New on FinoLib · Volume V: Personal Finance
I have just published a new article on FinoLib, my free finance education library: APY vs APR: How Savings Account Interest Works. It is part of Volume V: Personal Finance. Below is a summary of the topic in plain, expert language, so you can follow the idea even before you open the full article.
The idea in plain words
The interest on your savings is set by your bank, not by the central bank, and banks often pay far less than they earn on the same money. APY is the honest number to compare, because it shows what you really earn in a year, including interest on interest. How often interest is added matters very little. What matters is the rate. Moving your emergency fund to a competitive insured account can earn you hundreds of dollars a year for doing nothing different. Remember that interest counts as income, so some of it goes to tax.
Key points
■APY = (1 + r ÷ n)^n − 1; Regulation DD requires banks to disclose it and to pay interest on the full daily or average daily balance.
■Historically, deposit rates rose only about 0.46 point for each 1-point rise in the Fed funds rate.
■Interest is ordinary income: 4.00% APY nets 3.12% in the 22% bracket.
■With a state income tax, Treasury bills can beat a higher-rate savings account.
A closer look
A savings account quotes two numbers. The interest rate is the nominal annual rate the bank applies. The annual percentage yield (APY) is what a balance actually earns in a year once interest is credited and starts earning interest itself. Federal Truth in Savings rules (Regulation DD) require banks to disclose APY, so APY is the number to compare. If a rate r is compounded n times a year:
A worked example
Worked Example — Compare the Scenarios: $15,000 for a Year in Savings, a CD or Treasury Bills
Illustrative rates, not quotes: high-yield savings 4.00% (variable), 12-month CD 4.10% (fixed), 52-week Treasury bill 3.90% (fixed). Taxes: 22% federal, and either no state tax (the running household) or an illustrative flat 5%, with no itemizing. Option Interest After tax, no state tax After tax, 5% state Savings 4.00% $600.00 $600 × 0.78 = $468.00 $600 × 0.73 = $438.00 CD 4.10% $615.00 $479.70 $448.95 T-bill 3.90% $585.00 $456.30 $456.30 (state-exempt) Flip points: the CD wins unless the savings rate averages above 4.10% for the year; if cuts pull it to 3.50%, savings earns $525 against the CD’s $615.
Under the hood
Under the Hood: Why Your Bank Pays 0.37% When It Earns 3.90%
A bank’s risk-free alternative to paying you is leaving your money at the Federal Reserve, which has paid 3.90% on reserve balances since September 17, 2026. Against the FDIC national average savings rate of 0.37%, the average bank keeps a spread of 3.90 − 0.37 = 3.53 points; on interest checking at 0.07%, 3.83 points. The spread survives because most depositors never move.
Decision rule
Move savings when balance × rate gap × (1 − marginal tax rate) exceeds about $50 a year, roughly an hour’s effort. For the running household’s $15,000 that is any gap above $50 ÷ 0.78 ÷ $15,000 = 0.43 point; at 0.01% versus 4.00% the gain is $15,000 × 3.99% × 0.78 = $466.83 a year. Assumes the new account is insured in your name (2.6), the rate is not promotional, and transfers are free.
The costliest mistake
Leaving the fund where the paycheck lands. Held for ten years at constant rates, $15,000 earns $15,000 × (1.0001^10 − 1) = $15.01 at 0.01% and $15,000 × (1.04^10 − 1) = $7,203.66 at 4.00%: a gap of $7,188.65 before tax, or $5,383.14 after 22% tax. How to avoid it: open an insured high-yield account, link it to checking, move the fund once, and point the automatic transfer there (1.5).
Edge Cases: When the Standard Answer Changes
Situation What changes Why Number or rule Bank is not well capitalized It cannot pay far above market FDIC rate restriction (12 CFR 337.7) Savings cap 4.38% (Sep 21, 2026) You cash a CD early A penalty, set by contract Federal rules set only a minimum At least 7 days’ simple interest within the first six days; the penalty is deductible on Schedule 1 A bonus or gift for opening an account Taxable as interest IRS treats it as interest…
Recap
A savings account’s interest rate is the nominal figure, while the APY includes interest earning interest and is the number Regulation DD makes banks disclose, so compare on APY and remember that compounding frequency matters far less than the rate itself. APR, a borrowing measure, leaves compounding out, which is why a 20% card APR charged daily costs about 22.13% a year on an unpaid balance.
What the full article covers
The full article includes worked examples, a look under the hood at the mechanics, a clear decision rule, the one mistake that costs people the most, a recap, a reveal-on-click quiz and the official sources behind every figure.
Volume V: Personal Finance
Read the full article on FinoLib
The complete article, APY vs APR: How Savings Account Interest Works, with every worked example, diagram, quiz and source, is free to read in Volume V, Personal Finance on finolib.com.
Explore the Finance Education Series: Vol. II — Capital Markets · Vol. I — Global Economy · Vol. III — Finance Encyclopedia · Vol. IV — Finance Careers · Vol. V — Personal Finance