Perhaps you think having a savings account is a nice, but unnecessary, banking option. But you may benefit from having both types of accounts. Understanding the differences will help you decide.
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.
That promise is backed by the Federal Deposit Insurance Corp. (FDIC), 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 (NCUA) does the same for checking and savings accounts held at credit unions.
Savings accounts and checking accounts are equally safe as long as they’re held at an FDIC-insured bank or at an NCUA credit union.
That’s pretty much where the similarities end.
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.
To help make those transactions as convenient as possible, checking accounts typically come with the ability to make payments with a checkbook, debit card, mobile apps and payment services such as Zelle that allow you to send money to yourself or to other people, even if they bank elsewhere.
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. But there are usually ways to avoid these fees. For instance, a bank may have an account that reimburses foreign ATM fees – at ATMs out of its network – or by having a qualifying direct deposit you may be able to waive the monthly maintenance fee.
Banks attach many fees for two reasons:
- Banks can’t count on your money staying in checking accounts very long, so they must 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. This may include earning money based on point-of-sale transactions when you use your debit card for a purchase.
- 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. But you can find checking accounts that pay interest if you shop around. Though, generally, they won’t pay more interest than savings account and money market accounts.
Longer-term investment: Savings accounts are closer to a form of investment than a transactional account. 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. You’re limited to six convenient transfers or withdrawals per month from a savings account. Generally, checking accounts don’t have restrictions on withdrawals or transfers.
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. You may be able to initiate a wire transfer from a savings account, but generally this will fall under your limit of six transactions per statement cycle.
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. 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. Shop around to make sure you get the best rate on a savings account. Yields on savings accounts have improved significantly during the past few years. There have been nine Federal Reserve rate hikes since December 2015, including four last year. These increases are a part of the reason it’s easy to find a savings account yielding at least 2 percent APY. You can compare rates on savings accounts on Bankrate to find the right account for you.
Why you need both
It’s very likely you have a checking account.
While they’re a convenient way to pay for things, most 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.
Because of consumer protection laws regarding fraud, the bank will likely end up making you whole again, but meanwhile, you’re stuck.
And 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. Having two accounts can even allow you to dodge checking fees in some cases.
Just make sure you comply with Regulation D limits, which restrict you to six convenient transfers and withdrawals from your savings account per statement cycle. These limited convenient transfers from a savings account include preauthorized, automatic transfers; transfers and withdrawals made by telephone, fax or computer; and transfers made by check, debit card or other similar methods that are payable to third parties, according to the Federal Reserve. A checking account generally doesn’t have limitations on the number of transfers or withdrawals out of it, according to Regulation D.
Generally, checking accounts and savings accounts allow an unlimited number of ATM withdrawals – assuming the savings account has ATM access.
There aren’t usually different limits on the amount you can withdraw from a checking or savings account. But it’s possible that your bank could require seven days’ notice for a savings withdrawal – though this right is rarely exercised, according to the Federal Reserve. A checking account is also known as a demand deposit account (DDA). A DDA doesn’t reserve the right to require at least seven days’ written notice of a withdrawal, according to the Federal Reserve.
Advantages of keeping your money in a savings account vs. checking account
The top reason to keep your money in a savings account is to earn more interest. Generally, savings accounts earn much more interest than checking accounts. A savings account is where you should deposit money that you’re not planning to use but would need for unexpected expenses.
Savings accounts are also an appropriate place for other funds that you’re accumulating, such as money to save for a down payment on a home or any future goal that you’re saving for.
A checking account should be thought of as a transaction account – the place where your monthly bills will be paid from, where you’ll write checks or have money electronically drawn from to pay bills. A checking account should have a cushion. But the bulk of your money after the essential amount to pay bills should be in a savings account so that it can accumulate the maximum amount of interest with a high APY.