ownership category. Other countries have their own deposit guarantee schemes with different limits.

Conclusion

When comparing savings products, look at APY, not APR, and then think about what’s left after taxes and inflation. Use liquid high-yield accounts for emergency money, lock in rates with CDs or Treasuries for money you won’t need soon, and invest for long-term goals.