There’s no better way to induce that sickening stomach drop feeling than being caught in a financial emergency without the cash to cover it. Studies show that most Americans have savings accounts, but nearly half of the country has less than $500 in their accounts. That’s a paltry sum compared to the recommended three months of expenses.
If you’re ready to get serious about your savings goals, you need to master using an annual percentage yield calculator. This helps you determine which interest-bearing accounts work best for you. Read on for a quick introduction to how to calculate APY!
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Annual Percentage Yield 101
Annual percentage yield, or APY, is a term that refers to the amount of money your savings account accrues throughout a single year. APY includes what is known as “compounding interest.” That means your cash grows faster because you’re earning interest on the principal and any previously accumulated interest.
Depending on the account, interest on an account compounds a fixed number of times throughout the year. It’s best to look for accounts that accrue interest as frequently as possible because that means more money in your account.
For example, if interest compounds monthly, then your bank is adding cash to your account every single month. If interest compounds once a year, then your account grows much slower.
DIY Annual Percentage Yield Calculator
Most banks have a simple annual percentage yield calculator to help you determine what you stand to earn in any period of time. If you’d rather flex your math skills, you can also use a simple formula to determine your APY.
The formula is APY =(1+r/n)n-1. The r variable refers to your current interest rate. You’ll want it in decimal form, so 4% APY would be 0.04. The n variable represents the number of compounding interest periods in a given year.
Remember your order of operations, and you’ll be ready to calculate your heart out.
What’s the Best Interest-Bearing Account?
The truth is that APY in savings accounts fluctuates pretty frequently. In 2008, the average APY was a generous 0.21%. Following the Great Recession, APY gradually fell to a historic low of 0.06% in 2021.
Even though APY is low, that doesn’t mean you shouldn’t make an effort to shop around for the best options. Generally, you’ll find that most online banks have significantly more competitive APY rates than their brick-and-mortar competitors. Look into high-yield savings accounts to find the best rates available.
It’s important to know the limits of savings accounts. You’re not going to get the same level of returns as those who saved in their 401(k) plans. Still, it’s important to have a savings account with a stash of cash you can easily access in the event of an emergency.
Make Your Money Work for You!
Using an annual percentage yield calculator is a simple matter of understanding the formula. Once you’ve mastered the formula, you can shop for a new savings account. Comparing the APY on different interest-bearing accounts ensures that you make an informed decision and get the most in return.
Dealing with personal finance issues is nothing short of complicated. If you want to take control of your financial future, then you need a resource with tons of expert advice. Check out the rest of our blog for everything you need to improve your financial situation!
