If you’re saving money for the future, you are likely best off using a combination of checking, savings, and investment accounts. For savings that you want to keep safe while earning the best interest rate, a high yield savings account may be the best choice for you.

High yield savings accounts combine FDIC insurance, top interest rates, and quick access to your cash. This makes a high yield savings account ideal for emergency funds, down payments, and other big financial goals. Here are the most important details you should know about high yield savings accounts.

What is a high yield savings account?

A high yield savings account is a bank savings account that gives you more interest than the typical savings account. At the time of this writing, the average savings account interest rate is 0.09%. Some of the biggest traditional banks in the US pay as little as 0.01%, however. You can do a lot better for your money with a high yield savings account.

Many of the top high yield savings accounts online pay over 1.5%. That’s 150 times more than you get at the worst banks. For a $1,000 balance, you would earn just 10 cents over the course of a year. That’s not even enough for a gumball from a vending machine. At 1.5%, you would earn $15.10 over a year. That $15 more isn’t usually enough to make you rich, but it’s a lot better than just 10 cents.

For larger balances and longer periods of time, the interest rate has an even bigger impact on your total interest. In February 2020, the best interest rates for high yield savings were around 1.70% to 1.85%. That means you can earn 185 times more than at a traditional bank if you switch to a high yield savings account.

How do high yield savings accounts work?

High yield savings accounts are insured bank savings accounts ideal for a range of purposes. From young children putting birthday money in the bank to adults saving for an upcoming vacation, there are limitless uses for high yield savings.

These accounts have specific rules, however, that make them different from a checking account. You can typically make deposits and add to your account as often as you’d like, but withdrawals are limited to six times per month. You can withdraw as much as you want at any time as long as you don’t go over six withdrawals in a month.

To earn interest, you just have to deposit your cash and leave it there. Banks may choose to calculate interest daily or monthly. Over the short-term, there is very little difference between daily and monthly. Over the long term, however, daily compounding is better for your earning power.

Savings accounts in the US are insured by the FDIC (banks) or NCUA (credit unions), so you never have to worry about losing money as long as it’s within the insurance limit. Your deposits are insured up to $250,000 per account holder per institution. That means a joint account is insured for $500,000, but that limit applies across all of your accounts at a bank or credit union. If your bank goes out of business, the US government will guarantee you get your money back.

Savings accounts are fairly simple and straightforward to understand. High yield savings accounts work just like any other account. The only major difference is that high yield savings accounts pay you more interest.

What to look for when choosing a high yield savings account

While high yield savings accounts work the same at most banks, online or offline, there are a few important differences to look out for. These are the key features to note when looking for a high yield savings account online or at a traditional bank:

  • Interest rate: This is what qualifies an account as “high yield.” Interest rates can generally change at any time and follow market interest rates, but some banks tend to pay a lot more than others.
  • Monthly fees: You should never pay a monthly fee for a savings account. If the account agreement says there is a monthly service charge you can’t avoid, take your money elsewhere.
  • Minimum balance requirements: Some banks charge a fee if your balance dips below a certain level. Skip accounts with this type of fee, as you shouldn’t have to pay to keep money in a savings account regardless of the account balance.
  • Convenience: It should be easy to manage your money online or through your bank’s mobile app. If it’s hard to access and manage your money, you might want to find an account at a bank that’s easier to deal with.

When to use a high yield savings account

High yield savings accounts are great, but they are not perfect for every saving situation. They are best for short to medium-term savings for goals and long-term savings for emergencies.

For ultra-short-term spending, you’ll want to stick with your checking account. For long-term goals that are a decade or more away, an investment account could be better. Savings accounts fill the sweet spot in between.

Here are some popular uses for a high yield savings account:

  • Emergency fund: An emergency fund is essential for virtually all American households. This is cash you keep on hand for unexpected costs like medical bills, car repairs, or home repairs. Most households should save at least three to six months of expenses in an emergency fund. If you’re self-employed or don’t have a steady job, consider doubling that to at least six months to a year of expenses in savings to be safe.
  • Down payments: If you’re saving for a vehicle purchase or home purchase, a high yield savings account is probably the best place to keep your down payment.
  • Saving for a goal: Weddings easily cost tens of thousands of dollars. Big vacations for a family are often a four-figure expense. These and other financial goals are great reasons to save in a high yield account.

Pros & cons of high yield savings accounts

Pros:

  • Earn well over 100 times more interest than you typically get from many traditional banks
  • FDIC or NCUA insurance protects your cash
  • Keep quick access to your cash for emergencies and goals

Cons:

  • Limited to six withdrawals per month
  • Some banks charge monthly fees
  • Earns less than many investments

Should you sign up for high yield savings?

If you want to get the best return on every dollar you sock away in savings, opening a high-yield savings account could be a solution worth considering. High-interest rates and low fees make high yield savings ideal for emergency funds, down payments, and other savings goals.

If you want to make the most of your savings while limiting risk, high yield savings is the way to go. This kind of account is often a big win for your money.