What Is The Difference Between Checking And Savings Accounts

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 4 minute read

So, you’ve made the executive decision to switch banks. When you visit your neighborhood bank or credit union, the account manager will give you the option of opening a checking or savings account.

So, how do you pick between the two?

The answer is conditional on your intended usage of the account. Since the FDIC insures deposits in both types of accounts, your money is secure in any one (FDIC). However, the two varieties each have their own set of benefits that make them more suited for specific tasks.

What Is the Difference Between Checking and Savings Accounts?

In most cases, a checking account is used to save money for regular, everyday expenses. Money set aside for future use or use in an emergency might be kept in a savings account.

Savings Account

To keep your funds easily accessible, consider opening a checking account. This is the bank account from which you make your routine purchases and withdrawals, such as money for bills and groceries. Features often found in a checking account include:

  • Paper checks, which may be used to pay individuals and some companies.
  • A debit card, which may be used to make purchases or withdraw cash from an ATM.
  • Online banking, which allows you to access your account via a browser or a mobile banking app.
  • Online bill payment allows you to pay invoices straight from your bank account.

All of your funds in a checking account are always available to you. Withdrawals, transfers, and purchases are unlimited throughout the month.

Overdraft protection is a feature offered by many checking accounts. Your bank may provide you an advance of funds if you make a withdrawal or payment that exceeds the amount available in your account. However, the overdraft cost assessed by most banks is rather high.

Interest is not normally paid on checking accounts except in the growing number of incentives checking accounts. Interest-bearing checking accounts are available at certain conventional banks and credit unions, but the rate of return is often rather low. Thus, your checking account funds will not increase in value over time.

In many circumstances, the opposite is true, and your balance will decrease as time goes on. Because most checking accounts charge a monthly fee to keep them open. However, if you utilize direct deposit or maintain a specified minimum balance, most banks will forego this cost. Free checking accounts that don’t demand a certain monthly minimum are becoming increasingly rare.

Savings Account

Put your money down for the inevitable bad times with a savings account. The interest you accumulate on your savings is the primary benefit of having one. The annual percentage yield, or APY, is the rate of interest earned on a savings account each year.

Interest rates on savings accounts are often higher than those on checking accounts, however the annual percentage yield (APY) might vary. High-yield savings accounts are the norm for the best-paying accounts. Additionally, the interest rates offered by online savings accounts are often greater.

However, there are always caveats associated with APYs being so high. In order to get the best interest rate, many savings accounts mandate that you have a minimum amount. Direct deposit may be a need.

Money in savings accounts is less easily available than cash or checks. There is no option to get paper checks or debit cards with these accounts. Instead, you get a simple ATM card for cash withdrawals.

Also, the amount of withdrawals you’re allowed to make from a savings account is often low. Six withdrawals or transfers per month are the maximum that can be made from a savings account in accordance with federal legislation. It is not mandatory for banks to impose a fee for exceeding this threshold, but many do.

The Federal Reserve Board waived the restriction during the 2009 coronavirus epidemic. Now, you may open a savings account and make as many withdrawals as you like from it. However, many financial institutions continue to restrict savings account customers to a maximum of six free monthly transfers.

Bottom Line

In addition to traditional checking and savings accounts, there are many more options available. Neither is optimal if you are looking for long-term growth of your capital.

Money sitting in a checking account won’t grow at all. The monthly upkeep costs might possibly reduce its worth. Although income earned on savings accounts is better than nothing, at current interest rates it is not enough to keep up with inflation. This means that your money will still have decreasing buying power over time.

Alternative low-risk investments, such as high-yield money market accounts or certificates of deposit, may provide a superior return (CDs). These are safe places to put your money since they are FDIC-insured and yield a bit higher interest than regular savings accounts. U.S. 

Treasuries also fall under this category of reliable investments. Consider dividend stocks, exchange traded funds, and mutual funds if you are willing to take on some risk in exchange for a higher income. There is a chance of experiencing a loss in the near term with these investments. However, the long-term benefits are usually worth it.

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