Checking and savings accounts are the two most common financial products. Most Americans use one or both of them. Essentially, a checking account is used to manage your spending money on a day-to-day basis. A savings account, meanwhile, is used to hold cash over time. Understanding these differences will allow you to get the most out of whatever type of account you use.
For more help managing your own money, consider working with a financial advisor.
Checking Account Basics
A checking account is what’s known as a “depository account,” meaning it is financial product insured by the FDIC for up to $250,000 and intended to hold money safely. This is as opposed to an investment account, which is uninsured and intended to grow money by purchasing and trading securities.
The purpose of a checking account is to give you access to your stored money. The account is used for routine, daily transactions and withdrawing money on a regular basis. Checking accounts typically come with tools to directly withdraw money from the account, including ATM cards and old-fashioned checkbooks.
Since checking accounts are intended for regular withdrawals they typically pay little, if any, interest. Banks can’t rely on this money remaining in the account over time, so they don’t pay much to use it.
A checking account is useful for money that you want access to. It is less useful for money that you want to hold long term, or money that you want to see growth from.
Savings Account Basics
A savings account is also a depository account, meaning that it too is an FDIC insured financial product intended to hold money safely. The purpose of a savings account is to give you a place to store your money long term. The account is used for holding money that you don’t intend to access on a regular basis, but which you do want to keep in cash. This can include saving money for a specific purpose, such as setting money aside for a long term goal, or simply holding money that you don’t intend to spend right away.
The advantage of a savings account is the interest rate. Unlike a checking account, a savings account will pay some interest so that your money can grow over time. This interest is higher than a checking account, but is typically negligible relative to the returns of even a conservative investment portfolio. Interest in a checking account is also frequently lower than the rate of inflation
However, a savings account is not designed for easy access to your money. With a typical savings account, you do not get direct access to the money. It’s unusual for a savings account to have products like an ATM card or check book that lets you spend or withdraw money from the savings account. Instead, you typically have to transfer money from savings to checking before you can spend it. By law, with a typical savings account you make this transfer up to six times per month.
There are high-yield savings accounts available. If you’re going to use a savings account, these may be the best option. As of April 2023, a number of financial institutions were offering these with an annual percentage yield well above 4%.
This is the tradeoff with a savings account. The structure around this account gives your bank more predictability, so in exchange they pay you more interest. However, the structure around this account also gives you less access.
Which Should You Use?
Most households will want both a checking and a savings account, with their money divided between the two. Put money in a checking account if you want to have short-term access to it. In general, this is a good account to keep money that you’ll need during the next month. That allows you to have access to money for bills and spending, while also keeping relatively little cash in a functionally zero-growth fund.
Put money in a savings account if you want to keep it for long-term savings. In general, this is a good account to keep money that you would like to have safe and in cash, but that you don’t need access to in the immediate future.
It’s important to remember that a savings account will not substitute for an investment portfolio. This is an account for money that you want to keep safe but the interest rates offered by a savings account are, generally, best considered a bonus. Interest is a good reason to keep money in savings rather than checking, but it will not offer significant growth. If you’re looking to grow your money, you most likely need an investment portfolio rather than a savings product.
A checking account offers you access to your money but with little or no interest. A savings account offers you an interest rate with more restrictions on access. Both are used for storing cash safely.
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