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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.

Articles by Corbin Blackwell, CFP®
By Corbin Blackwell, CFP® Financial Planner, Betterment Published Oct. 03, 2019
Published Oct. 03, 2019
7 min read
  • Checking accounts should not be used for long term savings.

  • Look for savings accounts that pay a competitive interest rate.

  • Betterment’s cash management products can help you earn more money today so you can be more financially secure tomorrow.

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A checking account is a bank account which holds deposits that can be easily withdrawn via check, debit card, or online transfer.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.

Your checking account is the entryway to your financial life. That’s why it’s also important to have a checking account that limits fees, gives you access to most ATMs, and gives you the security of FDIC insurance.

If you open a Checking account, you’ll get just that: no monthly maintenance fees, no minimum balance, unlimited worldwide ATM reimbursements using your Betterment Visa Debit card, and more.

Open your Checking account

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.

What about alternatives to savings accounts?

Not all savings accounts are created equal. Using a high-yield cash account instead of a standard savings account could open the door for you to earn more interest over time and counter the effects of inflation.

Cash Reserve is a high-yield cash account that still holds the key benefits of a savings account while offering a variable APY of *. You can make unlimited transfers from Cash Reserve and it’s FDIC-insured for up to $1,000,000† once deposited at our program banks.

Start saving

Cash Reserve is only available to clients of Betterment LLC, which is not a bank, and cash transfers to program banks are conducted through the clients’ brokerage accounts at Betterment Securities.

When Should I Use A Savings Account?

Since savings accounts high-yield cash 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 specifically in a high-yield savings account, to increase the cushion of earned interest.

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
FDIC/NCUA Insurance Yes Yes
Unlimited Transactions  Yes No
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 or Cash Reserve 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.

Start your journey with Betterment

Betterment Cash Reserve

†Betterment Cash Reserve (“Cash Reserve”) is offered by Betterment LLC. Clients of Betterment LLC participate in Cash Reserve through their brokerage account held at Betterment Securities. Neither Betterment LLC nor any of its affiliates is a bank. Through Cash Reserve, clients’ funds are deposited into one or more banks (“Program Banks“) where the funds earn a variable interest rate and are eligible for FDIC insurance. Cash Reserve provides Betterment clients with the opportunity to earn interest on cash intended to purchase securities through Betterment LLC and Betterment Securities. Cash Reserve should not be viewed as a long-term investment option.

Funds held in your brokerage accounts are not FDIC‐insured but are protected by SIPC. Funds in transit to or from Program Banks are generally not FDIC‐insured but are protected by SIPC, except when those funds are held in a sweep account following a deposit or prior to a withdrawal, at which time funds are eligible for FDIC insurance but are not protected by SIPC. See Betterment Client Agreements for further details. Funds deposited into Cash Reserve are eligible for up to $1,000,000.00 (or $2,000,000.00 for joint accounts) of FDIC insurance once the funds reach one or more Program Banks (up to $250,000 for each insurable capacity—e.g., individual or joint—at up to four Program Banks). Even if there are more than four Program Banks, clients will not necessarily have deposits allocated in a manner that will provide FDIC insurance above $1,000,000.00 (or $2,000,000.00 for joint accounts). The FDIC calculates the insurance limits based on all accounts held in the same insurable capacity at a bank, not just cash in Cash Reserve. If clients elect to exclude one or more Program Banks from receiving deposits the amount of FDIC insurance available through Cash Reserve may be lower. Clients are responsible for monitoring their total assets at each Program Bank, including existing deposits held at Program Banks outside of Cash Reserve, to ensure FDIC insurance limits are not exceeded, which could result in some funds being uninsured. For more information on FDIC insurance please visit www.FDIC.gov. Deposits held in Program Banks are not protected by SIPC. For more information see the full terms and conditions and Betterment LLC’s Form ADV Part II.

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