1. What is APY?

APY (Annual Percentage Yield) is the real rate of return earned on a savings account, taking into account the effect of compounding interest. Unlike simple interest, APY considers that interest is earned on previously accumulated interest.

2. How Does the Calculator Work?

The calculator uses the APY formula:

Where:

• \( r \) — Annual interest rate (in decimal form)
• 365 — Number of compounding periods per year (daily compounding)

Explanation: The formula calculates the total amount of interest you would earn in a year, accounting for daily compounding.

3. Importance of APY Calculation

Details: APY helps savers compare different savings accounts by showing the true annual yield when compounding is considered. A higher APY means more earnings on your savings.

4. Using the Calculator

Tips: Enter the annual interest rate (as a percentage) that your savings account offers. The calculator will show you the effective APY with daily compounding.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between APR and APY?
A: APR (Annual Percentage Rate) doesn't account for compounding, while APY does. APY gives you the true picture of your earnings.

Q2: Why does Ally Bank use 3.50% APY?
A: 3.50% APY is a competitive rate that accounts for daily compounding, making their savings accounts more attractive to customers.

Q3: How often is interest compounded in savings accounts?
A: Most online banks, including Ally, compound interest daily and credit it monthly.

Q4: Does a higher APY always mean better?
A: Generally yes, but also consider factors like fees, minimum balances, and account restrictions when choosing a savings account.

Q5: How can I maximize my savings with APY?
A: Look for accounts with the highest APY, maintain the required minimum balance, and consider setting up automatic transfers to grow your savings faster.