If a savings account has an APY of .30% on a $1,000 or more balance, does that mean I get $300 a year interest if I keep at least $1,000 in it?
Categories
Thinking of investing your savings?
While increasing your savings is good, multiplying your money through smart investments feels great - there are lots of opportunities out there and you can be successful if you're arming yourself with the right information.
Where to start?
If you're going to try your luck on the stock market or trading options, first start by learning the basics and delay as much as possible buying real positions. One way of getting hands-on experience with the markets is through online trading - either forex or binary options are good learning grounds and most online brokers offer trial accounts free of charge (if you're wondering what are binary options, 24option.com has very good resources on it, besides offering a free practice account and a wealth of information about binary trading in general). Final warning for the very eager: binary options are exotic financial instruments; real trading involves substantial risk of monetary loss.
3 Comments
The APY is the annual percentage yield. That means if you put $1,000 in today, you will get that percentage if you leave the $1,000 plus any interest earned in the account for an entire year. In other words, the APY includes the effect of compounding the interest. Compounding means that interest earned earns interest on itself.
In your scenario, you have an APY of .30% (point three percent). This is not the same as 30% (without the decimal point). An APY of 30% would give you $300 total interest at the end of the year. An APY of .30% would give you $3 at the end of a year. A good APY now is 4.5% or so, which would give you $45 in interest on your $1,000 at the end of a year.
The APY takes compounding into effect, so yes if you put money in on 1/1 and leave it all year, that’s what you would get.
Your math is waaaay off. $1000 * .30% is really 1000 * .3 * .01 or $3.
(My savings account would pay $30. My checking account would pay $3.)
Annual Percentage Yield
How to Calculate APY With Ease
Calculating an investment’s APY can be tricky. If you want to just find out what an APY is with Excel, here’s the function:
=POWER((1+(A1/B1)),B1)-1 where A1 is the Rate and B1 is compounding frequency.
Try pasting this formula into any cell on a spreadsheet (except A1 or B1). In cell A1 you’ll put the stated annual interest rate – in decimal format. For example, if the stated annual rate is 6%, you’ll type “.06” in cell A1. Then, you put the number of times you’ll compound each year. For example, for daily compounding you’d enter “365” (or 360 depending on the institution) in cell B1.
In the example I’ve used, you’ll find that the APY is 6.183%. In other words, if you get 6% annually with daily compounding, your APY = 6.183. Try changing the compounding frequency and you’ll get an idea of how the APY changes. For example, you might show quarterly compounding (4 times per year) or the unfortunate 1 payment per year (which just results in a 6% APY).