• ## How banks can pay interest on your money

Most bank accounts use compound interest formulas, compounding daily, weekly, monthly, or according to some other rate of frequency. The annual percentage yield (APY) shows how much interest your money will earn in a given year, including all compound interest. When comparing bank accounts, it's important to look at the APY that each offers in addition to other factors such as branch/ATM availability and fees. See Business Insider's picks for the best high-yield savings accounts »

On a \$10,000 balance, that daily compounding would result in an extra \$2 of interest at the end of the first year. That may not sound too exciting. But imagine that you allowed the money to compound for 20 years. With simple interest, you would earn \$4,000 in interest over 20 years for an ending balance of \$14,000. But with daily compounding interest, your account would be worth \$14,918 at the end of the 20 years. That's nearly an extra \$1,000 that you would have earned thanks to the power of compound interest alone.

What's the difference between a bank account's interest rate and APY? Due to the effects of compounding, the actual rate of return that you earn on your bank account will be slightly higher than its interest rate. To help customers determine what they'll actually earn in a year's time, many banks publish a different number called the annual percentage yield (APY). A bank account's APY tells you how much interest your money will earn in a given year, including all compound interest. An account's compounding frequency will affect how much the interest rate varies from the APY. For example, if a bank account paid interest annually, the interest rate and APY would be the same. If interest compounds monthly, the APY will be slightly higher than the interest rate. And the APY would be even higher if the interest compounded daily. For these reasons, a bank account's APY is the key number that you want to focus on. Thankfully, most banks publish APY rates rather than interest rates, so this shouldn't be something you need to calculate on your own. But if you'd like to know how, the FDIC offers an APY mathematical formula. Which bank accounts offer the highest APY? According to the FDIC, the average savings account pays a paltry 0.06% APY. However, it's likely that you can earn a much better return by simply taking the time to shop around.  If you're comfortable with using online banks, this may be a good place to start your search. With no physical branches to maintain, digital banks are able to save money on overhead. Many, in turn, pass those savings along to their customers in the form of higher rates on their deposit accounts. That's not to say that full-service banks never offer competitive interest rates on their savings accounts, money market accounts, or CDs. A large bank, for example, may still offer a high-yield savings account as a means of differentiating itself from its competitors and attracting new customers.  The bank that offered the best APY yesterday may not be the bank with the best rate today. That's why it's important to look at the most up-to-date information when you're shopping for a bank account.  To make things easy for you, we've compiled a list of the top high-yield savings accounts available right now. Check out the list to compare APYs and to see what additional features and benefits each bank currently offers. Related Content Module: More Personal Finance CoverageJoin the conversation about this story »

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