A high-yield savings account is a type of savings account that typically pays 20 to 25 times the national average of a standard savings account. Traditionally, people have held a savings account at the same bank where they hold their checking account, making transfers between the two quick and easy. But with the advent of internet-only banking, as well as traditional banks that have opened their doors to customers across the country using online account opening, the competition on savings rates has skyrocketed, creating a new category of "high-yield savings accounts.”

These accounts pay several times more than the national average of savings accounts, which is currently 0.07% APY, according to the Federal Deposit Insurance Corporation (FDIC). Aside from the higher interest rate, high-yield savings accounts work the same as other savings accounts. You deposit money into the account, and, in return, the bank pays you interest. You can make withdrawals as needed, though your bank may charge a fee if you make more than a certain number of withdrawals per month.

Benefits of a high-yield savings account

Ivan Babydov/ Pexels | The best high-yield savings accounts come with no additional costs, such as monthly fees, and low (or no) minimum deposits

Emergency fund

One of the best ways to use a high-yield savings account is to use it for your emergency fund. If you make regular deposits into a high-yield savings account instead of investing all of your money, you don’t have to worry about a market drop wiping out your savings and pushing back your goal, for example.

Short-term savings goals

Lukas/ Pinterest | High-yield savings account holders can only withdraw or transfer money

High-yield savings accounts are also a good way to save for short-term goals, such as saving for a vacation or a car. If you want to pay for something in the next few months, you don’t want to put your money into risky investments like stocks. If the market drops, you’ll lose your vacation fund.

To park your windfall

High-yield savings accounts are also a good place to store windfalls, such as stimulus checks or other payments. You can save the windfall in your high-yield savings account until you decide what to do with the money.

What to Look for in a High-Yield Savings Account

Whether you're shopping for a high-yield account at a new institution, or are lucky enough to have one on offer at your current bank, it's always wise to compare options across the marketplace. Differences in interest rates and fees can add up over time, especially if you're keeping a relatively large balance in savings.

Karolina Grabowska/ Pexels | High-yield savings accounts can pay an interest rate that is 20 to 25 times the national average

Here's what to look for and compare:

Interest rate

How much interest does the account currently pay? Is it a standard rate or an introductory promotional rate? Savings account rates are generally flexible and can be changed at any time. But some accounts will specify that the currently advertised rate is only available for an initial period of time. Another factor to look for is whether there are minimum or maximum balance thresholds for earning the promoted rate.

Minimum balance required

How much money are you required to keep in the account going forward? You'll want to feel comfortable with always meeting the minimum threshold because falling below it can incur fees or invalidate the interest rate you're expecting.