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Checking Vs Savings Account

Faith Boluwatife
Faith Boluwatife
Faith is an enthusiastic freelancer and regular contributor for a number of finance and insurance blogs where she writes valuable pieces to educate individuals on finance and other options. As a skilled writer, Faith has created content for diverse industries – if it exists, she’s likely written about it.

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Table of Contents

Are you considering opening a checking or savings account, but you are not sure which is right for you? In this article, we will break down the key differences between checking and savings accounts, so you are guided in making an informed decision.

Takeaway Points

  • Checking and savings accounts are two distinct types of accounts with features that serve different purposes.
  • Checking accounts are best for day-to-day transactions, such as paying bills, making purchases, deposits, and transfers.
  • Savings accounts are designed for earning higher interest rates on long-term savings.
  • Checking accounts generally have fewer restrictions and withdrawal limits compared to savings accounts.
  • It is important to consider what your financial needs and goals are, as they will help you choose rightly between opening a checking or savings account.
  • It is possible and is often beneficial to have both a checking and savings account, so your financial needs are better met.

What is a Checking Account?

A checking account is a type of bank account that allows you to perform day-to-day transactions as warranted. These daily transactions include making purchases, paying bills and subscriptions, writing checks, ATM withdrawals, deposits, and transfers.

When you open a checking account, you would usually get a checkbook, a debit card, and online banking access, so your daily transactions can be seamless.

Checking accounts tend to have fewer restrictions and withdrawal limits, and they may or may not charge monthly fees. When choosing a checking account, the monthly fees are an important factor to consider, and it is best to go for accounts with little or no monthly fees since you will be performing numerous transactions with the account.

Also, checking accounts can be opened with a relatively small amount of money at hand and have little or no minimum balance requirements. However, some banks may charge monthly fees on their checking accounts that can be waived by maintaining a minimum balance.

What is a Checking Account Used For?

A checking account is useful for the following:

  • Regular transactions such as purchases, ATM withdrawals, bill payments, and transfers
  • Receiving credits such as salaries and business payments
  • Managing your money and keeping track of your spending
  • Building a good credit history
  • Overdraft protection
  • Other mobile banking features such as budgeting, self-imposed withdrawal limits, and account tracking

What is a Savings Account?

A savings account is a type of bank account designed for saving money and earning interest. While checking accounts can also offer interest, their interest rates are quite insignificant compared to what is provided by savings accounts.

Savings accounts can offer interest rates from 0.5% to 20% or even higher. Therefore, they help you grow your money and offer you more for the money you are expending very little or no effort on.

Some savings accounts offer interest rates in tiers, that is, your interest rate can increase as your balance grows. Many savings accounts require a minimum balance to avoid monthly fees and may or may not have withdrawal limits.

They mostly come with monthly transaction limits since they are designed for savings and not everyday spending.

What is a Savings Account Used For?

  • Saving money for higher interest
  • Receiving credits such as salaries, so you can save them directly and earn interest
  • Putting money away for specific projects such as getting a house, vacation, or child school fees
  • Saving money away in a safe, credible, and insured account
  • Emergency funding
  • Maintaining financial discipline and a good saving culture

Comparing the Features of Checking and Savings Accounts

Feature Checking Account Savings Account
Purpose Spending Saving
Interest Little or none Yes
Debit card Yes Yes
Check writing access Yes Yes
ATM access Yes Varies
Monthly transaction limits No Yes
Monthly Maintenance Fees No, or with options to waive charges if there are Varies
Other charges that may apply
  • Out-of-network ATM fee
  • Overdraft fee
  • Foreign transaction fee
  • Withdrawal limit fee

When Should You Choose a Savings or Checking Account?

Because checking and savings accounts serve distinct purposes, one may be the best fit for you over another. It is important that you consider what your financial goals are and how you plan to use the account when deciding what type of account to open.

To guide you, we have provided a couple of scenarios below that should make you go for one account type over the other.

Choose a checking account if:

  • You need an account for ease of daily transactions
  • You usually have plenty of transactions such as payment of bills and purchases to make per month
  • You do not have any intention to save, yet

Choose a savings account if:

  • You have a huge chunk of money you want to save
  • You have excess money that you may not be using for a long time
  • You desire higher interest rates on the money in your account
  • You aim to maintain a savings culture or better financial discipline

How to Choose a Checking Account

After you have decided that a checking account is the best fit for your financial goals, you must also ensure you go for a checking account that will best meet your needs while offering outstanding deals and ease of banking.

You should look out for the following in a checking account:

  • Little or No Maintenance Fee: Look out for checking accounts that either charge no maintenance fees or have options for waiving them. You perform plenty of transactions with a checking account. It is therefore possible for monthly transactional charges to add up very fast and become significant amounts. Accounts with little or no maintenance fees or options for waiving charges will help you combat this.
  • Debit Card and Checking Book Provision: Ideally, a checking account provides you with a debit card and checking book or allows you to link one of your previous debit cards to it. Otherwise, you will not be able to perform most of your transactions as debit cards are not only important for ATM withdrawals but also for electronic transactions.
  • Free and Nationwide ATM Access: Go for accounts that do not have ATM restrictions and will let you perform ATM transactions for free. As expected, you would be performing plenty of ATM withdrawals with your checking account, and you do not want to encounter restrictions or high transaction fees.

How to Choose a Savings Account

Here are features to look out for when choosing a savings account:

  • High Interest Rates: Savings accounts are not the type of account with the highest interest rates out there. However, a good savings account must be able to offer you a significant Annual Percentage Yield (APY) of up to 2% or higher.
  • Withdrawal Limits: Withdrawal limits are a popular feature of savings accounts. A withdrawal limit is the number of times you can make withdrawals from your account per month, after which you will be charged a fee (about $5 to $10) for every excess withdrawal. Withdrawal limits can be a good way to help you watch how often you “steal” from your own savings. However, you also want to check that the limits and excess withdrawal charges are not ridiculous such that you cannot perform as many transactions as you desire with the account.

Interest Rates for Savings and Checking Accounts

As we already highlighted, checking accounts may also offer interest to their clients. The interest rate for a savings or checking account would depend on factors like the account provider and the amount in the account.

For example, credit unions and online-only accounts tend to offer higher interest rates than brick-and-mortar banks. Among credit unions and banks, the interest rate would also vary based on company preference.

However, as a standard, savings accounts provide higher interest rates than checking accounts. Note also that interest rates tend to fluctuate over time based on factors like the state of the economy and government financial regulations per time.

Therefore, the interest rates that applied for a particular financial institution last year may no longer apply to the same account. The interest or APY may now be higher or lower.

Savings accounts tend to have interests around 1% to 2.5% with certain providers offering lower or higher interest rates. Checking accounts, on the other hand, can have interest rates from 0.01% to 0.5%.

Is My Money Protected in a Savings Account if the Bank Fails?

Most savings and checking account providers in the United States and insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per depositor. This means that if a bank fails, you will still be able to access your funds up to $250,000 which is the insured limit.

Credit unions, on the other hand, are insured by the National Credit Union Share Insurance Fund (NCUSIF) operated by the National Credit Union Administration (NCUA). The coverage limit is also $250,000 per depositor.

That said, it is important as a primary check to ensure that you sign up with a bank or account credit union that is insured, as not all bank providers are insured.

Next, you want to find out what the insured limit is and if you will be comfortable having an account with that bank, especially if your savings will be amounting to figures above the insured limit.

Alternatives to Regular Savings Accounts

Savings accounts help you grow your savings with little effort on your part. However, they are not the only option you have to achieve this. You will find certain other types of accounts that offer similar interest rates or even higher with other special features.

What matters is that you can look beyond the high interest rates offered by these accounts to their other features and terms, and then decide if they are a nice fit for you. Here are some of the alternatives to regular savings accounts:

Money Market Accounts

Money market accounts offer interests like savings accounts, but also provide debit cards, checkbooks, and more flexible transaction abilities. However, they tend to have higher minimum balance requirements than savings accounts.

Certificate of Deposit (CDs)

CDs are popular accounts for tucking away money for a fixed time and earning higher interest rates than regular savings accounts. CDs require that you leave the money untouched for a period of time, unlike savings accounts that will only restrict you through withdrawal limits. They also tend to have higher minimum deposit limits.

High-Yield Checking Accounts

High-yield checking accounts are a special type of checking account with all the features of conventional checking accounts but with higher interest rates.

Such accounts are typically provided by credit unions and online banks that have the luxury to offer higher interest rates due to the lower overhead costs they have to cater to. You qualify for the high-interest rates, you may need to maintain a minimum balance or complete a certain number of monthly transactions.

Should I have Both Checking and Savings Accounts at the Same Bank?

Firstly, we should outline that it is very possible and often beneficial to have both a checking and savings account. This will ensure that your savings and spending are better coordinated and the money you wish to save does not get mixed up with the money for everyday transactions.

Besides, a savings account can help you make more interest on money that you will not be using soon, and this is a better option than just having the excess tucked away in a checking account with a lower interest rate.

Most banks, credit unions, and other account providers offer both types of accounts to clients, and many of them would let you run both accounts concurrently with them. In fact, you might even get better interest deals with some banks if you have both a checking and savings account with them.

When deciding where to open any of your accounts, what should matter should be the trust you have in the bank and the features they offer. One bank may be able to satisfy you with their features and so you can stick with them for all your account types.

However, you may find out that different banks have better deals for certain types of accounts, and this may drive you to open your checking and savings accounts with separate banks.

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See how much you'll earn in interest with a high-yield saving account

How much will you deposit into your savings account?

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What is the APY on the savings account?

%

You can expect to earn this much in interest:

$338