Savings vs Checking Accounts

What's the difference between the two?

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Savings accounts and checking accounts are available at both banks and credit unions. Both are among the easiest financial accounts to open. When it comes to savings vs checking accounts, the difference is in the way each is designed for use. Although these accounts complement each other, which is why you need both, each serves a specific function in your financial wellbeing. Here's our comparison between these two account types.

What Is a Savings Account?

Boost Your SavingsSavings accounts have long been one of the simplest and safest ways to save. For many, opening a savings account is their first banking experience. The benefits of a savings account include:

  • Compound interest — whether on a daily, monthly, or other schedules
  • Low or no minimum amount to open the account
  • Federal Deposit Insurance Corporation (FDIC) coverage for up to $250,000
  • Complete liquidity
The downside of a savings account is that you must maintain a minimum balance. Interest rates paid on savings accounts are typically lower than related financial products such as money market accounts or certificates of deposit. There may also be a limit on how many withdrawals you can make each month.

What is the Key Difference Between a Checking and Savings Account

Under Federal Reserve Board Regulation D, account holders are not permitted to make more than six withdrawals from their savings account per month, which also holds true for money market accounts. Exceed that amount, and the bank will either levy a fee or change your savings account into a checking account. However, the six withdrawals per month regulation was temporarily suspended in response to the coronavirus pandemic. There is no limit on how often you may make deposits into your savings account.

Perhaps the biggest downside of a savings account is that you cannot make payments directly from the account to a third party. Fortunately, that's where a checking account comes in.

Benefits of Savings Account

emergency fundHow much you put into a savings account depends on your age and needs. Everyone needs an emergency fund for a proverbial rainy day, and a savings account is a great place to keep those funds. You should always aim for an emergency fund of between three and six months’ worth of living expenses. Should you lose your job, become ill, or have other unexpected events befall you, having those emergency funds in your savings accounts can make a big difference in your future.

You can open a savings account to suit a particular savings goal. Some banks offer Christmas or holiday club accounts — savings accounts in which the owner makes regular deposits throughout the year. Then, when holiday time rolls around, they have the money to spend on gifts or similar expenses. Vacation or travel accounts are a popular way to save for trips.

Currently, the national average Annual Percentage Yield (APY) for a standard savings account is just 0.06%. A high-yield savings account will earn you as much as 10 times more than a standard savings account. Because online-only banks have lower overhead than brick and mortar institutions, they are generally able to offer customers higher interest rates.

Should I Open a Savings Account?

Savings AccountIf you are just starting out in the world of banking and finance, opening a savings account makes sense. It is also a wise idea for those on a limited income, or when saving for a specific goal. For instance, a teenager saving for a car can store away the money earned from summer or part-time jobs, or birthday and holiday gifts, to make their auto ownership dream a reality.

Then there is the aforementioned emergency fund. The nature of such a fund is that you never know when you will need it. Everyone needs some kind of financial cushion to protect them when life throws a curve – and sooner or later, it will.

Parents open savings accounts for their children to teach them the basics of saving and how compound interest works. If a child has a goal in mind, having them save for it provides them with discipline in the process and satisfaction when they reach their monetary target.

Here are some recommended banks with high-yield savings accounts as of July 2021:

What Is a Checking Account?

Checking accountChecking accounts are the vehicles by which bills are paid. These days, the check may no longer be in the mail. Paper checks still exist, but most transactions are now made electronically. Along with a checkbook, upon opening a checking account you should receive a debit card and a mobile app for conducting transactions.

Benefits of a Checking Account

The benefits of a checking account include:

  • ATM access
  • Direct deposit
  • Establishing credit
  • FDIC insurance
  • Member specific benefits from the particular bank or credit union
  • Proof of payment in case of dispute
  • Utilization of online banking tools
The downside of a checking account is the monthly fees charged by financial institutions. It is possible to waive these fees by keeping a minimum balance in the account at all times. And some online banks, like Revolut and Chime, don’t charge any monthly fees.

An overdraft fee kicks in if a transaction occurs dropping the account balance below zero. Overdraft fees are high, and banks also add interest to the overdrawn amount. You could end up charged an additional fee for every day in which the account remains overdrawn. Depending on the circumstances, you may have an overdraft fee waived, but it requires contacting customer service and making your case. The odds of obtaining a waiver are greater if you have been a longtime customer and this is your first overdraft.

Some of our recommended banks for checking accounts include:

  • Discover Bank: This checking account offers 1% cash back on monthly debit card purchases of up to $3,000 and no monthly fees. Users have access to 60,000 no-fee ATMS nationwide.
  • Axos Bank: High-yield rewards checking offers an APY of up to 1.25%. No fees, unlimited ATM reimbursements. There are no minimum balance requirements.
  • Varo Bank: This online bank charges no monthly fees and requires no minimum balance for its checking account. It offers an early payday option with direct deposit.
  • Consumers Credit Union: There is no fee or minimum balance needed with free rewards checking. Earn up to 4.09% APY when meeting certain requirements.
  • NBCK Bank: This bank’s combined checking and savings account offers up to 1.5% APY with no minimum balance or account fees.

Why Do You Need a Checking and a Savings Account?

why do you need checking accountsChecking accounts serve as a tool for bill payment, while savings accounts are named for their main purpose: savings. Unlike savings accounts, most checking accounts do not pay interest. Also unlike savings accounts, there is no monthly withdrawal limit.

  • Grow your extra money — Because you do not receive interest from your checking account, there is no reason to keep excess funds in it. Instead, put the extra money to work for you in the savings account and transfer funds to the checking account when necessary.
  • Everyday Transactions — A checking account is the best account for everyday transactions since you use it to pay many of your bills. The average person pays their rent, mortgage, utility bills, credit card and insurance payments via check, while daily transactions are often paid with a debit card connected to the checking account.
  • Savings accounts can also serve as overdraft protection for a linked checking account.

How to Choose the Best Checking and Savings Accounts

how to choose a bankMany banks offer joint checking and savings accounts to make your financial life run as smoothly as possible. Before choosing a bank, decide which features you need. For example, some people prefer to use paper checks, but many banks charge for this feature.

Online-only banks work well for many customers. If you want to use a bank with a local physical branch, your choices may be more limited. Some customers feel more comfortable knowing they can head into a local branch and discuss any issues with a bank representative.

You should also compare a bank's fees to determine the best checking and savings account products. Along with monthly maintenance or overdraft fees, take out-of-network ATM fees or foreign transactions fees into consideration. Veterans and those on active military duty, as well as students and seniors, may qualify for special rates or discounts at some banks.

You can also look for offers such as bonuses for opening a checking or savings account. Free national ATM access for your checking account is another plus. With savings accounts, seek the highest APY.

The best checking and savings account is the one with the greatest number of options at the most attractive rate. Shop around to find what’s right for you.

Long-Term Considerations

Throughout your life, you will likely need a checking account. As your assets increase and your investment knowledge grow, a savings account may not prove necessary.

You may decide to keep your cash in a bank money market account or money market mutual fund. Both offer higher interest rates than savings accounts, but between $500 and $2,500 is required to open an account. Money market accounts and money market mutual funds are not synonymous. The former are covered by FDIC insurance, while the latter are not.

Jane Meggitt

Jane Meggitt’s work has appeared in dozens of publications, including USA Today, Zack’s, Financial Advisor, nj.com, the Houston Chronicle, and The Nest. She is a graduate of New York University.

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