The Key Differences Between Checking And Savings Accounts And Why You Need Both

Checking accounts are useful for everyday spending, while savings accounts offer higher interest rates on people’s savings. Both of these accounts can be instrumental in helping you reach your financial goals, whether it’s building up your emergency fund or paying off your credit card bills.

Checking vs. savings accounts

There are a few important distinctions between checking and savings accounts. Checking accounts give you fast and easy access to cash, while savings accounts are good for parking your money for longer periods of time.

What is a checking account? 

A checking account is a type of deposit account that you can put money into and then withdraw when you need to make purchases. 

Typically, with a checking account, you can deposit and withdraw money as frequently as you choose, accessing cash via ACH transfer, ATM withdrawals, a debit card linked to the account, or written checks. Sometimes checking accounts offer interest on the money you keep in the account, but it’s typically not as high as the rates offered on savings accounts or money market accounts. 

As long as you’re above the age of 18, you can open a checking account at a bank or credit union. However, it’s possible for some minors to open checking accounts, since minimum age requirements vary by bank and by state. 

Pros and cons of checking accounts 

Checking accounts can be a great option for regular spending—like paying bills or using a debit card to make purchases. However, you should be aware of the different fees such as overdraft fees, minimum balance requirements, monthly maintenance fees, and ATM fees, which could end up costing you money. There are a lot of options, so it’s important to do research before you open an account.

What is a savings account? 

Similar to a checking account, a savings account is a type of deposit account that you can open at a financial institution to store your money. But unlike a checking account, it offers significantly higher interest rates, or APYs, because it’s for emergency funds or money allocated for specific savings goals, like a down payment on a house or a vacation.

There are even high-yield savings accounts, which offer higher APYs. Online banks may provide higher APYs than brick-and-mortar banks, too, because they don’t have to pay operating costs for physical locations, according to Ryan Conte, AVP at BHCU credit union.

If you opt to open checking and savings accounts with the same bank, it can make transferring money between accounts faster, though you might potentially be missing out on higher APYS or lower fees at another bank.

“Ideally, it makes life a lot easier when you can work with one institution that can provide all of those [banking] solutions,” says Colin Walsh, CEO and founder of Varo Bank.

Pros and cons of savings accounts 

If you’re interested in earning more interest on your money (through the power of compound interest), savings accounts are a great option. However, you’ll be giving up some of the flexibility you would get with a checking account. 

Prior to 2020, consumers were restricted to making six withdrawals per month from their savings accounts. That regulation has been waived, but some banks may still have limits on how many withdrawals you can make so read the fine print on your account. Also, keep an eye out for fees like minimum balance and deposit requirements and monthly maintenance fees.

Minimum deposit or balance requirements. Some banks may require that you deposit a minimum amount of money when you first open the account or that you maintain a certain balance (or pay fees).

• Time-consuming money transfers. Transferring money between accounts at the same bank typically occurs immediately, but if you have accounts at different banks, it could take a few days.

The takeaway 

Both checking and savings accounts are essential financial tools that can help keep your money safe. Before you open a checking or savings account, it’s important to understand the difference between the two accounts when it comes to how they’re used, the fees, and the interest rates. 

A checking account is for your everyday expenses, whether it’s buying groceries with a linked debit card or setting up auto-pay for your credit card bills. You won’t receive much interest on the money in your checking account, but you’ll be able to access it as frequently as you want. 

On the other hand, if you’re looking for a deposit account to store your emergency fund, a savings account is a better choice. You’ll earn higher interest rates, but you might be limited in the number of withdrawals you can make each month.

Regardless of which account fits your needs better, pay close attention to any minimum balance requirements and monthly maintenance fees which could end up costing you big bucks if you’re not careful. Also, think about what features are important to you when shopping around. Is being able to visit a physical bank important? What about having overdraft protection on your checking account? 

You might have to do some research to figure out which account is right for you, but it could end up making a big difference for your finances.