We're so excited to share that we've launched interest on our Savings Jars to help your money grow even faster. But if you're new to saving, you might be wondering what APY is and why it's so important. Here's the lowdown…
What is APY?
APY stands for Annual Percentage Yield, which is the amount of interest earned on your savings account over a year. Interest means how much money the bank will pay you back in exchange for holding your savings with them.
In simple terms, if you save $100 in an account with a 5% interest rate, at the end of the year you'll have earned $5 interest and have a total of $105.
But in reality, an APY of 5% means you earn a little more than $5 on $100 saving because APY includes compounding interest.
What is compounding interest?
Compounding interest means you earn interest on your money, plus the interest you already earned. Monzo pays out interest monthly, which means over one year on a $100 investment, you'll earn $5.12 instead of $5.
On a small amount of savings this doesn't make much difference, but as your savings grow, so does the compounding interest.
Why is APY important?
Finding an account with a high yield is one of the easiest steps you can take to grow your money and reach your savings goals faster.
While the difference between 3% and 4% APR might not sound like a lot, it can be significant, especially with compounding interest at play. If you saved $100 a month for 5 years with a 3% APY, you would have $6,580.83 at the end ($6,100 deposits + $480.83 interest). But with a 4% APY you'd have earned $652 over the same period of time, with the same deposits. That's 36% more!
Is APY the same as APR?
Almost. APY is the interest you earn on your savings or investments, whereas APR is the interest you pay on the money you borrow (like a mortgage or credit card).
Is APY the same as AER?
AER stands for Annual Equivalent Rate, and is used interchangeably with APY.
How do I know which savings account to choose?
When choosing where to stash your savings, the APY on offer is important, but not the only thing to keep in mind. Consider the following, too:
How quickly can you access your money? Banks will usually offer a higher savings rate for fixed term accounts, where you can only access your money after a set period of time, like 2 or 5 years. This might work for you if you're saving for the long term, but wouldn't be suitable if you needed access to your money sooner.
Are there any fees associated with the account? Make sure to read the small print, as some banks charge hefty fees for their savings accounts. Fees for high-yield savings accounts can be up to $25 per month.
Is there a minimum deposit required? Again, these can be hefty for the top APY accounts, locking out those with smaller savings. But not all high-yield savings accounts work this way – it's possible to get a great rate without a minimum deposit.
Is your money protected? Before saving your money anywhere, make sure it's protected by the FDIC (Federal Deposit Insurance Corporation). FDIC protects up to $250,000 of your money in the event the bank or banking provider fails.
How long is the bank offering the APY for? If the bank's offering a high interest rate as a short-term introductory offer, the deal might not be as good as it seems.
Ready to start saving? Check out Monzo's new instant access high-yield saving Jars. Earn up to 4.25% APY on your savings, with no catch, no small print and no minimum deposit.
Monzo’s Savings Jar Annual Percentage Yield (APY) is as of July 29, 2024. The APY may change at any time.