Online Savings Accounts: Compare online savings accounts to find the highest rate for you.
APY vs. Rate
Most online banks advertise the Annual Percentage Yield of their accounts
instead of the interest rate. While both numbers represent how much
your money will grow, there is a difference between the two.
Annual Percentage Yield (APY) -
The APY of an account represents how much your account will change
after a year of compounding interest. Depending how frequently the
account's interest is applied to the balance, the APY and the rate
could be the same (if interest is compounded annually) or could be
slightly different. Online savings accounts typically pay interest
every month, meaning the APY and interest rate will be different.
The APY will be higher is this case and appear more attractive to
consumers. The problem with advertising APY is that interest
calculations are based on rates, not the APY.
r = interest rate, n = number of times compounded per year
Interest Rate -
The interest rate of an account is the actual number used to
calculate how much money the principal amount in the account will earn over time. The interest rate alone cannot be used to judge an account
as the frequency in which the interest is paid also determines how
much your account will earn. A slightly higher
rate that compounds only semiannually may actually provide a lower
APY than an account that offers a lower rate but compounds more
frequently. Because most people constantly deposit or withdraw funds
from their accounts, the interest rate and compound frequency are
more important than the account's APY.
Calculators for determining an APY, a rate, or the amount of interest earned can be found on the
calculators page.
Next: Play with the calculators to see how your money can grow >>