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What a high-yield savings account is and how it can grow your money

High-yield savings accounts earn you a much better return on your money than a traditional savings account. CNBC Select defines what they are and how they work.

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Editor's Note: APYs listed in this article are up-to-date as of the time of publication. They may fluctuate (up or down) as the Fed rate changes. CNBC will update as changes are made public.

If you have a checking account at your local bank, you likely have a savings account there as well.

Many people store their money into a savings account to earn interest and watch their money grow over time. But some savings accounts offer a much higher return than others  — which is where high-yield savings accounts come into play.

While the national average return on a traditional savings account is just 0.06%, a high-yield savings account applies a much higher interest earnings to your savings.  

For this reason, people store their cash in a high-yield savings account to reach their goals more quickly — whether it's saving up for something in the short term, like a vacation, or planning to make a large expense down the road, such as a down payment on a home.

Below, CNBC Select takes a look at what high-yield savings accounts are and how they work.

What are high yield savings accounts?

High-yield savings accounts stand out from traditional savings accounts in that they reward you with a higher interest rate, allowing your money to grow even faster as it sits in your account. 

The interest rate that these accounts offer is noted as APY, or annual percentage yield. The higher your APY on a particular savings account, the faster your money grows.

It's important to note, however, that the APY that savings accounts offer when you sign up can change at any time. These rates are variable and often go up or down in accordance with the Federal Reserve changing its benchmark interest rate.

Though the current economic climate has caused savings rates to drop as of lately, the highest-yielding accounts can still earn you over 16X more money than regular savings accounts. With the national average APY on savings accounts at just 0.06%, it's very likely that no matter what your high-yield account offers, it will still outearn a normal savings account. And as the economy recovers and the Fed later raises interest rates back up, APYs on savings account will follow suit.

Not only does your money earn a better return in a high-yield savings account, but you still have access to your cash when you need it as you would in a normal savings account.Your money in a high-yield savings account should be federally insured by the Federal Deposit Insurance Corporation (FDIC), which means that deposits up to $250,000 are protected if the bank were to suddenly collapse.

How high-yield savings accounts work

Compound interest allows your savings to grow quickly in a high-yield savings account.

Compared to simple interest, compound interest means you earn interest on both your principal balance and the interest it earns. With simple interest, it is just calculated based on your principal, or the balance you have in your savings minus interest.

How often your interest is compounded depends on the savings account. Some compound daily, while others compound monthly. The more your interest compounds, the greater your return.

With a high-yield savings account, you can withdraw or transfer money (including electronic transfers, checks and wire transfers) out of your account up to six times per month without having to pay a penalty fee or risk having their account closed. However, this federal law, known as Regulation D, has been temporarily lifted for all savings deposits during the coronavirus outbreak as people are requiring more urgent access to their money.

While a strong APY is a big factor in choosing a high-yield savings account, you will also want to look at the fine print. Because online banks don't have the overhead costs that brick-and-mortar banks have to account for, they may offer a higher APY. But it could come with starting deposits, minimum balance requirements and monthly fees, so be sure to read closely.

CNBC Select rated our top five, considering the above qualifications, as well as accounts' ease of use and accessibility.

Below are our top picks:

Bottom line

Before you put all your savings into one place, consider what a high-yield savings account can do for you. When it comes to growing your money over time, choosing an account with a higher return is a no-brainer.

Information about Marcus by Goldman Sachs High Yield Online Savings, Ally Online Savings Account, Synchrony Bank High Yield Savings, Vio Bank High Yield Online Savings Account, and Varo Savings Account has been collected independently by CNBC and has not been reviewed or provided by the bank prior to publication.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the CNBC Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.