Checking vs Savings Accounts

If you’re new to banking, you may be wondering whether to open a checking account, a savings account, or both. But what exactly is the difference between the two, and why might you want or need one, both, or neither?

Both good questions. Let’s get busy providing you with some equally good answers.

Both Checking and Savings Accounts Are Purpose-Driven Accounts 

Checking accounts and savings accounts are designed for different purposes, which really come down to timing and intent.

A checking account is considered a transactional account. It is designed primarily for you to move money in and out of it in order to pay for expenses and purchases. You keep money in a checking account knowing that you’re going to be using it to make payments, whether that’s in the form of a written check, an electronic transfer, a debit card transaction, or a digital wallet. But that money is earmarked to be used to pay for expenses you plan on incurring—as well as expenses you may not have planned for.

A savings account, on the other hand, is designed primarily to help you save money. The money in a savings account is typically deposited with the intention of mostly leaving it alone so it can earn interest. While you can still withdraw money from a savings account for purchases or to pay expenses, there are restrictions on the types and amount of access you have, which we’ll get into in a moment. 

Your Money Is Safe (Up to a Limit) in Both Checking and Savings Accounts 

Both accounts are federally insured, so you don’t need to worry about losing your money should the bank or credit union with whom you have the account fail. Money in a checking or savings account opened with a bank is  federally insured by the Federal Deposit Insurance Corporation (FDIC), up to $250,000 per account owner, per insured bank. Money in a checking or savings account opened with a credit union is federally insured by the National Credit Union Association (NCUA) for up to $250,000 per share owner, per credit union.

So long as you keep your deposit in either type of account below $250,000, it is backed by the full faith of the United States government. However, if you keep more than $250,000 in either a checking or savings account, you could lose any money over and above the $250,000 limit should the bank or credit union fail. But this risk can be easily mitigated simply by spreading your money into multiple accounts with different banks or credit unions and keeping each account balance at or below $250,000.

Do Both Checking and Savings Accounts Pay Interest?

A savings account pays interest on your deposit, and some checking accounts pay interest as well. However, a savings account will typically pay a higher interest rate than an interest-bearing checking account because, as mentioned, savings accounts are designed to entice you to leave your money in them for a while. If checking accounts paid interest rates as high or higher than savings accounts, there wouldn’t be much incentive for you to leave your money in a savings account, given you have more access to it in a checking account.

Some savings accounts known as high-yield savings accounts pay substantially higher interest rates than standard savings accounts, but typically have additional restrictions and requirements, such as requiring higher minimum deposits to open the account.

Checking Accounts Typically Come with ATM and Debit Cards

Because a checking account is a transactional account, most banks and credit unions provide multiple ways to access your money. Along with the ability to write checks, you can also make payments and/or purchases from a checking account via a debit card linked to the account. That same debit card typically also serves as an ATM card, allowing you to withdraw money from the account from automated teller machines. 

With a savings account, you cannot write checks on the account or make debit card payments or purchases because savings accounts don’t offer debit cards or checks. They do typically come standard with an ATM card, however, so you are able to make ATM withdrawals and deposits with a savings account. 

Savings Accounts Are Subject to Additional Restrictions Spelled Out in Federal Regulation D

Because a savings account is not a transactional account, it is subject to federal rules and regulations that a checking account, a transactional account, is not. These rules and regulations fall under what’s known as Regulation D. Reg D limits the types and number of transactions you can make each month with a savings account (or money market account), including but not limited to the following:

• Online transfers
• Phone transfers
• Overdraft transfers to a checking account
• Automatic transfers for bill paying

Both Savings and Checking Accounts May Charge Fees 

Fees charged for savings and checking accounts may vary by bank or credit union and the type of account you have. Two of the most common fees associated with savings accounts are monthly maintenance fees and excessive withdrawal fees (a violation of Reg D). There may also be fees for ATM withdrawals that exceed any designated monthly maximum or are made with out-of-network automated teller machines. Again, depending on the institution with whom you opened the account, you may be able to waive certain fees by meeting certain requirements, such as waiving the maintenance fee by maintaining a minimum balance. 

Checking account fees also vary by financial institution, but there are typically more fees associated with a checking account than with a savings account because there are typically more transactions made. Some of the more common checking account fees include:

• Monthly Maintenance Fee: Just like with many savings accounts, this fee is charged for maintaining and servicing your account. You may be able to avoid it by maintaining a minimum balance or meeting other requirements such as opting for electronic statements over paper ones.
• Overdraft Fee: This fee may be charged for writing a check with insufficient funds—if the account issuer offers overdraft protection.
  
• Non-Sufficient Funds (NSF) Fee: If overdraft protection isn’t offered and your check “bounces,” you may be charged an NSF fee.

Do I Need One, Both, or Neither of These Accounts? 

“Need” is a strong word. If you want to operate on a strictly cash basis, you can probably get by with neither, but that’s not terribly realistic in the world we live in today. And, if you’re keeping your cash under your mattress, it’s not protected like it would be in either of these accounts.

At the minimum, you’ll probably want a savings account in which to keep your money so that it’s protected and earning interest. You can still access it, and you’ll probably sleep better knowing you’re not just one home break-in away from losing your money. You can also use a savings account to pay bills electronically, which is very convenient.  

A checking account is a convenient way to handle bills, purchases, and other expenses. Even if writing checks isn’t your thing, you can pay bills electronically with a checking account, and a debit card is a convenient way to make purchases. Checking accounts are also typically used for direct depositing paychecks from employers, although savings accounts can be used as well.

Having both a savings and checking account provides the most flexibility and options. With both, you can pay your bills easily and build savings for tomorrow. And, if you need to transfer money from savings to checking—or vice versa—it can typically be done very easily.