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Banking 101: Checking vs. Savings Account


Written by Lauren Perez | Published on 3/23/2020

Note: This article is part of our Basic Banking series, designed to provide new savers with the key skills to save smarter.

 

You need both a checking account and a savings account as basic tools for managing your personal finances. A checking account lets you handle day-to-day transactions, while a savings account keeps your money safe and growing over the long term. Each account type has their own strengths and limitations, so it’s important to familiarize yourself with them both to best maximize your potential.

In this article we will cover:

Main differences between checking and savings accounts

The difference of checking versus savings comes down to what you’re planning to do with the money you deposit in each type of account. Both are places to stash your money safely with a bank or credit union, and both make it easy to access your funds when you need them. Here are the main differences:

  • Checking accounts: Designed to meet everyday spending needs, like debit card purchases, writing checks and paying bills.
  • Savings accounts: Where you stash money for specific financial goals, or for your emergency fund.
Checking Accounts Savings Accounts
Main purpose Daily spending Saving and growing money
Withdrawal limits None Six per statement cycle
Average interest rate 0.19% APY 0.27% APY
Online average interest rate 0.54% 1.71% APY
Minimum balance requirements Varies by bank Varies by bank
Common features
  • Debit cards
  • Direct deposit
  • Paper checks
  • Automatic bill payments
  • Overdraft protection
  • Mobile banking
  • Automatic deposits and transfers
  • Direct deposit
  • Mobile banking
Possible fees
  • Overdraft
  • Monthly maintenance
  • Low balance
  • Wire transfers
  • Out-of-network ATM withdrawals
  • Returned deposits
  • Paper statements
  • Foreign transactions
  • Debit card replacements
  • Monthly maintenance
  • Excess withdrawal
  • Out-of-network ATM withdrawals
FDIC-insured? Yes, up to legal limits Yes, up to legal limits

Checking vs. savings account: What’s a checking account?

Checking accounts are your day-to-day money-management workhorses. These accounts are 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.

Common checking account features

  • Debit card: Checking accounts come with a debit card, allowing you to make purchases in person and online, and withdraw and deposit money at ATMs.
  • Direct deposit: With direct deposit, paychecks or other recurring payments are routed directly into your account. 
  • Checks: Checking accounts are named after paper checks. They are used less today, but still come standard with many checking accounts. Depending on the bank or credit union, obtaining paper checks may incur a fee. 
  • Automatic bill payments: You can set up payments to automatically transfer from your checking account to pay recurring bills, like your credit card or utility bills. 
  • Overdraft protection: This opt-in service covers you in the event you try to spend or withdraw more money than you have in your account. There may be fees, depending on your bank or credit union. 
  • Mobile banking: On-the-go access is standard with nearly all accounts today. This often includes mobile check deposits, so you don’t have to visit a branch or an ATM.

Checking account pros

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, founder and editor of DepositAccounts. 

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 gift cards] and cash back when you use a debit card,” said Tumin. 

Checking account cons

ATM fees: Typically, a bank will allow you to use their own ATMs or ATMs within a partner network for free. Other third-party ATMs are considered “out-of-network,” and using one can incur a fee from both your bank and the ATM owner. 

ATM fees usually run around $2.50, and it doesn’t usually make financial sense to pay a fee to get money from an ATM. If you only have access to certain ATMs in a particular location, you’ll be better off finding a checking account within those networks. 

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,” Tumin 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. 

A minimum balance may be required to waive an account’s monthly fee, as well. So if you fail to maintain that minimum for even a day, a bank could charge you the monthly fee. 

Little to no interest: If you’re hoping to earn money from interest on a large deposit, a checking account isn’t your best option. Some checking accounts pay very little interest, if any at all.

Checking vs. savings account: What’s a savings account?

Savings accounts are where you keep money you don’t need to spend right away. Many people rely on these accounts when they want to stash money for a major purchase, like a car or home, or if they’re trying to accumulate wealth.

Savings accounts are more restricted than checking accounts, limiting users to six withdrawals/transfers per month, per Federal Deposit Insurance Corporation (FDIC) laws. 

Common savings account features

  • High interest rates: Savings accounts reward users with higher rates than are generally available with checking accounts. Online savings accounts typically offer even better rates than your traditional savings account.
  • Automatic deposits and transfers: Getting money into and out of a savings account is easy. You can even set up recurring transfers from your checking account to your savings account for more efficient savings habits.
  • Direct deposit: This feature is available on savings accounts for recurring payments. 

Savings account pros

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 — some more than others — which can help your money grow over time.

Avoid overdraft fees: Some banks let customers link their savings account with their checking account to reduce the likelihood of 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.

Savings account cons

Withdrawal limits: Due to the Federal Reserve’s Regulation D, you can only make six “convenient” withdrawals or transfers from your savings account each month (you may be able to make additional transactions at an ATM, by mail or in a branch). Some banks will impose even stricter rules on savings accounts, limiting customers to just a few transactions a month. 

Less accessible: Savings accounts typically don’t include a debit or ATM card, or check-writing abilities, although some money market accounts do. This may limit your savings account access to online only, unless you have a checking account debit card with the same bank. 

“You need to check if it’s free to initiate an electronic fund transfer and if there are small limits. I’ve seen limits as low as $2,000 per transfer,” said Tumin. 

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. Many accounts also require a minimum balance to earn a particular interest rate, or earn any interest at all.

Checking vs. savings account: Fees

While you should have both a checking and savings account, there are a number of factors you should consider when deciding which accounts to open. Fees are one of the most important things to consider when deciding between a checking account versus savings account.

Checking accounts tend to have more fees because the high volume of transactions requires more administration to manage on the bank’s side. 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 enrollment status in school.

Checking vs. savings account: Interest rates

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.

Savings accounts tend to offer higher interest rates than checking accounts. On average, banks offer a 0.27% APY on savings accounts, compared to 0.19% on checking accounts. You can probably score a better deal by shopping around, though. 

“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.

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. The average savings account rate jumps to 1.71% APY when you look at online accounts. The average online checking account rate also performs better at 0.54% APY.

Checking vs. savings account: Accessibility

Savings accounts aren’t meant for common transactions — it’s best to leave that to your checking account. Checking accounts are more easily accessible, too, with debit cards and checks.

Checking accounts may also be better to send your direct deposits to, especially if you need to use your paychecks for more immediate bill payments. You can always transfer the excess to your savings account later. 

That’s not to say you cannot use savings accounts to make payments or transfers; you still have those capabilities in case you need to. But you’re limited to six per statement cycle, and triggering an excessive transaction fee for that seventh or eighth transaction can really hurt your savings. 

Why you need both a checking and a savings account

A well-organized financial life requires both a checking account and a savings account. 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 you deposit your regular income. You can link your checking account to your savings account to quickly transfer money between them.

There may be some situations when you only want one account rather than opting for both when choosing between a checking versus savings account. 

“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.

Whichever account you’re looking for, pay attention to the fees associated with each, as well as their accessibility to ensure these features align with your own financial preferences and goals.

How should I split my money between checking and savings?

To maximize your savings, you could keep the majority of your liquid money in a savings account. More money in savings means more earnings. However, this will also require more management on your part, monitoring transfers and keeping an eye on your checking account balance. The latter is crucial to avoid overdrafting your checking account.

Another great savings strategy is to set up automatic recurring payments from your checking account to your savings account. This guarantees regular savings each month, and the amount can be whatever fits your budget, whether $25 or $250. This set-it-and-forget-it strategy is more low maintenance for those who can’t monitor both account balances and transactions.

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.

Another advantage is the ease of managing your accounts. You can access both with one sign-in rather than bouncing between different institutions’ websites and apps. 

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.

Comments


Jean
  |     |   Comment #2
Very nice article. I forward all these basic banking series to my young neices and nephews. Keep up the good work.
deplorable 1
  |     |   Comment #3
The best solution is both. Use a free local checking account linked to a high yield savings. If you don't have a checking you will hit the 6 transfers per month limit for paying bills. If you don't have a high yield savings account you will be earning next to nothing on your money. If you try and maintain a rewards checking account with debit card hoops and other requirements you will lose the 2-5% on cash back credit cards and get frustrated trying to meet the monthly requirements. Keep it simple when just starting out.
Bozo
  |     |   Comment #4
deplorable 1 (re comment #3): As I've noted in other threads, Alliant works for me. Stash your cash in savings (at 2.1%) until you need it. Then transfer what you need to checking. No per check fee, no fuss, no gimmicks. It's like having a (free) checking account earning 2.1%. After all these years, I'm still on my first (free) order of paper checks.
deplorable 1
  |     |   Comment #5
@Bozo: I was just giving "generic" advice to anyone just starting to save. I personally use a free Bank of America checking linked to Ally Demand Notes. This way I can keep next to nothing in the checking at 0% and keep bill pay money at Ally DN earning 2.12%-2.27% currently. We are both basically doing the same thing in different ways. Ally DN has free checks and no ACH or bill pay restrictions. None of my bills come out of the BoA account it is just there as a local branch to collect a direct deposit, make deposits of checks/cash, easy ATM access etc. I have been using this basic setup for decades as it allows you to earn a decent interest rate on cash waiting to pay bills with no debit card hoops.
deplorable 1
  |     |   Comment #6
For those just starting out I also wanted to mention something I consider to be a predatory banking fee. It is called "overdraft protection". Every bank will try to encourage you to sign up for this scam. At first it sounds good so you never bounce a check but when you dig into the details the fees they charge for this "service" can be almost as bad or worse than bounced check fees. I used to have this service when it was free but now it is standard practice that the bank will not only charge you a fee for transferring your own money from a linked savings account but then start charging a interest rate on the funds transferred from a linked credit card or line of credit until you pay it off! The fees and interest rates they charge can be quite high. I have seen them as high as $39 and 27%! I have heard many horror stories of those using debit cards linked to a checking incurring a stack of these fees before they even realize they went under balance. Personally I would just rather have the transaction declined. Many banks will automatically sign you up for this so called "service" when you open a account with them or they will try very hard to convince you to sign up for it. This is because it is a huge fee generator for the bank. The best advice I could give would be don't buy things you can't afford and opt out of overdraft protection.
https://www.consumerreports.org/banks-credit-unions/think-twice-before-signing-up-for-overdraft-protection/
and
https://clark.com/commoncents/overdraft-fees-cost-11-billion-how-to-save/

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