Note: This article is part of our Basic Banking series, designed to provide new savers with the key skills to save smarter.
Everyone needs a safe place to store their money, but deciding which type of bank account to open can be confusing. Should you open a checking account with a debit card that you can use for everyday purchases? Or is it better to consider a savings account, where you can build a rainy day fund?
While there’s no one-size-fits-all solution that works for everybody, learning the differences between checking and savings accounts can help you find the best solution for your needs.
From features and benefits to fees and limitations, here’s what you need to know about the differences between a checking vs. savings account.
Checking vs. savings account: What's the difference?
The debate of getting a checking vs. savings account comes down to what you’re planning to do with the money you deposit.
Both checking and savings accounts provide an annual percentage yield (APY), which represents the total interest your account earns in one year, including compounding interest that may be calculated at shorter intervals.
- Savings accounts are best used as a place to stash away money, either for a specific goal (like a vacation) or a general emergency fund. These accounts earn you a little more interest than a checking account would, usually under 0.3%. The current average APY (as of May 2019) for savings accounts is 0.276%, also a five-year high. Online-only savings accounts typically provide higher returns. If you shop around, you can find online savings with high interest rates.
- Checking accounts, on the other hand, are best used for everyday spending needs, like writing checks, paying bills and making purchases. These accounts tend to have APYs under 0.2% — the current average APY (as of May 2019) for checking accounts is 0.196%, the highest it’s been in five years.
Checking accounts typically allow you to take as many withdrawals as you’d like, while savings accounts users are limited to six withdrawals/transfers a month in accordance with federal law. Another difference between them is the number of fees.
“Typically, checking accounts will have more fees to worry about,” said Ken Tumin, founder and editor of DepositAccounts.
|Checking Accounts||Savings Accounts|
|Main purpose||Daily spending: Designed for frequent deposits and withdrawals, lets you manage your funds on a day-to-day basis.||Saving and growing money: Designed to hold funds set aside for long-term needs, only infrequent access.|
|Withdrawal limits||Few restrictions; however, some banks limit the amount you can withdraw from an ATM each day||No more than six withdrawals per month (however, withdrawals and transfers you make by mail, at an ATM or in person at the bank don’t count toward this limit); you may otherwise be charged an excessive withdrawal fee|
|Interest earned||The average rate is 0.196%||The average rate is 0.276%.|
|Minimum balance requirements||Varies by bank||Varies by bank|
|Common features||Checks, debit cards, automatic bill payments, mobile banking||Mobile banking, automatic deposits, ATM card (or link to debit card)|
|Possible fees||Overdraft, monthly maintenance, low balance, wire transfers, out-of-network ATM withdrawals, check printing, returned deposits, printed statements, foreign transactions, debit card replacements||Monthly maintenance, excess withdrawal, out-of-network ATM withdrawals|
|FDIC insured?||Yes, up to $250,000 per person, per bank, and per deposit type at FDIC-insured banks and savings associations||Yes, up to $250,000 per person, per bank, and per deposit type at FDIC-insured banks and savings associations|
As you can see, checking and savings accounts each have unique purposes, limitations and benefits. Using the right account can help you avoid fees and potentially grow your money.
Checking vs. savings: What’s a checking account?
Checking accounts are your day-to-day money-management workhorses. These accounts can be useful tools to make regular purchases, pay bills and deposit your paycheck. Most checking accounts come with digital tools like online dashboards and apps for managing your money on your smartphone. Before you open one, get to know the pros and cons of checking accounts.
Many ways to access money: Checking accounts are typically set up with everyday spending in mind. Banks don’t limit your transfers, and give you a variety of ways to spend money from your checking account.
“You can have many types of transactions on a checking account, including writing checks, debit card usage, online banking usage and automatic drafts,” said Ken Tumin.
Get direct deposit: When payday comes around, who doesn’t want to spend some of their hard-earned money? A checking account can accept direct deposit from your company’s payroll. Rather than making a trip to the bank to deposit a paycheck, your money will go straight to your account and be available for use in one business day or immediately.
Opportunity to earn rewards: Rewards aren’t just for credit card customers—they’re also available with some checking accounts, too.
“A company called Kasasa helps community banks and credit unions set up rewards checking accounts for their customers. They offer rewards like high yield and cash back when you use a debit card,” said Ken.
ATM fees: It doesn’t usually make financial sense to pay a fee to get money from an ATM. However, if you only have access to out-of-network ATMs in a particular location, you might incur fees from the ATM and your bank to withdraw cash.
Overdraft fees: If your account goes into the negative — say because you wrote a check for more money than you had — you may need to pay an overdraft fee. These fees can be hefty, at a median of around $34 each, according to the Consumer Financial Protection Bureau.
“People who tend to have a low balance and are often on the edge of overdrafts should definitely consider the overdraft fees on a checking account,” Ken advised.
Minimum balance requirements: Some banks require that customers maintain a minimum balance. The minimum balance varies widely by institution, so ask the bank what it requires for your type of account.
Little to no interest: If you’re hoping to earn money from interest on a large deposit, a checking account might not be the best option for you. Some checking accounts pay very little interest, if any at all.
Checking vs. savings: What’s a savings account?
Savings accounts are your long-term money-stewarding tools. Many people rely on these accounts when they want to stash away money for a major purchase, like a car or home, or if they’re trying to accumulate wealth.
These accounts are more restricted than checking accounts, limiting users to six withdrawals/transfers per month. They don’t usually come with debit cards, checks or online bill payment — some do offer these options, especially money market accounts. In many cases, online and ACH transfers are the only way to get money in and out of a savings account. FDIC-insured savings accounts are a safe place to store money until you’re ready to spend it.
Grow your money: When you deposit money into a savings account, the bank uses that money to provide loans to other customers. The bank rewards you for lending them your money by paying you interest on your balance, which can help your money grow over time.
Protect your savings: Savings accounts at reputable banks and savings associations include insurance from the Federal Deposit Insurance Corporation (FDIC). That means the amount you deposit into your savings account (up to $250,000) is protected, even if the financial institution fails.
Avoid overdraft fees: Some banks let customers link their savings account with their checking account to reduce the likelihood overdraft fees. If you accidentally make a debit card purchase for an amount that’s greater than your checking account balance, it will transfer some money from your savings account to cover the difference — and help you avoid a hefty overdraft fee.
Withdrawal limits: Due to regulations from the Federal Reserve, you can only make a maximum of six withdrawals or transfers from your savings account each month (although, you may be able to make additional transactions at an ATM, by mail or in a bank branch without penalty). Some banks will impose even stricter rules on savings accounts, limiting customers to just a few transactions a month.
Less accessible: If you open a savings account at an online-only bank, an electronic fund transfer might be the only way you can withdraw money, which makes it less accessible than a many checking accounts.
“You need to check if it’s free to initiate an EFT and if there are small limits. I’ve seen limits as low as $2,000 per transfer,” said Ken.
Minimum balance requirements: Some banks require customers to maintain a minimum balance in their savings accounts. If you don’t meet that requirement, you might need to pay a fee.
Differences in fees
Fees are one of the most important things to consider when deciding between a checking vs. savings account. Banks tend to include more fees in checking accounts because the high volume of transactions requires more administration to manage. The types of fees you may incur will vary by bank and type of checking account.
“Look for a checking account with low fees, especially in the activities you care most about,” said Ken. “For example, if you’re a big ATM user, then fees associated with ATMs will be very important.”
You should also watch out for overdraft fees on a checking account. Overdraft protection is sometimes an option if you link your checking account with your savings account.
As for savings accounts, look for potential excess withdrawal fees. These charges happen when you make more than a certain number of withdrawals a month. Checking accounts don’t typically have these types of fees.
Finally, both checking and savings accounts may come with a monthly maintenance fee. Banks often offer ways you can get this fee waived, such as having a direct deposit, maintaining a minimum balance or enroll in school.
Differences in earning interest
One of the biggest benefits of opening a checking or savings account is the opportunity to earn interest. Interest-bearing accounts can help your money grow just by storing it at the bank.
Interest rates are generally higher at online banks. They don’t face the same overhead costs as retail banks with brick-and-mortar locations, so they can pass those savings along to their customers.
Checking accounts tend to offer lower interest rates than savings accounts. On average, banks in the U.S. offer 0.06% interest in checking accounts, but you may be able to score a better deal by shopping around. Compare checking accounts to find a rate that works for you.
“Quite a few community banks and credit unions offer high-yield checking accounts that are higher than what you can get with an online savings accounts. These usually come with some catches, though, like debit card usage requirements, online banking usage and monthly direct deposit,” said Ken.
Why you need both checking and savings accounts
A well-organized financial life requires both kinds of accounts. A savings account is the perfect place to keep an emergency fund or to stash away money you’re saving for specific things.
“Besides the emergency fund, you may have savings goals, like a down payment for a house or money for a vacation,” says Tumin. “A savings account is a good type of product for that.”
You also need a checking account to keep your money for daily expenses and bill paying. This is also the account where your income lands. You can link your checking account to your savings account to quickly transfer money between them.
Do I need checking and savings accounts from the same bank?
It isn’t necessary to have your checking and savings accounts at the same bank, though doing so has advantages.
One advantage is that you can transfer money from one account to the other almost instantaneously. Many institutions let you set up overdraft protection where they automatically shift money from savings to checking to help you avoid overdrawing your account. If your accounts are at different institutions, it can take one to three business days to transfer funds between them.
Checking accounts and savings accounts are essential, easy-to-use tools for short- and long-term money management. Signing up for these two types of accounts should be your first step in organizing and managing your finances.
Choosing between a checking vs. savings account
There’s a lot to consider between a checking vs. savings account if you only want one account rather than opting for both. From potential fees and limitations to interest rates and special features, each offers its own distinctive benefits and disadvantages.
“A checking account might be the entire focus at the beginning, and it might not pay to worry about a savings account until you’ve accumulated some savings,” said Tumin.
When it comes to choosing between a checking vs. savings account, there’s no right or wrong choice — only you can decide which type of account can help you meet your goals.