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 how often interest is applied to the balance.

2. How Does the Calculator Work?

The calculator uses the APY formula:

Where:

• \( r \) — Annual interest rate in decimal form (e.g., 0.046 for 4.6%)
• 365 — Number of compounding periods per year (daily compounding)

Explanation: The formula calculates the effective annual rate when interest is compounded daily, which is typical for high-yield savings accounts like SoFi.

3. Importance of APY Calculation

Details: APY allows you to compare savings accounts accurately by showing the true yield after compounding. Higher APY means more earnings on your deposits.

4. Using the Calculator

Tips: Enter the annual interest rate in decimal form (e.g., 0.046 for 4.6%). The calculator will show the corresponding APY, which is typically slightly higher than the nominal rate due to compounding.

5. Frequently Asked Questions (FAQ)

Q1: Why is APY higher than the interest rate?
A: APY includes the effect of compounding (earning interest on interest), making the effective yield higher than the stated annual rate.

Q2: How often does SoFi compound interest?
A: SoFi compounds interest daily and credits it to your account monthly.

Q3: What's a good APY for a savings account?
A: As of 2023, top high-yield savings accounts offer APYs around 4-5%, significantly higher than traditional bank savings accounts.

Q4: Does APY change over time?
A: Yes, APY on savings accounts can change based on Federal Reserve interest rate adjustments and bank policies.

Q5: Is APY the same as APR?
A: No, APR (Annual Percentage Rate) typically refers to borrowing costs, while APY refers to investment earnings, with APY including compounding effects.