What is APY (ELI5 – Explain Like I'm 5)

Hey there! Are you curious about Annual Percentage Yield (APY)? It’s a term that you might have seen before when you’re looking into saving money, but what does it really mean?

Annual Percentage Yield, or APY, is a term used to describe the amount of interest that is earned on an investment or savings account over the course of a year. It is similar to the term APR, or Annual Percentage Rate, which is the interest rate that is charged on a loan or credit card. However, there are some key differences between APY and APR that it is important to understand.

Annual Percentage Rate (APR) vs Annual Percentage Yield (APY)

APY is used to describe the actual amount of interest that is earned on an investment or savings account, including any compounding that occurs. For example, if you have $100 in a savings account with an APY of 1%, you would earn $1 in interest over the course of a year. If the account compounds interest daily, you would actually earn a little bit more than $1, because the interest that you earn is added to your account balance and then earns interest as well. This is why it is important to pay attention to the APY when you are shopping for a savings account or other type of investment, because it can make a big difference in the amount of money that you earn over time.

APR, on the other hand, is used to describe the interest rate that is charged on a loan or credit card. It is the annual interest rate that is charged on the balance of the loan or credit card, and it does not take into account any compounding of interest. For example, if you have a credit card with an APR of 20% and you have a balance of $1,000, you would be charged $200 in interest over the course of a year.

It is important to understand the difference between APY and APR because they can have a big impact on the amount of money that you earn or pay over time. When you are shopping for a savings account or other type of investment, you should look for the highest APY possible, because it will help you earn more money in the long run. When you are shopping for a loan or credit card, you should look for the lowest APR possible, because it will help you save money on interest over time. By understanding the difference between APY and APR, you can make better financial decisions and save more money in the long run.