Are you looking for options to make the most of your savings? If so, understanding the difference between APY and interest rates is essential. Many people think these two terms are interchangeable, but they are not. This article will help you understand the difference between APY and interest rates and how to maximize your savings by choosing the highest APY savings account.
What is an HYSA Account?
Before diving into APY and interest rates, define an HYSA account first. A High-Yield Savings Account (HYSA) is a type of savings account that usually pays a higher interest rate than traditional ones. Online banks typically offer HYSA accounts and have become increasingly demanding over the years due to their high-interest rates and easy accessibility.
What is APY?
APY stands for Annual Percentage Yield, the total amount of interest you will earn on your savings account in a year. APY takes into account the interest rate as well as any compounding that occurs on the account. Compounding is the process of earning interest on the interest you have already earned. The higher the APY, the more money you will earn in your savings account.
What is an Interest Rate?
An interest rate is the percentage of your savings account balance that the bank will pay you in interest. Interest rates are usually expressed as an annual percentage rate (APR), which is the annual interest rate before considering any compounding that may occur. Interest rates are important because they determine how much interest you will earn on your savings account.
APY vs. Interest Rate
Now that you have defined APY and interest rates, let’s discuss the difference. The main difference is that APY considers the compounding that occurs on your savings account, while interest rates do not. This means that the APY will always be higher than the interest rate on a savings account. For example, if a savings account has an interest rate of 1% and compounds annually, the APY would be 1%. However, if the same account compounds monthly, the APY would be slightly higher at 1.01%.
How to Make the Most of Your Savings
Now that you understand the difference between APY and interest rates, let’s discuss how to maximize your savings. The first step is to choose a savings account with a high APY. As mentioned earlier, HYSA accounts typically offer higher APYs than traditional savings accounts. You can shop around and compare different savings accounts to find the one with the highest APY.
Another way to maximize your savings is to take advantage of compounding. Compounding can significantly increase the interest you earn on your savings account. To use compounding, choose a savings account that compounds frequently, such as monthly or daily.
For example, SoFi Bank offers a high-yield savings account that compounds interest daily, allowing you to earn more on your savings over time. Their website mentions that “Interest is compounded daily, meaning that every day, the interest you’ve earned is added to your account balance, and the following day, you earn interest on that combined balance.”
Understanding the difference between APY and interest rates is essential when it comes to making the most of your savings. By choosing a savings account with a high APY, using compounding, and regularly depositing money into your account, you can maximize the interest you earn on your savings. Remember to research and compare different savings accounts to find the best fit for your needs.
