We’ve all seen promotions for savings products such as certificates, savings, and checking accounts that show dividend or interest rates. There is also reference to an annual percentage yield, or APY. Your monthly savings statements may also show something called the annual percentage yield earned, or APYE. Here’s what all that alphabet soup means and why it’s important for your finances.
Many deposit accounts pay an annual rate of interest (banks) or annual rate of dividends (credit unions). This rate does not take into account the compounding of earnings within the year. Savings and checking accounts providing easy access to funds may pay lower rates. Money market accounts and certificates, with more limited access, may pay higher rates. The quoted rates are applied to balances in the accounts, and financial institutions may pay interest or dividends monthly, quarterly, semi-annually or annually. So, if you have $100,000 on deposit and the account earns a 1 percent interest or dividend rate, you will receive approximately $82 a month. That rate is calculated by multiplying the dollar amount and dividend/interest rate and dividing that total by 365 multiplied by the number of days in month. (100,000X1%)/365X30= $82.20
When looking at the fine print on certain savings products, like certificates, you may notice there is also an APY posted. What gives? The annual percentage yield (APY) measures the total amount of earnings on an account based on the dividend rate and the frequency of compounding. It takes into account the earnings made on your original deposit, as well what you earn on top of the other earnings. So, back to that account with $100,000 in it. In month one, you earn about $82, bringing your balance to $100,082. The next month, that 1 percent dividend rate is now applied to $100,082. You’ve now earned $82.26 in dividends for that month, bringing your account balance to about $100,164. And so on.
An APYE, or annual percentage yield earned, is included on your bank or credit union statements. The APYE is an annualized rate that reflects the relationship between the amount of dividends actually earned on the account during the period and the average daily balance. The APYE is affected by deposits and withdrawals made during the statement period. The APYE may also be a lesser amount than the dividend rate, but this does not mean that your account was not paid the correct dividend rate.
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