What is a high-yield savings account?

A high-yield savings account may offer a higher rate of return than a traditional savings account, with an annual percentage yield (APY) often several times higher than usual. How does a high-yield savings account work? High-yield savings accounts, in most other respects, work just like your usual savings account. They are oriented for long term savings, allow for regular deposits, and withdrawals, but may have monthly withdrawal limits, and are protected up to $250,000 at FDIC insured banks.

Aside from their higher interest rates, high-yield savings accounts can sometimes come with a few other differences. Typically, high-yield savings account rates are offered by online banks that operate without brick-and-mortar locations or the physical staff required to maintain them. This lower overhead lets online banks offer some unique perks, like waiving common fees and, sometimes, no minimum deposit requirements.

As attractive as these perks can be, they may also be accompanied by a few key drawbacks. Some online banks that typically offer competitive high-yield savings account rates may not offer many of the usual services of a brick-and-mortar institution, like checking accounts, ATM cards or traditional deposits. Those that do offer these services, may require the account to be opened as a "bundle" with another account such as a checking account or a certificate of deposit account.

Nonetheless, if you don’t mind the inconvenience, the higher rates of a high-yield savings account may be worthwhile. Although Chase currently doesn’t offer a high-yield savings account, we’ll cover the reasons why you may want to open one of these accounts.

Why open a high-yield savings account?

There’s no right or wrong answer when asking, "Is a high-yield savings account worth it?" Indeed, the benefits of a high-yield savings account may be worthwhile to one person and outweighed by the potential drawbacks for another. That said, there are some important advantages that, in the eyes of some, might outshine any potential downsides.

May help reduce the impact from inflation

One of the main reasons someone may open a high-yield savings account is because the interest rate is typically higher than a standard savings account. This higher rate of return may help reduce the impact from inflation.

Compounding interest

The main attraction of a high-yield savings account is its ability to compound interest with an interest rate higher than that of a traditional savings account. Compounding is, essentially, earning interest on interest earned. As a savings account accrues interest, it gradually increases the total principal — increasing the amount of interest earned on the next term period. This effect accelerates with time. Depending on the rate of compounding frequency, which is determined by your account type, and also depending on your interest rate, your money could grow faster. You then start to see the potential rewards of compounding. This is assuming you don't make withdrawals from the account.

Tips for opening a high-yield savings account

Opening a high-yield savings account can be exciting; the prospect of a higher-than-usual rate of return is, for some, well worth the potential inconvenience of operating accounts across multiple institutions. But, like opening any new bank account, keeping a few key considerations in mind can help keep things running smoothly.

• Look for the best interest rates: When searching for a high-yield savings account, it may seem obvious to prioritize higher interest rates. Just remember that going by APY, which considers compounding frequency alongside interest, can provide a clearer picture of real returns than an interest rate.
• Know the fees: Similarly, keeping in mind all fees associated with the account can give you a clearer picture of how your money might grow. Evaluating the fees associated with the account, such as the monthly service fee or withdrawal limit fees, can help illuminate the costs that might come with parking your money in a particular institution.
• Understand deposit requirements: Many banks require an opening deposit with a new savings account. Others may not have any immediate funding requirements. Ensuring you understand fully what your institution of choice requires ahead of time can help get any necessary funds ready before you need them.
• Pick the right financial institution: There are many institutions to choose from for high-yield savings accounts these days. Many of them are likely to be online banks, but some credit unions offer high-yield savings accounts too. Joining a credit union may have different protocols than a bank, like eligibility requirements or costs to join. Researching your available options and their individual requirements ahead of time may help determine what’s most convenient for you.

In summary

A high-yield savings account may offer a higher rate of return than a traditional savings account. You’re more likely to find a high-yield savings account at an online bank where lower overhead affords more competitive offers on interest rates. This higher return, however, may come with some inconvenience, as online banks may be unable to offer many of the usual services associated with brick-and-mortar institutions.

Although Chase doesn’t currently offer a high-yield savings account, you can continue exploring our Education Center for more personal banking articles.