accounts with dividends better than those with a good APY?

[sedric1]

kinda a newb in the savings arena but from what im seeing - there are some savings accounts that offer APY around 3-5% up to a certain amount.

 

Then there are some accounts that offer like .50% and daily compounded dividends for a certain amount of time/term without a limit - like navy's custom club. Not good on the math but it sounds like there is more potential for growth with an account like this? Am i right that 5% apy is only calculated once a year?

[Kevin20]

kinda a newb in the savings arena but from what im seeing - there are some savings accounts that offer APY around 3-5% up to a certain amount.

 

Then there are some accounts that offer like .50% and daily compounded dividends for a certain amount of time/term without a limit - like navy's custom club. Not good on the math but it sounds like there is more potential for growth with an account like this? Am i right that 5% apy is only calculated once a year?

 

No, unless the fine print says otherwise, a bank savings account is going to compound and pay interest MONTHLY.

 

The purpose of the APY is to standardize on some way to show and compare potential returns, without forcing you to do math on accounts with APR's of varying compound periods. The APR rate dictates how much interest is awarded each compounding period, but the APY rate shows you the net result of 12 months of such compounding, no matter how many periods there are. In other words, if you deposited $100 at the beginning into an account that pays 5% APY, then you'd end up a year later with $105 -- no matter whether you get there by compounding yearly, monthly, weekly, daily, or whatever.

 

So ideally those dividend paying accounts would also give the APY for your comparison.

 

But if not, you need to find a calculator that'll let you input daily compounding as well as monthly compounding, so you can compare competing accounts. There is a benefit to more frequent compounding, but it's limited, so it doesn't make as big a difference as you might think.

 

Unfortunately offhand I can't find any such online calculator and I don't remember the algebra!

Edited April 17, 2012 by Kevin20

[sedric1]

hah thanks for the explanation! i'll see if i can find a calculator. if not, i may break down and call them to do the math