CD Apy, Annual Percentage Yield Explained

In this article, we wanted to provide information regarding what the CD APY is, as well as tips for earning the most.  For starters, the acronym APY stands for “Annual Percentage Yield”, which is a unique tool that helps to evaluate the amount you earn on a CD or Certificate of Deposit.  Just as people pay close attention to the APR (Annual Percentage Rate) when purchasing a home, the CD APY is important.  With the APY, you have a way of comparing CDs from different financial institutions to find o

In this article, we wanted to provide information regarding what the CD APY is, as well as tips for earning the most.  For starters, the acronym APY stands for “Annual Percentage Yield”, which is a unique tool that helps to evaluate the amount you earn on a CD or Certificate of Deposit.  Just as people pay close attention to the APR (Annual Percentage Rate) when purchasing a home, the CD APY is important.  With the APY, you have a way of comparing CDs from different financial institutions to find one that would ultimately earn you the most money.[br]

A CD APY is calculated on an annual basis for the money you could earn on your deposit.  Obviously, the goal for taking out a certificate of deposit in the first place is to build a healthy savings account.  Therefore, you want to work with a financial institution that offers the best terms and interest rates so any money invested by you will begin to grow.  Some people will take out a CD as a short-term investment and others will lock into the longest period possible.

It is important to note that with a CD APY, the savings account is compounded.  This means that the money you put into the certificate of deposit and its earnings actually make earnings.  In other words, the interest rate on the CD is what grows your money but the CD APY is what grows the money earned from the interest.  While knowing the interest rate is important, if you want to monitor your true earnings, you need to know the CD APY.

As you start the process of shopping around for the best CD possible, you want to pay close attention to the CD APY and in doing so, realize that it will be much higher during periods of frequent compounding.  Each bank and credit union will compound on unique schedules so you need to identify how often compounding is done.  As an example, some financial institutions compound quarterly whereas others compound daily.  With this scenario, the CD APY is going to earn far more on a daily basis.[br]

Now, along with depending on what the bank or credit union does with the CD APY, you also have some control over the amount.  This means that as you analyze your savings, you obviously need to consider the money being saved with the certificate of deposit but also money being grown in your interest-earning checking and savings accounts.  A common mistake is that people will only consider the CD accounts but to make the most money, all accounts have to be considered.

You can also help increase the amount of the CD APY by compounding more often, if this is an option.  Let us say you had invested in four CDs, all of them paying out the identical interest rate.  However, if you looked at the amount of money earned for the those that compound the APY on a monthly basis instead of quarterly or even at the maturity date, you would be amazed at how much more money you would earn.  Therefore, when looking for a new CD, always understand frequency of compounding.

A representative from the bank or credit union can assist in calculating the CD APY in that the process can be a little complicated.  However, there are calculators online that can do this for you or if you have a Excel and understand math, then you could create your own formula by making your A1 field the interest rate and the B1 field the frequency of APY compounding.  At that point, the sum becomes 1+A1 divided by B1 and then B1 minus 1.