What’s the Difference Between Checking and Savings Accounts?
Nearly every financial institution offers two basic options when it comes to opening a new account: a checking account or a savings account. As the banking industry’s standard accounts, you’re probably familiar with both to some extent. But what’s the difference between checking and savings accounts?
Understanding the difference is vital for managing your money. Since both accounts can help you achieve specific financial goals, most people would likely benefit from opening both a checking account and a savings account. So, it’s helpful to know how each account works and why you might want one. Let’s take a closer look to explain checking accounts vs. savings accounts.
What Is a Checking Account?
In the digital age, a checking account may be confusing for some people — especially younger folks. Because the use of physical checks has become increasingly uncommon, the general concept may not be as obvious as it once was. However, the name doesn’t exclusively refer to that kind of check.
In the past, you paid a check or bill with a paper check drawn from your bank account. But now you have the option to use electronic payment methods like debit cards. While the method may have changed, the principal remains the same.
- Checking accounts often offer little to no interest
- There typically aren’t transaction or withdrawal limits
- Usually supports debit cards and paper checks
- Employers can direct deposit your paycheck
- Some have a monthly fee to maintain the account
How Do Checking Accounts Work?
A checking account is for everyday transactions. It can be accessed in many ways: debit cards, cash withdrawals at an ATM, wire transfers, and paper checks. Nearly any business you shop at can accommodate some form of payment that’s drawn from a checking out.
There are few hard and fast rules to keep in mind. In general, a checking account is an affordable way to pay for things and accept deposits. However, some banks have checking account fees. For example, there may be a monthly fee, an overdraft fee, or an out-of-network ATM fee. Since some banks have lower or no fees, it’s a smart move to compare top online banking providers to see how each stacks up.
If you want to open a new checking account, then many banks offer a bonus to new customers who open an account. So, that’s another factor in choosing the right bank for your needs.
What Is a Savings Account?
As the name suggests, a savings account is designed to help you save money. While checking accounts are intended for immediate purchases, savings accounts are meant to be a place you leave money for a fairly long period of time. So, as an incentive to keep your money put, a savings account typically offers better interest rates than a checking account.
- Interest rates vary but some have APYs between 0.20% and 0.60%
- Typically, limited to 6 transactions per month
- Usually doesn’t support debit cards or paper checks
- Employers can direct deposit your paycheck
- There may be a monthly maintenance fee
How Do Savings Accounts Work?
Some savings accounts have more stringent rules for when and how you can access your money. But generally speaking, a savings account is best used to save money you know you won’t need access to for a while. By leaving your money in place, you can gain the maximum benefits a savings account offers.
Beyond traditional savings accounts, there are also high-yield savings accounts. They earn more interest than a normal savings account. High-interest account APYs change based on the interest rates dictated by the Federal Reserve. However, on average, the interest is much higher than a traditional savings account. Depending on interest rates, you may be able to save up to 10 times as much interest.
Just like checking accounts, many banks offer a bonus to new customers who open a savings account.
Checking Accounts vs. Savings Accounts
Because checking accounts and savings accounts do different things, one can’t be considered better than the other. In fact, the difference between checking and savings accounts is why both are necessary for most people. So, in order to make the most of your money, it can be effective to use both.
For instance, it’s a good idea to keep money in your checking account for paying bills and taking care of everyday expenses. Then deposit extra money in a savings account so it can gain interest for large investments or emergencies in the future.
The Bottom Line
Based on how savings and checking accounts work, most people would make use of both. A low-to-no-fee checking account gives you fast access to cash — at all times, no matter where you are. So, a checking account is a convenient way to pay bills, buy goods, and put cash in your pocket.
On the other hand, a savings account is useful for the money you don’t anticipate spending immediately. If you put your extra money in a savings account, then it can grow thanks to interest rates. For this reason, it can be a helpful tool for saving up for big-ticket purchases and emergencies.
As a result, the difference between checking and savings accounts makes them a powerful duo to meet your financial needs.