Making Cents of Annual Percentage Yields (APY)
First it is important to understand what Annual Percentage Yield (APY) is. The APY is the actual rate of return that includes compounding interests on savings accounts, and investments that financial institutions pay you.
While it’s important to compare the APY, the frequency of compounding may be even more important. Because some financial institutions compound more frequently, comparing accounts based on the APY alone, is not accurate.
Say two financial institutions offer a CD for 12 months at 2% APY, but one pays out compounding interest monthly, and the other annually. Your return will be higher with the one that compounds monthly, since each month; you have an increasing principle earning interest, as opposed to only once.
Also, be sure to compare penalties for pulling money out of an account early, or if you fall below a certain balance. This may reduce your interest earnings, prin-cipal balance, or even hit you with fees.
Read the fine print when comparing accounts or CDs, and realize that the highest APY doesn’t always pay you the best.
If you are interested in the great rates and terms offered on CDs at Ascentra. Check out our CDs & IRAs page.