What is the difference between a checking account and a savings account? Find out how each impacts the accessibility, security, and profitability of your bank account, and how to find the one that best suits your needs.
Our articles, research studies, tools and reviews maintain strict editorial integrity; however, we may be compensated when you click or are approved for offers from our partners.
What type of bank account do you need the most: a checking account or a savings account?
If you’re like a lot of people, you need both types of accounts because each is good for a different purpose.
The following comparison between checking and savings accounts can help you choose the right account for specific financial situations.
How chequing and savings accounts differ
Checking accounts and savings accounts are extremely secure types of bank accounts that allow you to access your money at any time.
The big difference is that checking accounts are primarily designed to help you make regular payments, while savings accounts are better suited to building up a reserve of money for future needs.
At the heart of this difference is a legal limit of six transfers per month from a savings account to a third party (i.e. someone other than the bank or yourself). Since checking accounts have no limit on the number of transactions you can make, they are best suited for routine transactions like paying bills.
In addition to this legal distinction, the current account and the savings account each have different characteristics and characteristics described below:
1. Interest rate
Generally speaking, savings accounts tend to pay higher interest rates than checking accounts.
Banks can use the money you deposit with them for lucrative activities such as lending. Since transactions in savings accounts are limited, account balances tend to be more stable and therefore money is readily available to the bank for lending purposes.
As a result, banks are able to pay a higher rate of interest on savings accounts. So, unless you need to use your money in the near future, it is better to keep money in a savings account rather than a checking account.
2. Monthly fees
Another key distinction between checking accounts and savings accounts is the monthly account maintenance fees.
Although some savings accounts charge a monthly fee, this is more of the exception than the rule. In contrast, most checking accounts charge a monthly fee, and that’s not cheap.
MoneyRates.com’s most recent checking account fee survey found that almost two-thirds of all checking accounts charge a monthly fee. The average amount of these fees is $ 13.47, which works out to $ 161.64 per year.
3. Transfers or withdrawals
You can withdraw money directly from a checking account whenever you want, but the transaction restriction applies when it comes to making payments to third parties.
Since savings accounts are limited to six third-party transfers per month, you may find that they are unable to keep up with the amount of routine bill payments you have to make. Checking accounts are well suited for these types of frequent transactions, whether you’re doing them by writing an old-fashioned paper check or through automatic payments or wire transfers.
4. Security of account balances
Here’s one thing that checking and savings account balances have in common: Both are covered by federally guaranteed deposit insurance.
If your money is deposited into a checking or savings account at a US bank, it is covered by Federal Deposit Insurance Corporation (FDIC) insurance up to $ 250,000. This means that even if the bank goes bankrupt and is unable to reimburse customers, FDIC insurance will cover these deposits.
The $ 250,000 deposit insurance limit applies to your total deposits with a bank; thus, if you have a savings account and a checking account at the same bank and the combined balances of those accounts exceed this limit, only $ 250,000 is covered.
However, you can get more coverage if you spread your money across multiple banks so that you don’t have more than $ 250,000 in one bank.
If your money is with a credit union, it’s covered by a similar insurance program backed by the federal government and administered by the National Credit Union Administration.
Under normal circumstances, bank failures are quite rare – but deposit insurance can be crucial at times like the financial crisis which saw 465 bank failures in a five-year period starting in 2008.
How chequing and savings accounts are used
As mentioned earlier, checking accounts are well suited for the regular flow of money in and out of your account. They give you several ways to pay your bills efficiently, including by check, automatic payments, or wire transfers.
Savings accounts are best suited for account balances that you want to keep and that increase over time. They can be used to accumulate savings for future needs such as a down payment on a house or retirement. They can also be used to hold an emergency fund in reserve for unforeseen needs.
Alternatives to chequing and savings accounts
In addition to checking and savings accounts, there are other financial tools that can play similar roles in certain situations. Here are some alternatives to consider:
Because they are designed for frequent transactions, credit cards can be used to pay for regular expenses instead of a checking account.
The main disadvantage of credit cards is that they charge relatively high interest rates, but these can be minimized if you pay off your balance in full and on time each month.
Using a credit card when your checking account is low can help you avoid risking overdraft fees, although it makes more sense when you’re sure you’ll have the cash on time. pay the credit card bill by the end of the month.
Money market accounts
Banks invest deposits in money market accounts differently from deposits in savings accounts; but, from the customer’s point of view, they work the same as a savings account.
Money market accounts pay interest and are limited to six third party transactions per month. Since money market accounts pay competitive interest rates compared to savings account rates, including them in your rate comparisons gives you a better chance of finding a better rate.
Certificates of deposit (CD)
If you know that you are unlikely to need your savings for a while, a CD can be a good alternative to a savings account. Certificates of deposit hold your money for a fixed period of time, and in return, they often pay higher interest rates than savings accounts.
If you can go long term with at least some of your savings, using a CD instead of a savings account is a good way to earn more interest.
With checking and savings accounts, as well as other financial alternatives, it’s not a question of whether one type of account is generally better than another. It’s about knowing which one fits your needs.
Deciding how you should use your money will go a long way in determining the type of bank account you need. When you think about your different financial needs, you might find that you need both savings and a checking account.