Checking Accounts Vs. Savings Accounts
Banks offer a ton of accounts, loans, and other products.
However, the two most common types of accounts offered by banks are checking accounts and savings accounts.
When you’re opening a bank account for the first time, you might be wondering whether you should start with a checking account or a savings account.
This is an important question, as these accounts are quite different from each other.
In addition, there are multiple types of checking and savings accounts.
It’s important to understand the differences between checking and savings (as well know the various types of checking and savings accounts) before you jump the gun and open the wrong account for your financial needs.
But before we discuss the differences between these two bank offerings…
Do They Share Any Similarities?
Despite their many differences, checking and savings accounts do have a few small similarities.
What Is Done With Your Money
When you deposit your money, you probably imagine the bank taking your physical bills and putting them in a super secure box with your name on it.
It’s like a safer, more secure version of having a mattress stash, right?
Well, that’s not exactly accurate.
See, banks incur expenses to provide you all the conveniences that accompany a bank account.
Not to mention that they want to turn a profit.
So what does your money have to do with it?
It turns out when you deposit your money at the bank, you’re actually lending it to the bank so they can use it to profit.
You money is pooled together with money from other customers so that the bank can lend money to borrowers.
The interest earned on the money makes up a good portion of their profits.
Both checking and savings accounts are insured up to $250,000 per account by the FDIC or by the National Credit Union Association if you’re at a credit union.
Speaking of credit union, check out this article to learn all about credit unions and why you might want to consider switching to one.
In addition, these accounts are backed by the full faith and credit of the US government (as you’ve probably heard/seen everywhere).
We’ve arrived at the end of the similarities between checking and savings accounts.
Let’s talk differences.
First, let’s talk about checking accounts.
There are many types of checking accounts:
- Personal checking – The simplest, most generic type of checking account. These are meant for everyday personal spending.
- Business checking – If you’re self-employed or an entrepreneur, a business checking account will come in handy. These help you separate business expenses from personal expenses; plus, tax time is easier since you’ll have all your business revenue and expense records on your business checking.
- Interest checking – Most checking accounts don’t pay interest, but a some do. The interest isn’t anything to write home about, but you still earn it while receiving all the perks of a normal checking account.
- Student checking – Students tend to have tight budgets and little credit history. Student checking accounts are available for those still in school who can’t afford extra fees.
- Online checking – The same thing as a personal checking account, but wholly online. These are offered by online-only banks, as you might expect.
So what do all these accounts have in common?
When you put your money into a checking account, it’s not locked in there.
In fact, you withdraw or transfer money to and from your checking account as many times as you please.
And barring dollar limits on transfers to or from checking accounts, you can deposit, withdraw, or transfer as much money to and from checking accounts as you want.
Therefore, the checking account is meant for making payments.
Think about it; what’s that slip of paper that you use for larger purchases called?
That’s right, you’re thinking of a check. And thus, checking account.
But the checking account’s accessibility means you can do other things such as bill pay.
Link all your online accounts for things like rent, utilities, loans, and credit cards to your checking account for increased convenience and stress-free payment.
Your typical checking account comes with a debit card.
This card is meant to be used for on-the-go withdrawals from ATMs, as well as for typical purchases like groceries or gas.
Unlike a credit card, a debit card isn’t borrowed money; instead, you’re limited to the funds that are in your corresponding checking account.
But be careful; if you spend more money with your debit card than there is in your checking account, most banks will hit you with pricey overdraft fees.
Always check your balance before using your debit card!
Little To No Interest
Your typical checking account doesn’t pay interest.
This can be a major downside if your money lays dormant for long periods of time.
As we previously discussed, some checking accounts actually do offer interest rates; however, they tend to be much less than the rates on savings accounts at the same bank.
For example, Ally’s Interest Checking is known for it’s extremely high (for a checking account, at least) APY of 0.6%.
That’s pretty high, but it’s nowhere close to the Ally savings account’s 2.20% APY (which is pretty good for a savings account in general as well).
If the only reason for opening a bank account is to earn money on your money, steer clear of most checking accounts.
Remember how you learned banks make profit by lending your money at a higher cost than they pay you for it?
Well another way they make money off you is by charging you all manner of fees.
Both savings and checking accounts have fees, but the list for checking accounts is a lot longer.
We already talked about overdraft fees. These occur when you attempt to make a debit card purchase that costs more than the funds remaining in your account.
Now that’s fair; you can’t spend money you don’t have.
But many fees are quite annoying and can even seem unfair.
For example, take the minimum balance fee.
Yes, you read that right. If you don’t maintain the bank’s minimum balance criteria, they will charge you a fee.
Or how about ATM fees?
Using an ATM that isn’t your bank’s ATM may run you a few dollars; quite an annoyance when all you want is access to your own money!
Since savings accounts don’t have debit cards, that fee is unique to checking accounts.
When you’re opening a checking account, make sure you understand all the terms and conditions so you can minimize all those frustrating fees.
Built For Spending
Checking accounts are much more accessible than any other type of product that banks offer, but at the cost of little or no interest.
They are meant to be used for everyday transactions, bill payments, and other similar uses.
Think of checking accounts as spending accounts.
Banks want you to spend the money in this account; if you aren’t spending it, move it to your savings!
With our discussion of checking accounts at and end, let’s take a look at savings accounts.
Similar to checking accounts, there are multiple types of savings accounts:
- Basic savings – Your run-of-the-mill savings account. You’ll earn interest on deposits.
- Certificates of Deposit (CDs) – Long-term bank accounts; once you put money in a CD, you’re not allowed access for a certain period of time (such as half a year).
- Money market – These are technically a type of savings account, but they are a kind of hybrid between checking and savings. To learn more about these, check out this post detailing everything you need to know about money market accounts.
- Student savings – Again, banks don’t want to leave broke college students out. Some banks offer simpler savings account for people who are still in school.
- Online savings – Basic savings accounts offered by online-only banks.
Basically every savings account pays you interest.
Interest rates can vary; we already mentioned that Ally pays their savings account customers a 2.20% APY.
Contrast that to Chase, who’s savings accounts don’t go above 0.09% APY.
If you’re doing the math, Ally pays almost 25 times more interest on their savings accounts than Chase does!
Heck, even Ally’s checking account’s 0.6% rate is better than Chase.
As for savings interest vs. other interest rates…
Standard savings account APYs are unfortunately no match for things like money market accounts and certificates of deposit.
Also important to note: online savings accounts have some amazing interest rates since the banks don’t have to spend tons of money running physical branch locations.
Almost No Fees
It’d be unfair to nickel and dime you with fees if you can’t move your money around as easily.
Most savings accounts are fee free.
But buyer beware; some banks such as Bank of America require a minimum daily balance in their savings offerings in order to avoid fees.
As always, just make sure you understand the terms and conditions of the account you plan on opening to avoid any unwanted fees.
Unfortunately, your savings account’s funds are much less accessible than a checking account.
In fact, the federal government limits both withdrawals AND transfers from savings accounts to only six per month.
Otherwise, you’re hit with fees.
The only transfers you should be doing from a savings accounts are to fund your checking account so you can pay for something.
Or perhaps for emergency purposes.
Savings accounts are very commonly used for building an emergency fund due to their limited accessibility.
Since you won’t be touching your savings account very much and they earn some interest yet not as much as most other assets, they make a great home for your emergency fund.
The money market account DOES allow you to write checks directly from the account, but you can only write a few a month.
No Debit Card
Savings accounts aren’t accompanied with a debit card.
This shouldn’t come as a surprise, seeing as the money you put in a savings account is only supposed to be accessed on rare occasions.
Again, If you want to spend the money in your savings account, you need to transfer it to your checking account first if it’s not a money market account.
Built For The Long-Term
Savings accounts are used for longer-term goals.
And although some types of savings accounts have checking account features, they’re still savings accounts at their core.
You are limited in the amount of times you can make withdrawals from your savings account, but you’ll also earn interest.
In addition, there are less types of fees that your savings account can be hit with.
All of this is to encourage you to save your money for a rainy day.
I mean hey, it’s in the name.
Have Both For The Best Results
Beyond the way banks use your money and the FDIC/NCUA insurance, checking and savings accounts are completely different.
But take a closer look.
For every base that the checking account fails to cover, the savings account makes up for it.
They are meant to be complementary.
You’ll get the best results from opening both accounts.
Use your checking account for everyday purchases and to pay bills.
Beyond having enough in case of accidentally overdrawing your account, try to maintain as little extra money as possible in your checking account.
Use your savings account to store your extra cash and build up a significant emergency fund.
Let your emergency fund earn a bit of extra interest; free money never hurts, no matter how little.
And don’t forget to look into the more “advanced” bank products like CDs or money market accounts; these offer other unique features that can diversify your return on your deposited funds.
By combining the functions of both of checking and savings accounts, you’ll get much more out of your money and more accurately manage your money.