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Cash Flow Clarity
What Is APY?
APY, or annual percentage yield, is the real annual return on savings once compounding is factored in.
APY reflects how often interest compounds, not just the stated rate. A savings account with a 5% interest rate that compounds daily has a slightly higher APY than one that compounds annually, because you earn interest on interest sooner.
Banks are required to advertise APY, not the raw interest rate, which is why the number on a savings account ad is usually the one that matters.
The more frequently interest compounds, the closer APY gets to the theoretical maximum for that interest rate. The difference is usually small in dollar terms, but it is real.