In today's world, an investor can choose between numerous investments with different risk profiles. There are investments to suit different risk appetites and needs. Likewise, are there many tools to compare different indicators of an investment's performance. One such measuring tool is the APY or the Annual Percentage Yield.
The APY is a measure of interest rate, which takes into consideration the change in account balance after interest is paid. Thus APY is a measure that takes compounding into account.
How do you get your money to earn the best APY?
- Put your money in those investments that have the best guaranteed APY. A higher APY rate would earn more money, other things being equal.
- An investment with more compounding periods will be a higher earning investment than another one with fewer compounding periods. Let's say you have funds in investment option A, compounding every quarter, at 4% APY and another investment option B, compounding every six months, with APY at 4%. In this example, the investment option A will earn a higher APY, as it compounds twice more for the same period, one year.
- View your finances as you would the finances of a company, and look at all the investments that you've made. Those that compound fewer times in a given period than others, earn a lower APY. They have to be moved out and invested in the higher earning ones.
- Financial institutions pay out higher APY normally when money is committed to the account or investment for longer periods.
- A higher APY is also given by banks when there is more money invested with them, so the higher the value of investment, the higher the APY.
- Annual percentage yield is not normally linked to investments that have fluctuating share prices and also no established interest rate. Therefore, there will be no APY quoted for bonds, stocks etc.
- Money market accounts normally offer higher rates of APY over free checking accounts, savings accounts and short-term CDs.
- There is a kind of checking account offered by some banks called a Maximum Savings account which offers up to 6% APY. For such an account you must do direct deposits and a minimum number of signature-based transactions in a prescribed period. This essentially means that the account is being sponsored by merchants.
Thus the APY is a standardized means of comparison of the interest earning capability of an account. The higher the APY the more money your money will make. So while comparing investment options in the market, keep the above points in mind, and you will find that your money is earning the best APY possible.