When shopping for a savings account, CD, or money market account, it's easy to assume the highest interest rate automatically means the best return. But the number that determines how quickly your money grows isn't always the interest rate advertised alongside an account.

Financial institutions often display both an interest rate and an annual percentage yield (APY). And while they may look similar, they measure different things. Understanding the difference can help you compare accounts more accurately and maximize your interest earnings.

APY vs. interest rate

The interest rate and APY on an account are closely related, but they aren't the same. The key difference is that APY accounts for compound interest , while the interest rate doesn't.

In other words, the interest rate is the base rate that your balance earns — also known as simple interest.

APY, however, represents how much interest you'll earn on both your initial deposit and on the interest you accumulate in one year.

• Interest: The flat rate you earn on your deposits only, not on your full balance.

• Annual percentage yield (APY): The rate you earn on your total balance, including your deposits and the interest you've already earned. This is also known as compound interest.

The more often interest compounds, the higher the APY and the more interest you stand to earn. Depending on the account, the interest can compound daily, monthly, or annually. Here's a comparison of how much you'd earn with different compounding periods at a 5% fixed rate:

As you can see, there's not necessarily a big difference in what you earn with a simple interest rate vs. APY — at least not when it comes to small deposits and short timeframes. But those differences are accelerated when you make larger deposits and/or you leave the money in your account for a longer period.

How can I earn a higher APY?

The best way to earn a higher APY is to shop around for an account that offers a high rate. Here are some features to look for:

• Type of financial institution: Online banks typically offer higher APYs than traditional banks.

• Account type: Checking accounts don't always pay interest. For the highest rates, you usually have to look to CDs, money market accounts, or HYSAs.

• Compounding periods: The more frequently the balance compounds, the more interest you'll earn.

• Balance requirements: You might have to make a large minimum deposit or maintain a high minimum balance in order to qualify for the highest APYs, though that's not always the case.

• Account tiers: Some deposit accounts have different rates that apply to certain deposit amounts. For example, the first $1,000 might earn a higher APY.

• Fees: Account fees are not figured into the APY. So if you have to pay a monthly account maintenance fee, your earnings will be less.

Is interest rate or APY more important when choosing an account?

APY is a more accurate reflection of the returns you earn on your deposit accounts, including savings and CDs, since it takes compound interest into account. So when you're comparing deposit accounts, APY is a more important comparison.

One way APY falls short, however, is that it doesn't take fees into consideration. Even if you deposit your money into an account with high APY, you could end up losing money if you pay frequent or substantial bank fees.

Frequently asked questions (FAQ)

What's the difference between APY and APR?

Annual percentage yield (APY) and annual percentage rate (APR) are both related to interest. However, APY represents the compounding interest you earn on your account balance, while APR represents a combination of the interest and fees you pay on debt, such as credit cards and loans.

Read more: APR vs. APY: What's the difference (and why does it matter)?

Why does my account have multiple APYs?

Your account may have multiple APYs because it's a "tiered-rate account." These accounts have different rates that apply to different balance amounts. Usually, the highest APY applies to a limited portion of your balance. For example, the first $5,000 in deposits may earn 4% APY while the remaining balance, regardless of how much it is, earns 2%.

Why isn't my account earning interest?

There could be a few reasons your account is not earning interest. The most likely reason is that your account doesn't come with this benefit. This issue is most common for checking accounts. For CDs, your account will stop earning interest after it reaches the maturity date unless you or the bank rolls the money into a new CD.

How can I find the APY on my account?

When you're researching an account, you might find the APY information in the bank's advertisements or on their website. For accounts you already have open, you can look in the Truth is Savings disclosure or on your bank statements to find the APY.