APY, APR and how interest is figured
Banks advertise savings accounts and CDs by APY, annual percentage yield, which already includes the effect of compounding. If you leave $10,000 in an account paying 4.50% APY for exactly one year, you earn $450.00, period. For other terms the balance is P × (1 + APY)^(years), so 18 months at 4.50% APY earns $682.54 and 6 months earns about $222.52. The math is the same for a high-yield savings account and a CD; the difference is that a CD locks the rate and charges a penalty for early withdrawal.
APR (or the nominal rate) is the rate before compounding. Most savings accounts compound daily and credit interest monthly, so APY = (1 + APR/365)^365 − 1. A 4.50% APR compounded daily is a 4.60% APY; going the other way, a 4.50% APY corresponds to a 4.40% APR. The gap grows with the rate but stays small at today's levels, which is why comparing accounts by APY alone is safe as long as every bank quotes it, and federal Truth in Savings rules require that they do.
CDs versus savings accounts
A savings account rate can change any day; online banks raised rates quickly in 2023 and trimmed them as the Federal Reserve cut. A certificate of deposit fixes the APY for the term, from 3 months to 5 years, in exchange for an early withdrawal penalty that is typically 3 to 12 months of interest. If you expect rates to fall, a CD locks in today's yield; if you might need the money, keep it in savings. A CD ladder, splitting the deposit across several maturities, is the usual compromise.
Money market accounts and Treasury bills are close substitutes. T-bill interest is exempt from state income tax, which can make a 4.3% bill beat a 4.5% savings account for residents of high-tax states. Interest from banks and credit unions is fully taxable as ordinary income; you will get a Form 1099-INT for any account paying $10 or more in a year, and you owe tax whether or not you withdraw the interest.
Safety and fine print
Deposits at FDIC-insured banks (and NCUA-insured credit unions) are covered up to $250,000 per depositor, per bank, per ownership category. A couple with a joint account gets $500,000 of coverage on that account plus $250,000 each on individual accounts at the same bank. Anything above the limit is safest spread across banks. Check the FDIC BankFind tool if you are unsure whether an online bank is insured, and be aware that some fintech apps deposit through partner banks with different rules.
Read the rate details before opening an account. Some banks pay the headline APY only on a tier of balances, only for a promotional period, or only if you meet a monthly direct-deposit requirement. The calculator assumes the rate holds for the whole term, which is true for a CD but only a snapshot for a savings account.