When it comes to managing money, you may be wondering whether a checking account or a savings account is better equipped to meet your needs. According to financial research, 5.4% of American households are unbanked, meaning no one in these families has a bank account. That's about 7.1 million households across the country. Both types of bank accounts can help meet different needs for staying on top of your finances, though they don’t function in the same way.
Key Takeaways
- Checking accounts are designed for everyday banking transactions and generally come with no cap on the number of transactions you can execute each month.
- Savings accounts can help you grow your money with interest but may come with restrictions on how many times you can make withdrawals every month.
- Consider the fees, annual percentage yield you can earn on deposits, withdrawal rules, and banking access, among the other features when you're looking for an account.
- Many online banks offer no- or low-fee checking accounts and better interest rates on savings accounts compared to brick-and-mortar banks.
- Look out for rewards programs or promotions that can help you save money.
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What Is a Checking Account?
A checking account is an account held at a financial institution that allows you to make credit and debit transactions. These accounts can offer both a debit card and check-writing capabilities. Withdrawals can take the form of cash withdrawals made at a branch or an automated teller machine (ATM), as well as debit card purchases, checks, money orders, ACH transfers, and wire transfers. Similarly, deposits can be made by depositing cash, checks, or money orders at a branch or an ATM, as well as via mobile check deposit, automated clearing house (ACH) transfer, or wire transfer.
“If you need to use funds for daily transactions, a checking account is the best way to do that,” says John Bergquist, President at Lift Financial in South Jordan, Utah.
A checking account is useful if you need to:
- Pay bills electronically or via check
- Make purchases or ATM withdrawals using a linked debit card
- Transfer money to an account at a different bank electronically
Checking accounts may or may not be interest-bearing. If it is, the money you deposit earns interest as long as it stays in your account. These accounts can be offered by brick-and-mortar banks, online banks, credit unions, and other financial institutions.
What Is a Savings Account?
A savings account is a deposit account that’s designed for holding funds that aren’t earmarked for everyday use, such as paying bills or spending. For example, you might open a savings account to grow your emergency fund, set aside money for a vacation, build your down payment if you plan to buy a home, or save money for home improvements. Like checking accounts, you can find savings accounts offered at different financial institutions like traditional banks, online banks, and credit unions.
Between savings and checking accounts, you’re less likely to earn interest with the latter. Banks pay savers an annual percentage yield (APY) as an incentive for depositing and keeping money in their savings accounts. The APY savers can earn isn’t uniform, however. It can vary from bank to bank. On average the national savings rate was 0.07% as of May 2022.
“An online savings account is a much better option at almost 20 times higher a rate than the traditional checking account,” Bergquist says. “In fact, it’s even very similar to what you would earn when purchasing a 10-year Treasury bond.”
Online banks often have the capability to pass on higher interest rates to savers, owing to their lower overhead and operating costs. The rates can vary widely, but it’s not unthinkable to find high-yield online savings accounts from banks and credit unions earning an APY in the range of 1.90% to 2.25%.
In addition to higher interest rates on savings, online banks may charge fewer fees. For example, a traditional bank may charge a monthly maintenance or minimum balance fee for a savings account, while an online bank may not charge either of these fees.
Special Considerations
A key mark in favor of checking accounts is the fact that withdrawals are virtually unlimited. You could use your card 10 times a day to shop, make daily cash withdrawals, and pay your bills without being penalized by the bank. But that may not be the case with your savings account. This started with Regulation D, which was a rule imposed on banks by the Federal Reserve.
According to the rule:
- Share savings accounts, savings accounts, and money market accounts (MMAs) were limited to a maximum of six withdrawals per month. Your account provider could charge you excess withdrawal fees if you exceeded the maximum number of withdrawals per month.
- Transactions that counted toward the limit included ACH withdrawals, overdraft transfers from savings to checking, transfers made via online banking or by phone, debit card point-of-sale (POS) transactions, and transfers or withdrawals made via fax.
- Unlimited withdrawals from savings accounts were allowed when made in-person, via mailed request, or at an ATM.
Although Regulation D withdrawal restrictions were lifted in April 2020, some financial institutions may still charge their customers excess withdrawal fees if they're made from a savings account. It's always a good idea to ask your bank or credit union for the rules about your savings account so you're not surprised with fees that you weren't expecting.
Shop around to get the best deal—one that fits your needs and lifestyle. For instance, if you're looking for a better return, some banks reward customer loyalty with higher rates if they open both a checking and savings account and link them together.
Checking vs. Savings Accounts: Which Is Better?
When comparing checking and savings accounts, you may find that one is better suited than another to your needs, and in some cases, you may benefit most from using both. Here are some questions to consider when shopping around for a checking or savings account.
- What are the fees associated with the account? For example, is there a monthly maintenance fee?
- Is there a minimum balance requirement that needs to be met?
- Does a savings account come with an ATM card or a debit card?
- Are there daily limits on ATM withdrawals for checking accounts?
- Are there daily limits on deposits for a checking or savings account?
- Does the account earn interest, and, if so, what is the APY?
You should also check to see whether the bank offers any special perks for opening an account.
“Banks are highly competitive in a ridiculously low-interest-rate environment, and there are occasional incentives that could make a checking or savings account more attractive,” O’Donnell says. For example, you may be able to join a debit card rewards or discount program that could save you money, or you could take advantage of promotional deals for opening other accounts, such as a money market or certificate of deposit (CD).
Lastly, keep in mind the kind of access you need when it comes to banking. Whether you choose a checking or savings account, consider whether the bank offers the online and mobile banking tools you need to manage your money digitally, the number of ATM locations, and whether branch banking is available, if that’s something you occasionally use.
How Much Money Should You Have in Your Checking Account?
There's no definitive answer as to how much you should have in your checking account because it depends on a few key factors. If your bank requires you to hold a minimum balance in your account, you should at least have that amount or you risk being hit with service charges that eat away at your balance. But it's always a good idea to keep at least one to two months' worth of expenses in your checking account. This ensures you have enough to cover your living expenses and bills in case of an emergency.
What Do You Need to Open a Checking or Savings Account?
There are several things you'll need before you can open a bank account of any kind, whether that's a checking or savings account. That's because the financial institution needs to verify your identity. This means you'll need a valid piece of government-issued identification, such as a passport or driver's license, proof of your address, or your Social Security number. If your bank has a deposit requirement, you'll have to bring that with you, too.
Which Savings Account Earns You the Most Interest?
The interest rate on most savings accounts is fairly low. But that doesn't mean all is lost as there are several options available for higher rates—you just have to look. Consider tiered accounts that offer higher rates as you deposit more money. Another option is the high-yield savings account, which pays more when you deposit a higher balance, usually over $5,000. If that's not enough, you may want to open a money market account, which has the features of both a checking and savings account. This type of account uses the money you deposit to invest in other vehicles. But it's still highly liquid.
Insights, advice, suggestions, feedback and comments from experts
Introduction
As an expert in personal finance and banking, I can provide you with valuable insights on the concepts discussed in this article. My expertise is based on extensive knowledge and experience in the field of managing money and financial accounts.
Checking Accounts
A checking account is a type of bank account that allows you to make credit and debit transactions. It is designed for everyday banking transactions and offers features such as a debit card and check-writing capabilities. With a checking account, you can easily pay bills electronically or via check, make purchases or ATM withdrawals using a linked debit card, and transfer money to an account at a different bank electronically.
Checking accounts are typically offered by brick-and-mortar banks, online banks, credit unions, and other financial institutions. They may or may not be interest-bearing, meaning that the money you deposit may or may not earn interest. It's important to consider factors such as fees, withdrawal rules, annual percentage yield (APY), and banking access when choosing a checking account.
Savings Accounts
A savings account is a deposit account designed for holding funds that are not earmarked for everyday use. It is commonly used to save money for specific purposes, such as building an emergency fund, saving for a vacation, or setting aside money for a down payment on a home. Unlike checking accounts, savings accounts are not intended for frequent transactions.
Savings accounts are offered by various financial institutions, including traditional banks, online banks, and credit unions. One of the key benefits of a savings account is the opportunity to earn interest on your deposits. Banks pay savers an annual percentage yield (APY) as an incentive for depositing and keeping money in their savings accounts. Online banks often offer higher interest rates on savings accounts compared to traditional brick-and-mortar banks, thanks to their lower overhead and operating costs.
When choosing a savings account, it's important to consider the APY, fees, and any withdrawal restrictions that may apply. Some savings accounts may have limitations on the number of withdrawals you can make per month, although these restrictions were lifted in April 2020 by Regulation D. However, it's always a good idea to check with your bank or credit union to understand the specific rules and potential fees associated with your savings account.
Comparing Checking and Savings Accounts
When comparing checking and savings accounts, it's important to consider your individual needs and financial goals. Here are some questions to consider:
- Fees: What are the fees associated with the account? Does it have a monthly maintenance fee or a minimum balance requirement?
- Access: Does the account come with an ATM card or a debit card? Are there daily limits on ATM withdrawals or deposits?
- Interest: Does the account earn interest? If so, what is the APY?
- Perks: Does the bank offer any special perks for opening an account, such as rewards programs or promotional deals?
- Digital Banking: Does the bank offer online and mobile banking tools that meet your needs? How many ATM locations are available? Is branch banking an option if needed?
It's worth noting that in some cases, using both a checking and savings account can be beneficial. For example, some banks offer higher interest rates if you open both types of accounts and link them together. Additionally, certain financial institutions may provide incentives or rewards programs that make a checking or savings account more attractive.
How Much Money Should You Have in Your Checking Account?
The amount of money you should have in your checking account depends on several factors. If your bank requires a minimum balance, it's important to maintain at least that amount to avoid service charges. Additionally, it's generally recommended to keep one to two months' worth of expenses in your checking account as a safety net for emergencies.
Opening a Checking or Savings Account
To open a checking or savings account, you will typically need the following:
- Valid government-issued identification, such as a passport or driver's license.
- Proof of address.
- Social Security number.
- If there is a deposit requirement, you will need to bring the required amount with you.
These requirements may vary slightly depending on the financial institution you choose.
Finding a Savings Account with High Interest Rates
While the interest rates on most savings accounts are relatively low, there are options available for higher rates. Here are a few suggestions:
- Tiered Accounts: Consider tiered accounts that offer higher rates as you deposit more money.
- High-Yield Savings Accounts: Look for high-yield savings accounts that offer higher interest rates for higher balances, typically over $5,000.
- Money Market Accounts: Explore money market accounts, which combine features of both checking and savings accounts. These accounts invest your deposits in other vehicles and can offer competitive interest rates.
By exploring these options, you can find a savings account that earns you the most interest based on your financial goals and deposit amounts.
In conclusion, understanding the differences between checking and savings accounts is crucial for managing your finances effectively. By considering factors such as fees, access, interest rates, and perks, you can choose the account(s) that best meet your needs and help you achieve your financial goals.
