In personal finance, what annualized rate includes the effect of compounding on a savings account?

In personal finance, the annualized rate that includes the effect of compounding on a savings account is the annual percentage yield.

Annual percentage yield, or APY, expresses how much an account would earn over one year if its stated interest rate and compounding schedule remained unchanged. Because it includes compounding, APY can be higher than the account’s nominal annual interest rate when interest is credited more than once a year.

For example, an account paying interest monthly may produce a different annual result from one paying the same nominal rate annually. APY helps consumers compare deposit accounts on a more consistent basis, although fees, minimum balances, promotional terms, and changing variable rates can affect actual results.

APY is commonly confused with APR. APR is generally used to describe borrowing costs, while APY describes the annualized return on a deposit or investment after compounding. Financial institutions often disclose APY for savings accounts and certificates of deposit.