Understanding APY: What it means and how it works
written_by SingSaver Team
updated: Apr 12, 2025
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Saver takeaways
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APY stands for Annual Percentage Yield, and it reflects the interest you earn when you deposit money into an account. Most savings accounts—and some checking accounts—offer an APY. Generally, the higher the APY, the more your balance can grow over time, assuming no withdrawals are made.
For those looking to maximise the return on their savings, understanding APY is essential.
Understanding APY: What does it mean?
When it comes to earning interest on your savings, it’s important to understand the difference between simple interest and compound interest:
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Simple interest: Calculated only on your original deposit, the interest amount remains the same each period.
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Compound interest: Interest is calculated on both your original deposit and any interest that has already been added, allowing your savings to grow faster over time.
Annual Percentage Yield (APY) incorporates compound interest, which makes it a more accurate measure of the total returns you could earn in a year. In Singapore, this concept is closely related to what banks often refer to as "per annum" (or "p.a.") interest. For those seeking stable returns, exploring high-yield savings accounts and the best fixed deposits are great options to consider.
» Learn what are high-yield savings accounts?
In Singapore, savings accounts often feature interest rate tiers, where the APY may vary depending on the balance you maintain. For example, UOB One Account offers a maximum APY, with interest rates adjusted based on your balance. However, the actual APY you receive may differ from the maximum rate, depending on various conditions such as monthly deposits or specific account terms.
» Learn more about average bank interest rates for savings account
Saver-savvy tip
Online banks often provide higher APYs since they don't incur the costs associated with maintaining physical branches. This helps them reduce operational expenses, enabling them to offer better rates to customers. If you're aiming for a high APY, consider starting with online banks.
If you're willing to commit a portion of your savings for a fixed period, a certificate of deposit (CD) may be a good option. CDs often offer a fixed APY that can surpass the rates of high-yield savings accounts. In exchange, you'll agree to keep your money untouched for a set term, which can range from a few months to several years. Explore and compare the best CD rates to find the right option for you.
Best Fixed Deposit Options
APY calculation: A step-by-step breakdown
APY is calculated using the following formula:
APY = (1 + r/n)^n – 1
Where:
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r is the annual interest rate
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n is the number of compounding periods (e.g., monthly compounding would be 12)
Example of APY calculation: Let’s assume you have a savings account with an interest rate of 6%, compounded monthly. Using the formula:
APY = (1 + 0.06/12)^12 – 1 = 6.17%
This means that even though the interest rate is 6%, you’ll actually earn 6.17% over the year due to monthly compounding.
If you already know your APY, you can easily estimate your earnings over a set period using a compound interest calculator. Simply enter your starting balance, monthly deposits, the time frame, and the APY.
APR vs. APY: Key differences
APY typically refers to the interest you earn, while APR indicates the interest you pay.
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APY (Annual Percentage Yield) reflects the total interest earned on a deposit or investment over one year, taking into account both the interest rate and how frequently it compounds.
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APR (Annual Percentage Rate) shows the cost of borrowing money over a year, dividing the annual interest into monthly payments.
When choosing deposit accounts, look for higher APYs to maximise the interest on your savings. For loans or credit cards, aim for lower APRs to reduce the cost of borrowing.
» Discover: the best savings accounts in Singapore to park your money
What is compound interest and how does it work?
Compound interest is the process where interest earned on an account is added to the principal balance, allowing future interest to be calculated on both the original amount and the accumulated interest. The frequency of compounding can vary, with daily and monthly being the most common.
Generally, daily compounding results in more interest earned over time compared to monthly compounding. While the difference might seem minor, it accumulates significantly. For example, if you have $100,000 in an account with a 2.00% APY, here's what you'd earn in one year based on different compounding frequencies:
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$2,020.08 with daily compounding
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$2,018.44 with monthly compounding
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$2,000 with annual compounding
When comparing savings accounts or CDs, it's important to prioritise accounts with high APYs and check how often the interest compounds. Daily compounding can make a noticeable difference in the amount of interest you earn over time.
» Discover: Understanding interest rates: how you can use it to save even more money
Is your APY fixed or adjustable?
This depends on the type of account you have.
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For regular savings accounts, the APY is usually variable. Your bank or credit union may adjust the rate based on market conditions.
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With a CD, the APY is locked in for the term of the deposit, but future CDs may offer different rates.
Changes in the Federal Reserve’s benchmark interest rate can impact APYs on savings accounts and CDs. For example, if the Fed reduces its rate, deposit account APYs typically decrease as well.
Online banks often provide some of the most competitive APYs, regardless of changes in the benchmark rate.
» Discover the differences between bank account types that you need to know
Frequently asked questions about APY
What is a good APY?
In Singapore, a good APY varies depending on the account and the conditions met. For example, high-interest savings accounts like the OCBC 360 offer an APY of up to 7.65% when all conditions are met, while others like the Mari Savings Account offer up to 2.7% without requiring a salary credit. To determine what’s good, consider your ability to meet the account’s requirements.
How is APY calculated?
The formula for calculating APY considers both the interest rate and the frequency of compounding periods throughout the year. If you know your APY and want to quickly estimate the interest you'll earn on your balance, you can use an online calculator to simplify the process.
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SingSaver Team
At SingSaver, we make personal finance accessible with easy to understand personal finance reads, tools and money hacks that simplify all of life’s financial decisions for you.