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What’s A Checking Account, And How Does It Work?

A checking account is a bank account for your normal money: the cash you might need day to day. Here’s everything you need to know about how they work.

Articles by Andrew Westlin, CFP®

By Andrew Westlin
Financial Planner, Betterment  |  Published: September 13, 2019

Checking accounts are for your daily money: withdrawals, paying bills, and other commonplace transactions.

When choosing a checking account, there are many factors to consider: monthly and transactional fees, special features, and promotions are some to .

Checking accounts are at the core of all of our financial lives.

Like many folks, I’ve had a checking account since I was 18, and while I’ve personally bounced between several banks (mostly because of geographical needs), one thing has remained constant. My checking account is the first thing I turn to for my daily needs: whether that be to pay my energy bill (which is continuously rising in this NYC heat), or to withdraw a $20 bill for pizza and some ice cream. Checking accounts are for your daily or monthly money.

Because of this intimate relationship, your checking account should have some key functionalities. 

Below, you will find Betterment’s guide to checking accounts and the details you should consider when selecting what’s right for you. Please note that Betterment is not a bank.

What are checking accounts good for?

  • Monthly Transactions: Checking accounts generally do not have limits on the number of monthly transactions you can make electronically, through your debit card, or at the ATM. On the other hand, with savings accounts, you may be limited.
  • Variety of ways to use: You can use your debit card at merchants around the globe, withdraw cash from an ATM, make electronic transactions, and even write checks.
  • Automatic transfers to other financial institutions: With a checking account, you can easily transfer money between your own personal accounts or to others.
  • FDIC Insurance: If your bank is an FDIC member, your money in a checking account is insured by the U.S. Government for up to $250,000.  Please see here for more information.

What are checking accounts not good for?

  • Interest Rates: Banks pay an average of 0.06% on checking accounts, and most pay as little as 0.01%. Because of this, you should consider limiting the amount of funds that you keep in your checking account to cover daily or monthly expenses. Keeping too much cash may harm you in the long run due to inflation.

What kind of fees can be expected with a checking account?

  • Monthly Maintenance Fees: Most checking accounts come with a monthly maintenance fee. The fee varies by bank, but is generally in the range of $0-20. Oftentimes there are easy ways to get around this fee, by maintaining a certain average daily balance (set by each bank), or by establishing and maintaining a direct deposit to your account. This can come right from your paycheck.
  • Overdraft Fees: If you withdraw more than the available balance in your checking account, you may be subject to overdraft or Non-Sufficient Fund fees. These fees are generally in the range of $35. Many banks offer overdraft protection, which allows you to link another account (i.e. savings account or credit card) to your checking to prevent overdrafts.
  • ATM Fees: If you withdraw from an ATM outside of your bank’s network, you may be charged a fee, generally $2.50-$3, sometimes more. If you believe that you’ll frequently be in need of physical cash, you might choose to open an account with a bank that has several ATM locations in your area.

Some Things To Know When Opening A Checking Account

  • Requirements: To get your account open, you’ll generally need a government-issued ID. You may need to provide proof of address as well through a copy of a bill. Some checking accounts require a minimum deposit upon opening (can be as low as $25). If you are under 18, you’ll need a cosigner to open.
  • Features: Many of these are listed in the bullet points above, but are all factors you should consider when choosing a checking account. What are the fees associated with your bank? What are the balance requirements? Do you have any withdrawal restrictions? Are there ATMs near where you live or work? Your everyday money doesn’t need all the thrills, but needs to fit in with your lifestyle.
  • Promotions: Some banks will offer promotions for moving over a certain amount of funds or opening multiple accounts at the same time. Of course, this shouldn’t be the only factor you consider, and you shouldn’t keep too much cash in your checking account just to get a bonus. Make sure to read the fine print and familiarize yourself with the promotional details so that you know what you’re signing up for.

Recommended Use Of A Checking Account

A checking account should be used to pay bills and for your day-to-day transactions. Therefore, you need to keep enough to cover these expenses—Betterment estimates that you need five weeks’ worth of expenses in your checking account. Basically, enough to cover one month of bills and other expenses in advance.

Some customers may ask: why not more? We recommend limiting your checking balance for the following reasons:

  • Limits Excessive Spending: The more “free cash” you have, the more likely it is to be spent. Maintaining an appropriate checking balance can help you stay within your spending range.
  • Make Your Money Work Harder: As we reviewed earlier, checking accounts pay a nominal interest rate, making them a poor option for you to grow your money. For the five weeks’ worth of expenses, we are sacrificing growth for every day needs.

For longer term financial goals, consider opening a Betterment investment account that can help you grow your money further.

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