Smart banking: Checking vs. savings

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Perhaps you think having a savings account is a nice, but unnecessary, banking option. Bankrate tells you why the difference between a checking and savings account is important -- and why you need both.

Not much in common

You wouldn't know it by looking at a checking account disclosure, but they average 44 pages, according to a study by The Pew Charitable Trust. Still, bank accounts aren't really that complicated.

Checking and savings accounts are basically an arrangement to lend money to a bank in the form of deposits, which they promise to keep safe until you withdraw or spend it.

RATE SEARCH: Get some interest on your savings starting today by shopping money market accounts.

That promise is backed by the Federal Deposit Insurance Corp., which fully insures checking and savings deposits up to $250,000 per person, per account, which is in turn backed by the full faith and credit of the U.S. government. The National Credit Union Association does the same for checking and savings accounts held at credit unions.

That's pretty much where the similarities end.

Checking accounts

Transactional: Traditional checking accounts are transactional accounts, meaning banks expect account holders to frequently take out money, with few restrictions on the timing or amount of those transactions.

"You could put $1 million in right now at 11:36 and pull $1 million out at 11:37," says William Mahnic, associate professor of banking and finance at Case Western Reserve University's Weatherhead School of Management.

To help make those transactions as convenient as possible, checking accounts typically come with the ability to make payments with a checkbook, debit card and even mobile apps.

Typically paid for by fees: Checking accounts usually carry fees for a long list of services or account holder missteps, such as not carrying a high enough balance, using another bank's ATM or for covering an overdraft. Banks attach so many fees for 2 reasons, says Drew Lamparello, solution architect for Carlisle & Gallagher Consulting Group:

  • Banks can't count on your money staying in checking accounts very long, so they have to hold a greater amount of your money in reserve than they would for a savings account, and they can't lend it out. Instead, they make money on checking accounts through fees.
  • Keeping a close eye on a lot of transactions incurs administrative costs for the banks.

No interest payments: Most traditional checking accounts don't pay any interest to account holders, no matter how much is in the account.

Limited transactions: Banks are required by the Federal Reserve to limit the number of transactions that savings account holders are allowed to make to no more than 6 per month, just 3 of which can be payments to people outside the bank. Any more than that and banks are required to impose some kind of penalty, and if the behavior continues, convert the account to a transactional one, Lamparello says.

Savings accounts

Longer-term investment: Savings accounts are closer to a form of investment than a transactional account, Mahnic says. You're giving a bank access to your cash, typically for longer periods than with checking, so they can loan out almost all of it to earn a return.

Harder to spend: By design, money contained in savings accounts is hard to spend directly. Savings accounts typically don't have check-writing privileges or debit cards attached to them, so in many cases, you'll need to withdraw or transfer it before you spend it, Lamparello says.

Few fees: With savings accounts, banks make money off the "spread" -- the difference between the interest rate they pay you and the interest rate on the loans they fund with your money, Mahnic says. Because of that, and the fact that they don't cost as much as checking accounts to administer, banks typically charge little, if any, fees on savings accounts.

Pays interest: Current yields on savings accounts may not be great, but they may be able to help you accumulate a little more cash over time.

"Even though rates are very, very low right now, you will get interest," Mahnic says.

Why you need both

It's very likely you have a checking account.

While they are a convenient way to pay for things, checking accounts are terrible places to save. Not only can money be drawn out quickly by savers themselves in moments of weakness, but checking deposits make a ripe target for thieves, Mahnic says.

Because of consumer protection laws regarding fraud, the bank will most likely end up making you whole again, but meanwhile, you're stuck.

"That's a lot of blood, sweat and tears, and a lot of time you have to wait," Mahnic says. "I'd rather have an account that people don't see when they get a check from me and don't see when they get an electronic payment from me."

Easy to have both

If you're worried about the hassle of managing multiple accounts, it's easier than ever, with the ability to bank online and via mobile, says Jeff Blyskal, senior editor at Consumer Reports. Having 2 accounts can even allow you to dodge checking fees in some cases.

"Especially now when it's so easy with mobile banking, at the same bank, you can have several different accounts, and you can probably arrange it in a way that you're not paying too many fees with direct deposit and such," Blyskal says.


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