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Checking And Savings Accounts

The Two Account Types

Credit cards and debit cards are two of the most commonly used payment methods, offering convenience and ease of use. They might appear similar, but their underlying mechanisms, benefits, and risks differ significantly. Understanding these differences is crucial for making informed financial decisions.

Purpose

Checking accounts are bank accounts designed for day-to-day transactions, including deposits, withdrawals, and payments. This account is essential for everyday finances, facilitating daily purchases, paying bills, and receiving income.

 

Savings accounts, on the other hand, are meant for storing money and earning interest over time. They are not typically used for daily transactions but are ideal for building an emergency fund or saving for specific goals. 

Interest

When you store money at a bank, they are reinvesting it, such as making loans to other clients, to generate revenue. If you withdraw your money often, they will have to scramble to pay you back. Thus, they will try to incentivize you to store your money with them for an extended period, such as offering interest.

 

For bank accounts, interest is the money earned on the balance in your account, calculated as a percentage of the amount you have deposited.

 

Checking accounts generally provide no interest, or very little. The accounts are designed for everyday finances and transactional convenience. This doesn’t align with the goals of paying interest

 

Savings accounts offer significant interest, as they are trying to incentivize you to store money for a long time. 

Accessibility of Money

Checking accounts offer unlimited transactions and the best access to your money. Banks often have features like debit cards, checks, online banking, and mobile apps you can link to your account to streamline transactions. 

 

Savings accounts also have access to those features but have ways of discouraging you from making transactions. They often have withdrawal limits and fees for withdrawing money. 

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Fees

Fees differ based on the bank and the package, but here are some common ones for each. 

 

For checking accounts: 

  • Monthly fees – Banks may charge a monthly fee for maintaining a checking account that comes with a debit card. This can often be waived. 

  • ATM fees – Some cards charge you for using ATMs from other payment networks, or in foreign nations.

  • Foreign transaction fees — Making purchases in foreign currencies might lead to being charged a foreign transaction fee.

 

For saving accounts: 

  • Monthly fees – Banks may charge a monthly fee for maintaining a checking account that comes with a debit card. This can often be waived. 

  • Excessive transaction fees – A penalty for making transactions too frequently. The limit is usually 6 per month in the US. 

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Minimum Balance Requirments

Banks often have a minimum balance they would like you to hold in the accounts. 

 

For checking accounts, the minimum balance is less emphasized. You often don’t get punished for going below, and it’s often just a way to waive the monthly fee. 

 

For saving accounts, you might also get penalized with fees and lower interest rates. Though it is still a way to waive the monthly fee. 

Security

No matter what kind of account you open, banks will do their best to ensure your money is secure. For instance, there would be fraud monitoring and alerts for unusual activity. 

 

Also note that in the US, the Federal Deposit Insurance Corporation (FDIC) will insure your money for up to 250,000 USD, per account category. 

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​Should I Open a Checking or Savings Account?

It really comes down to your goals!

 

If you are looking to make frequent transactions, a checking account is the way to go. 

 

If you are trying to store money for a while, and want to accumulate interest, savings accounts are ideal. 

 

Or, why not both? Many people benefit from having both a checking and a savings account. This allows them to manage daily expenses while also setting aside money for future needs.

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TL;DR

  • Checking accounts are ideal for daily transactions and provide easy access to your money through debit cards, checks, and online banking. However, they usually don't earn interest.

  • Savings accounts are designed for storing money and earning interest over time. They have limited access and often include withdrawal restrictions to encourage saving.

  • Checking accounts typically offer little to no interest, while savings accounts provide higher interest rates to incentivize keeping money in the account for longer periods.

  • Checking accounts allows unlimited transactions, making them perfect for frequent use. In contrast, savings accounts might have limits and fees for excessive withdrawals.

  • Both account types may come with fees, which vary depending on the bank and account package. Checking accounts might have monthly fees, and savings accounts could impose fees if you make too many withdrawals.

  • Both account types are insured up to $250,000 by the FDIC in the U.S., and they include fraud monitoring to protect your money.

  • If you need an account for frequent transactions, a checking account is the best choice. If your goal is to save money and earn interest, a savings account is more suitable. Many people benefit from having both types of accounts.

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