Checking vs. Savings Account: What’s The Difference?
What are the differences between checking and savings accounts? Learn the pros and cons of each, and find out how you can use them to meet your financial goals.
Checking accounts should not be used for long term savings.
Look for savings accounts that pay a competitive interest rate.
Knowing the key differences between checking and savings accounts can help you make the most of your money.
Today, we rely heavily on our computers and smartphones to accomplish daily tasks— from ordering dinner and scheduling doctors appointments to paying bills. In keeping with this trend, it’s not surprising that online banking continues to increase in popularity.
In the next few years, digital banking is expected to become a $9 trillion industry. Already, the online financial space has seen lots of innovation and everyday there seems to be more and more banking options to choose from.
Before choosing the right online bank for your needs, it’s important to understand the fundamentals.
The two most common bank account types are checking and savings accounts. With this article, we hope to clarify what these two accounts are, as well as when and how to use them appropriately. Please note that Betterment is not a bank and this article is intended to be purely educational.
What Is A Checking Account?
A checking account is a bank account which holds deposits that can be easily withdrawn via check, debit card, or online transfer. Your classic checking account does not pay interest, and is used as a transactional account. It might even be the first account you opened, if for no other reason than you needed an easy place to deposit your first paycheck or easy cash earned on the side through babysitting, yard work, odd jobs, etc.
When Should I Use A Checking Account?
Since checking accounts allow for unlimited transactions, these are great accounts for your day to day expenses. We recommend using your checking account for short term spending needs but not as a holding tank for the bulk of your savings since in most cases, you won’t earn any interest.
What Is A Savings Account?
A savings account is a bank account that is designed to hold longer term deposits. Banks lend out your savings deposits to other banks in exchange for interest. Then, your bank passes along some of the interest earned to you, as compensation for allowing them to lend out your money.
Due to a Federal Reserve regulation, there is a monthly limit on the number of convenient transactions you can make from a savings account: each month, you can usually only make six transfers.
However, while most common transactions are limited to six per month, not all transaction types fall under this regulation. In person transactions at a bank, over the phone withdrawals when a check is requested, and ATM transactions are not limited to six per month.
When Should I Use A Savings Account?
Since savings accounts pay interest, this can be a great option for longer term savings. For large expenses that are coming up in the next year or so, a savings account is a great option.
With a time horizon of less than one year, a savings account will help you earn some interest without exposing you to market risk. In addition, some people may choose to keep their emergency fund in a high yield savings account.
Because of the transaction limit, a savings account can help reduce the temptation to dip into your funds. But, for longer term expenses, we recommend reducing idle cash by investing in an appropriate mix of stocks and bonds. Betterment offers many tools to make investing for your long term goals easy and efficient.
Which Bank Accounts Are Insured?
Both savings and checking accounts are offered by banks and credit unions, and as such, both types of deposit accounts may be eligible for deposit insurance up to $250,000 if the bank or credit union is a member of the FDIC or NCUA.. This means that if your bank or credit union were to fold, you would be able to recoup your balance up to $250,000.
Banks have FDIC insurance, whereas coverage for credit unions is NCUA insurance. In either case, the $250,000 limit is per depositor, per FDIC-insured bank, per ownership category. For example if you have $15,000 in your checking account in Bank A and $260,000 in your savings account in Bank A, you would only have $250,000 in FDIC insurance. If you and your spouse had a joint savings account with $500,000 all $500,000 would be covered under FDIC insurance since there are two owners. You should always make sure that your cash deposits are FDIC/NCUA insured.
Comparing Checking vs. Savings
|Checking Accounts||Savings Accounts|
|Earns Interest||Typically No||Yes|
|Debit Card/ Check Writing Ability||Yes||Typically No|
How Checking And Savings Come Together
While checking and savings accounts should play different roles in your financial life, using both accounts in combination with appropriate investment accounts is a better way to maximize your money.
We recommend having no more than three to five weeks worth of expenses in your checking account at any one time.
Think of your checking account as a quick “layover” stop for your cash: useful for getting to where you need to go, but certainly not the final destination. Ideally, your cash would only have a short “layover” in your checking account before being used to pay bills and make transfers to your longer term savings and investment accounts.
Because of the unlimited transfers and easy access via checks and debit cards, checking accounts play a very useful role in your financial life, but you should not settle for keeping all of your cash there. Your savings account on the other hand, is appropriate for longer term savings. The interest some savings accounts pay can help your cash grow over time without any extra work on your part.
In addition, the six transactions per month limit can be useful in helping you avoid unnecessary spending.
Now that you hopefully understand these accounts better, it’s important to shop around for a bank that will provide you with low fees and competitive interest rates in order to help fully maximize your cash.
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