APY (annual percentage yield)
The yearly return on a deposit account, including the effect of compounding — the honest, comparable number for savings.
APY tells you what a savings or checking account actually pays in a year, with compounding already baked in. Compounding is the interest your interest earns: a balance that pays monthly interest earns a little on last month's interest the next month, and APY sums that up into one comparable figure.
If an account advertises 4.00% APY and the balance is held steady for a year, it earns 4.00% of the balance over that year. On $5,000, that is $200. On the same balance at 0.01% APY — common at large banks — the year earns 50 cents. Same money, same deposit insurance, same access.
Two calm facts. APY floats with the broader rate environment, so today's rate is not a promise about next year. And interest earned is taxable, so the after-tax figure is a bit lower. APY is the fair comparison between accounts; APR is the parallel term used for borrowing, where compounding is excluded.
Plumb is financial education, not financial, investment, tax, or legal advice.