How to Calculate APR Savings

Don't put your money in a can, save it in an account with a good APR.

Saving money is an investment in your future. By saving, you can stop the emotional roller coaster of living paycheck to paycheck and begin to make progress on your goals. However, selecting a savings account can be confusing. Deciding which one will offer the best return on your money can be daunting. The annual percentage rate, or APR, versus the annual percentage yield, or APY, may not seem clear at first, but you can learn how to compare savings options and begin to invest in your future.

Instructions

1. Read through your bank brochures and websites. Jot down the APR or APY for each savings account. Some banks may also offer certificates of deposit, or CDs, which are a type of savings account that allows you to earn higher interest but restricts when you can withdraw your money. If you can afford to be without your money for at least one year, then a CD might be a good choice for you.

2. Compare the numbers that are the same. So look at all the APY numbers and rate the banks based on their APY. Almost all savings accounts will be rated by their APY. If any savings accounts are listed by their APR, list them separately. Be sure to note any fees the bank may charge and how often the fees are applied. Many banks will charge a maintenance fee for a savings account if the balance is under a certain threshold. Write down the savings threshold as well.

3. Calculate the APR for all of the banks that reported their APY. According to the Federal Reserve Bank, the APY is the simple number that shows what an account will yield in returns after one year factoring in the compounding of interest. The APR also includes any fees that may accrue during that same year. So your APR for a savings account will be your APY minus any fees--expressed as an annual percentage. For example, if a bank will charge you $10 per month as a maintenance fee and it will pay you a 2 percent APY on the account and you invest $10,000, then your APR will be: 2 percent - .12 percent = 1.88 percecnt. Expressed in dollars that would be: $2,000 - $120 = $1,880.

4. Select the savings account that will offer you the best APR based on the amount of money you can invest and the amount of fees you will be required to pay.

Tips & Warnings

• If you are saving for an emergency fund, do not use CDs or bonds since the money is difficult to access. The purpose of an emergency fund is not to make money, but to have quick access to it when it is needed.

• Ensure that any savings account is insured by the FDIC.

References

• Dave Ramsey: Savings
• Federal Reserve Bank: Introduction to Interest Rates