Whether you’re building your emergency fund or saving for a short-term goal, a high-yield savings account can be an excellent place to stash your cash. These deposit accounts offer generous rates compared to traditional savings accounts, meaning you’ll earn more interest on your balance over time.

If you’re considering using one to increase your savings, here’s what to know about high-yield savings accounts, how they work, and how to find the best one.

What is a high-yield savings account?

A high-yield savings account is a type of deposit account offered by a bank or credit union. It works similarly to a traditional savings account in that your money remains easily accessible and you can deposit or withdraw it as needed.

Depending on the institution, these accounts are typically insured by the Federal Deposit Insurance Corp.(FDIC) or National Credit Union Administration (NCUA). The FDIC and NCUA provide government-backed insurance on deposit account balances up to $250,000, which protects your savings if your bank or credit union encounters financial trouble.

While the traditional savings account rate is currently around 0.45%, high-yield savings accounts may offer an annual percentage yield (APY) as high as 5% or more. This means that if you opt for a high-yield savings account vs. a traditional savings account, you can earn a lot more interest without any extra work.

Read more: What is a good savings account interest rate?

How does a high-yield savings account work?

You can find high-yield savings accounts at brick-and-mortar banks, credit unions, and online banks. But online banks tend to offer higher savings rates, as they don’t have the overhead costs associated with running physical branches. For instance, you might see a local bank offering a savings rate of 2.35% and an online bank offering over 4.00%.

With a high-yield savings account, you generally benefit from compound interest, meaning you don’t just earn money on your initial account balance as you would with a simple-interest account. Instead, the interest you earn is added to your balance each month, and you earn interest on your new balance the following month. This accumulation of interest can help you grow your savings more quickly over time.

While you can deposit money to a high-yield savings account as often as you like, some banks and credit unions might limit you to six monthly withdrawals. This monthly withdrawal limit often applies to traditional savings accounts too.

Are high-yield savings accounts safe?

Benefits of a high-yield savings account

• High APY: You’ll generally earn more interest than you would with a traditional savings account.

• Compounding interest: Interest compounds, usually monthly, helping you grow your savings more quickly.

• Accessibility: These accounts are a great place to put an emergency fund, as your money remains accessible. Some accounts, like certificates of deposit (CDs), offer higher rates, but you need to leave your money deposited for a certain time period or pay an early withdrawal penalty.

• No fees or minimal fees: Fees are rare with high-yield savings accounts, so you won’t need to worry about high added costs eating into your balance.

• Low-risk: Because high-yield savings accounts are insured by the FDIC or NCUA, they’re a very low-risk option for your money. The chance of losing your deposits is slim to none.

Downsides of high-yield savings accounts

• Variable rates: Your savings account’s APY can increase or decrease over time. While individual banks set rates, they’re guided by the federal funds rate, which is set by ​​the Federal Reserve. Banks may also opt to decrease APYs when the Fed lowers the rate.

• Initial deposit requirements: Some accounts have an initial deposit requirement, often around $100.

• Tiered APYs: Some banks may offer tiered APYs. For instance, you might earn a higher rate if you deposit $5,000 vs. $100. While a $5,000 deposit isn’t necessarily required, it could result in a better APY.

• Better for short-term savings: High-yield savings accounts aren’t the best choice for long-term savings goals, like retirement. Investment accounts tend to offer higher long-term returns.

• Withdrawal limits may apply: As mentioned, you might be limited to six monthly withdrawals, depending on your bank.

What to look for in a high-yield savings account

APY

Compare APYs as you compare accounts. A higher APY will result in higher interest earnings, though the account with the highest available APY might not necessarily be the best option. Considering other factors in addition to APY can help you find an account that best meets your needs.

Required deposits

Research applicable deposit requirements. Is there a minimum initial deposit requirement? Do any other deposit requirements apply? Are there tiered APYs depending on your deposit amount?

Fees

Some accounts may charge monthly maintenance or other fees. Look into which fees may apply before opening a new account.

Accessibility

Understand how you can access your money before opening a new account. Can you log into an online dashboard? Does your bank have a mobile app? Is it connected to an ATM network?

Deposit options

Review available deposit options. Are mobile deposits an option? Can you make deposits via an ATM?

Account linking

Look into whether you can link your new account to an existing account at another bank. This can help you quickly and easily add money to your account or make withdrawals.

How to open a high-yield savings account

Once you’ve found an account that works for you, opening one is simple and can be done in person or online. You’ll generally need to provide your personal information, proof of identity, and address to open a new account. So come prepared with your driver’s license, Social Security card or Individual Tax Identification Number, and copies of a recent mortgage statement or utility bill.

Depending on the account, a minimum deposit amount could apply. If that’s the case, you’ll also need to be ready to transfer money from an existing account to meet the deposit requirement.