If you're looking for safe ways to grow your money and protect your savings, a high-yield savings account (HYSA) can be a great option. This type of deposit account is available through many banks and credit unions, particularly online financial institutions. An HYSA works like a traditional savings account, except it offers a much higher annual percentage yield (APY).

Although your cash is secure in a high-yield savings account, there are some instances when you could lose money. So if you plan on opening a high-yield savings account, be sure you understand how to protect your principal and earned interest.

What is a high-yield savings account?

A high-yield savings account is a type of savings account that offers a higher interest rate compared to standard savings accounts. These accounts are available through both traditional banks and online financial institutions. The higher interest rate means you earn more on your deposited funds over time, allowing your savings to grow faster.

If you open an account with a federally insured financial institution, your savings account deposits are protected in case the institution fails. With banks, deposits are protected by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per institution, per depositor, per ownership category. With credit unions, deposits are similarly insured by the National Credit Union Share Insurance Fund (NCUSIF).

Read more: High-yield savings account vs. traditional savings account: Which one is better?

Can you lose money in a high-yield savings account?

The short answer: No. In most cases, anyway.

Unlike investments, money in a high-yield savings account isn't tied to the stock market. Your account can earn interest, but your balance won't fluctuate with market conditions like it might with stocks, mutual funds, index funds, or other types of securities.

However, it is possible for your HYSA to lose value in certain situations.

Fees

Many high-yield savings accounts are free, meaning there’s no monthly maintenance fee. However, some HYSAs do come with certain fees, depending on the terms of the account.

For example, you may be required to keep a minimum amount on deposit in order to earn the highest advertised rate and/or avoid a monthly fee. Some financial institutions also have limits on the number of withdrawals you can make each month, and charge a fee for excess transactions. If your high-yield savings account comes with ATM access, there may be fees associated with using ATMs outside of the bank’s network.

These fees could exceed the interest you earn, leading to a net loss in your account balance. Before opening an account, be sure you understand the terms and how to avoid fees.

Inflation

If the current inflation rate is higher than the interest rate you're earning on your high-yield savings account, your money's purchasing power will decrease over time. In this case, while you're not losing the principal amount deposited, the real value of your money could decline, meaning you can buy less with the same amount of money in the future.

Changing rates

Although HYSAs typically have higher APYs, the rates are not fixed. As banking rates and economic conditions change, the rates can adjust accordingly. If your bank currently has a high APY, it's possible for the rate to significantly decrease over time. With a lower APY, your money will earn less interest.

The fluctuating APY won't cause your balance to decrease, but it will affect your interest income.

For example, if you had $10,000 in a savings account that earns 5.00% APY, you'd earn $500 after one year. But if your account's APY dropped to 3.00% APY, your annual interest earnings would drop to $300.

Bank or credit union failures

Although uncommon, it is possible for banks and credit unions to fail. If your high-yield savings account is held at a federally insured financial institution, your deposits are protected up to $250,000. But if you have deposits that exceed this limit, you risk losing the additional amount if the bank or credit union fails.

Alternatives to high-yield savings accounts

High-yield savings accounts can be appealing because of their higher APYs, but they may not be the best solution for your needs. Depending on your situation, one of the following options may be a better option to grow and protect your money.

Money market accounts

A money market account (MMA) is a type of savings account offered by banks and credit unions. Unlike regular savings accounts, money market accounts often come with the ability to write checks and may include a debit card.

MMAs also typically pay higher interest rates than regular savings accounts. They often offer tiered interest rates, which means the rate can increase as your account balance grows. However, they also often require a higher minimum balance to open and maintain the account without incurring fees.

Certificates of deposit (CDs)

Like money market accounts, a CD is a deposit account that typically earns a higher APY than savings accounts. Whereas money market account APYs can change over time, CD APYs are fixed for the length of the CD's term, so they can be a smart way to lock in a higher APY for months or even years; some CDs have terms as long as 10 years.

Series I bonds

Series I bonds, commonly referred to as I bonds, are issued by the U.S. Department of the Treasury. These bonds earn interest monthly, and the interest is added to the bond principal every six months. You can buy a bond with as little as $25.

Series I bonds are less flexible than savings accounts; you need to wait at least 12 months to redeem your bond, and there are limits on how much you can invest in bonds per year. They tend to earn a higher APY than most savings and money market accounts, but the APYs are only locked in for a short period and reset every six months.