Use our annual percentage yield (APY) calculator to determine the potential earnings or growth of an investment over a year.
Page written by Ian Hawkins. Last reviewed on June 13, 2024. Next review due October 1, 2025.
This calculator is intended for illustration purposes only and exact payment terms should be agreed with a lender before taking out a loan.
Annual Percentage Yield (APY) is a financial term that represents the total annual rate of return an investment will earn, taking into account the effects of compounding. It is expressed as a percentage and reflects the actual interest or investment earnings over a year, including the impact of reinvesting those earnings.
Unlike the nominal interest rate, which only considers the flat rate of return without factoring in compounding, APY provides a more accurate measure of the investment’s growth potential. APY takes into account how frequently the interest or earnings are compounded, such as annually, semi-annually, quarterly, monthly, or even daily.
The APY formula considers both the principal amount (initial investment) and the accumulated interest or earnings. It calculates the interest earned on the principal and any previously accumulated interest, thereby reflecting the compounding effect.
It’s worth noting that APY assumes the investment remains untouched for the entire year and that the interest or earnings are reinvested. In reality, actual returns may vary due to factors such as market fluctuations, fees, and any early withdrawals or changes to the investment.
Calculating APY (Annual Percentage Yield) from the principal amount and interest earned with a formula is straightforward.
You can use the following: APY = (1 + (Interest Earned / Principal))^n – 1
Where:
Interest Earned: The total interest accrued over a specified period.
Principal: The initial amount of money invested or deposited.
n: The number of compounding periods per year.
Simply plug in these values into the formula to determine the APY of your investment or savings account.
For example, if your annual interest rate is 5% and it compounds monthly, the formula would be: APY = (1+ 12/0.05)12 − 1.
To calculate APY on savings, utilize the APY calculator or formula mentioned above, inputting your principal amount, interest earned and, and the number of compounding periods per year.
While the interest rate reflects the percentage of interest earned annually, APY considers the effect of compounding on the interest earned, providing a more accurate representation of the true earnings potential of an investment or savings account.
A good APY for a savings account typically exceeds the national average and aligns with your financial goals. Higher APYs offer greater returns on your savings, but consider factors such as account fees and accessibility when choosing the right savings account for you.
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