Think of savings accounts and checking accounts in terms of a day in your life. What are your plans? Are you headed to the grocery store this afternoon or are you planning a hike up a Himalayan mountain? A checking account will serve you perfectly fine at the store, but you’ll need a healthy savings account to visit that mountain.
In the simplest terms, checking accounts are for everyday needs. They’re sometimes called “transaction accounts” for this reason – you transact personal business with them, probably often. Savings accounts are linked to the horizon. They’re for your long-term goals.
There’s no rule that says you can’t have one of each, and this can be an ideal arrangement. In fact, Discover conducted a survey that indicated that 41 percent of all consumers had both savings and checking accounts.
Your Short-Term vs. Your Long-Term Needs
The idea behind a checking account is that you’re most likely going to want to tap into that money on a daily basis to pay bills and to meet your living expenses. You’ll ideally be making at least one deposit a week as well.
Savings accounts, on the other hand, are intended to sit and stay. This is long-term money. You’re not going to withdraw from the account daily to pay a utility bill or to go grocery shopping. A savings account waits for the future, either that Himalayan vacation or as a an emergency fund in case life goes haywire and you find that you must lay your hands on a sum of cash in a hurry, or for some other use that meets your savings goals.
Virtually all the differences between savings and checking accounts stem from this basic concept as they realte to your financial goals: One is “today” money and the other is “tomorrow” money.
Accessing Your Money
You’ll most likely be provided with multiple ways to reach your money when you open a checking account. Virtually all these accounts come with debit cards or ATM cards that you can swipe to pay for those groceries or insert into an ATM machine for some cash – for free and just about anywhere in the country. You’ll get paper checks, too, that you can use to pay that utility bill if you want to it the good, old-fashioned way and mail in your payment.
Read More: How Does a Debit Card Work?
Most banks offer mobile apps and online banking for checking accounts as well. You can get to your money from almost any place at any time. You can even arrange for automatic bill pay service for accounts that you pay every month. Now that’s convenience.
You won't be able to get your hands on your savings quite so easily. Remember, this is tomorrow’s money, and your bank shares that opinion. It doesn’t want you tapping into your account balance on a regular basis – it wants to know that your money is going to stay put there for a while because that’s the foundation of how banks make money. So you’ll probably face some restrictions and rules as to when and how often you can take withdrawals.
Depending on your bank, you might even have to show up in person to make a savings withdrawal. You’ll most likely have to transfer money from savings to your checking account if you want to use your debit card to access your cash in savings unless both your accounts are with the same bank. And federal law actually limits you to six withdrawals from a savings account per month, although this rule can be lifted in states of national emergency, and banks have the right to limit you to fewer than six. Not so with checking accounts.
Will Your Money Earn Interest?
You might be wondering by now why anyone would want to bother with a savings account. They do it because savings accounts can actually earn you a little bit of money, and they keep your money safe from temptation with all those limitations. They pay interest, although not at a sky-high rate, and rates can and do vary by bank. And some banks require that you maintain a minimum monthly balance to earn it.
The money in your checking account is most likely not going to earn you interest. It doesn’t just sit there in your financial institution, for one thing. It’s in and out. You might have $3,000 in your checking account today, then you pay your rent and your balance is half that tomorrow. It can be difficult to calculate interest with all that activity, although, if they do, it will most likely be on your average daily balance. Some banks do pay minimal interest on checking accounts, but it’s typically less than what’s paid on savings accounts, and savings account interest isn’t all that much to start with.
Costs and Fees of Maintenance
Interest earned on an account can easily be offset by bank fees with both checking and savings, and the two types of accounts can be somewhat equal in this respect. You might have to pay to use them.
Many banks charge a monthly maintenance fee for checking accounts, and you’ll pay a overdraft penalty fee if you overdraw your account, spending more than your available balance in the midst of all that hectic, day-to-day activity. Some banks will zap you with an extra fee if you use your debit card to take cash from an “out of network” ATM. The good news here is that most banks provide ways by which you can avoid maintenance fees, such as by making at least a minimum number of transactions a month.
You might have to pay a monthly maintenance fee for your savings account, too. They often kick in when you don’t maintain at least a certain amount of money in the account. This is referred to as a minimum balance charge, but some banks will waive it if you maintain that minimum balance.
As for those six withdrawals you’re limited to each month by federal law, the catch here is that you can actually take more than that, but you’ll pay a penalty fee to the bank for doing so.
Banks Want Your Business
It might sound as though banks are trying to discourage you from placing your money with them, in either a savings account or a checking account, what with all these fees, negligible interest and other restrictions. But, in fact, they want your business very much. They just want to hold your money for you on their own terms.
Some banks offer rewards for frequently using your checking account, and the rewards can be greater than the interest your savings account earned all year, depending on how much you have in savings. Discover Bank offers 1 percent cash back on up to $3,000 in debit card purchases. And some banks offer sign-up bonuses of anywhere from $100 to $500 for opening a checking account with them. Some offer sign-up bonuses for savings accounts, too, and they can be even more, dollar-wise, up to $700 or so.
The Bottom Line
A comparison between checking and savings accounts can all come down to the bank in some respects – and, of course, what you intend to do with the money. Be sure to check that your money is FDIC insured. You'll often see "member FDIC" or "insured by the Federal Deposit Insurance Corporation," although it doesn't hurt to ask for details. Always compare fees, service charges, interest rates and balance requirements before you commit, and do it for both types of accounts. You don’t have to maintain both accounts with the same bank, although it can make life easier if you do, all other factors being equal.
- Bankrate: Checking vs. Savings Account – What’s the Difference?
- Santander: What Are the Differences Between Checking and Savings Accounts?
- Corporate Finance Institute: What Are Checking Accounts vs. Savings Accounts?
- Discover: Should I Choose a Checking Account or Savings Account?
- Capital One: Dollar by Dollar
- Dave Ramsey: What Is a Savings Account?
- National Credit Union Administration. "Share Insurance Fund Overview." Accessed Sept. 6, 2020.
- FDIC. "Transparency & Accountability - Consumer Protection & Deposit Insurance." Accessed Sept. 6, 2020.
- Federal Reserve. "Regulation D, Reserve Requirements," Page 3. Accessed Sept. 6, 2020.
- Ally. "Online Savings Account: High Interest Savings, Rates & Reviews." Accessed Sept. 6, 2020.
- Capital One. "Online Savings Accounts: Performance 360." Accessed Sept. 6, 2020.
- Consumer Financial Protection Bureau. "What Is a Certificate of Deposit (CD)?" Accessed Sept. 6, 2020.
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.