How to Calculate Your Bank Account APY

Quick Answer

A bank account’s yield measures how much interest it could earn in a year. Most high-yield savings accounts, CDs and money market accounts calculate your yield using compound interest.

Person using calculator on a desk

Bank account yield is the rate of return the bank rewards you with in interest for storing your money in one of their accounts. Taking it a step further, the annual percentage yield, or APY, is the amount you could earn on an account in one year. Unlike APR, which is the interest you pay for credit including credit cards and loans, APY is the interest you earn on an account.

Savings accounts with high-yield APYs can be a good place to store your cash and grow it over time. Depending on your account's yield, it might even be a way to protect your savings from the effects of inflation. Let's go over how yield works and how you can use an APY to calculate your potential earnings.

What Is Bank Account Yield?

When you place your money in a bank account, you're giving your bank the opportunity to use it as they wish, including by lending it in the form of credit cards, loans and other credit products. In return, your bank rewards you with interest on an account.

The interest you'll earn varies by account type, including checking, savings, certificate of deposit (CD) and money market accounts. When you're shopping and comparing different bank accounts, keep an eye on these terms to help you make the best choice:

  • Annual percentage yield (APY): Expressed as a percent, this is the amount of interest an account earns in a year. The higher the yield, the higher your savings' earning potential.
  • Balance: Your account balance is the amount of funds available in your account at a given time. Some accounts, like traditional savings accounts and CDs, require a minimum opening balance.
  • Simple interest: Your account may calculate your earnings as simple interest, which is money earned exclusively from your principal balance.
  • Compound interest: As a rule, compound interest is more beneficial than simple interest because it is based on the accumulated interest over time in addition to your original investment.

How Do You Calculate Yield?

Most savings, CDs and money market accounts use compound interest, but you can get a rough estimate of your projected earnings by calculating the simple interest on your account. Calculate the interest earned for one period with this formula:

Simple Interest Formula:

Simple Interest Formula

  • P = The initial deposit
  • r = The interest rate expressed as a decimal
  • t = The number of years the amount is deposited

Using simple math, let's say a financial institution is offering a high-yield savings account that pays 3.5% APY annually, and you open an account with a $1,000 deposit. In that case, you could compute the interest as $1,000 x 0.035 x 1 = $35. Assuming you don't deposit more money or withdraw the initial deposit amount, you'll earn $35 over one year and $350 over 10 years on your initial deposit.

Compound Interest Formula:

Compound Interest Formula

  • A = The total amount you'll earn during the compounding period
  • P = The initial deposit
  • r = The interest rate expressed as a decimal
  • n = The number of compounding periods in a year
  • t = The number of years the amount is deposited

While the compounding formula isn't as hard as it looks, the easiest way to calculate it may be to use a compound interest calculator. After punching in your numbers, you'll see how much interest you could accumulate, with compound interest growing your balance exponentially.

Using the above example, if you deposit $1,000 in the same savings account earning 3.5% APY, but your account calculates interest using compound interest daily, you would end up with an extra $419.04 over 10 years, $79.04 more than you would earn with an annual simple interest calculation.

While these earnings may seem paltry, remember the initial investment was a one-time $1,000 deposit. Your earnings could be exponentially higher if you follow a monthly savings plan and contribute more over time. If you're comparing accounts, you can get an apples-to-apples comparison by comparing the APYs since the compounding factor is the same.

What Types of Accounts Provide the Best Yield?

The yield you might earn can vary by account type. For example, a high-yield savings account typically offers substantially higher interest rates than a traditional one. The national average savings rate is a mere 0.24% APY as of November 2022, according to the Federal Deposit Insurance Corp (FDIC). By contrast, the top high-yield savings accounts deliver a substantially higher yield of 3% or greater.

Here's a snapshot of the average yields by account type as of November 2022, according to the FDIC. (The FDIC does not publish rates for high-yield savings accounts specifically.)

Bank Account Type Average Interest Rate
Savings 0.24%
Interest checking 0.04%
Money market account 0.29%
1 month CD 0.10%
3 month CD 0.32%
6 month CD 0.52%
12 month CD 0.90%
24 month CD 0.91%
36 month CD 0.90%
48 month CD 0.86%
60 month CD 0.98%

Source: FDIC

Of course, earnings are only part of the equation. When comparing different accounts, take a close look at each account's fees, which have the potential to offset or completely negate any interest you earn. Your ability to access funds in the account is another important factor to consider—some accounts, including CDs, penalize you for accessing your funds before the maturity date.

A high-interest savings or money market account could provide a low-risk place to store your emergency fund or other money you wish to keep liquid. Similarly, CD laddering could be a safe strategy to grow income during retirement.

But depending on your age, lifestyle and financial goals, you may find better options than an interest-yielding bank account. For example, if you're a younger investor saving for retirement, you'd likely earn greater returns by investing your money in a tax-advantaged IRA or 401(k). If long-term savings and growth are your goals, placing your money in stocks, bonds, mutual funds and other investments may deliver a greater return that keeps up with inflation.

The Yield Is Important, but Saving Is Essential

Letting your money work for you and earning a solid yield is important, but establishing a regular savings habit toward your goals is even more critical. Invest in your account regularly, whether you open a savings, money market or certificate of deposit account. By doing so, you can maximize the advantage of high yields and compounding interest and build long-term wealth over time.

And as part of your overall financial well-being, check your credit report and credit score for free through Experian to know where you stand. Maintaining good credit can help you qualify for favorable interest rates when you borrow.