Is there a “Right” Bank Account? Decoding the Differences Between Checking and Savings
You know you need a bank account, but with so many options it can be daunting to make a choice. Are you worried about overdrawing and being hit with fees? Or maybe you’re tired of searching for the account with the best interest rate because they’re always changing? If you’re looking to start better managing your finances, the best place to start is to understand the fundamental differences between checking and savings accounts. While each type of account serves a different purpose, they will both be important on your financial journey.
Key Differences Between Checking and Savings Accounts
The simplest explanation is that a checking account is intended for everyday transactions and payments, while a savings account is meant to store money for future goals.
Let’s take a further look at some of the key differences between them:
- Purpose
- Checking Account: This account is perfect for your daily expenses and transactions, like paying bills and withdrawing cash.
- Savings Account: As the name suggests, this account is designed to help you save money for specific goals or emergencies.
- Interest Rates
- Checking Account: Usually, checking accounts don’t offer high-interest rates, or sometimes they may not offer any interest at all.
- Savings Account: On the other hand, savings accounts offer higher interest rates to help your money grow over time.
- Access to Funds
- Checking Account: With a checking account, you have easy access to your funds whenever you need them. Write a check or swipe your debit card—it’s quick and convenient!
- Savings Account: To encourage saving, savings accounts typically have higher interest rates. This helps you resist the temptation to dig into your savings for unnecessary expenses, in order to earn more interest from your funds.
- Fees and Requirements
- Checking Account: Some checking accounts may have monthly fees or require a minimum balance to avoid those fees. Make sure to check the terms and conditions.
- Savings Account: In contrast, savings accounts often have no fees, but they might require you to maintain a minimum balance to earn the advertised interest rate.
Not All Savings Accounts are Created Equal
When considering savings accounts, there are a few different options to choose from such as a traditional savings account, high-yield savings account, health savings account (HSA), or money market account. Each of these accounts offers distinct features that cater to different financial needs and goals.
- Traditional Savings Account: A traditional savings account is a standard account offered by banks that allows individuals to deposit funds and earn interest on their balance. According to CNBC, 57% of Americans keep their savings in traditional savings accounts which are typically used for short-term savings goals or emergency funds. Though monthly transactions are limited, you still have relatively easy access to your funds with the ability to withdraw money at any time without penalties. However, interest rates on traditional savings accounts tend to be lower compared to other options like high-yield savings accounts or money market accounts.
- High-Yield Savings Account: A high-yield savings account typically offers a higher interest rate, or higher yield, compared to traditional savings accounts. This means that the money you deposit in a high-yield savings account will earn more interest over time, helping your savings grow faster. These accounts are usually offered by online banks or financial institutions and often have no monthly fees or minimum balance requirements.
- While they may have some limitations, such as a cap on the number of withdrawals allowed per month, high-yield savings accounts are a great option for people looking to maximize the growth of their savings without taking on too much risk.
- Health Savings Account: In contrast, a health savings account is a tax-advantaged* account specifically designed to help individuals save for future medical expenses. HSAs are available to individuals with high-deductible health plans and offer the opportunity to contribute pre-tax dollars to cover medical costs. Unlike traditional savings accounts, funds in an HSA can be used for qualified medical expenses without being subject to taxes. Additionally, any unused funds in an HSA can roll over from year to year, providing a valuable tool for long-term healthcare savings.
*GSB does not provide tax advice. Please consult a tax professional for tax-related questions - Money Market Account: Lastly, a money market account combines the features of a traditional savings account with the higher interest rates typically associated with certificates of deposit (CDs). Since money market accounts offer a higher yield compared to traditional savings accounts, they are often a popular choice for those seeking a balance between accessibility and returns. However, money market accounts often come with higher minimum balance requirements and may limit the number of withdrawals allowed per month. Despite these restrictions, money market accounts remain a competitive option for individuals looking to maximize their savings potential.
Need to Choose Between a Checking and Savings Account?
When choosing between a checking and a savings account, you’ll first want to consider your financial goals. If you have specific goals that require saving money, a savings account is the way to go. It will help you restrict access to your funds and inherently help you grow your savings. If you need easy access to your money for daily transactions, a checking account is the most suitable option.
Next, you should consider your spending habits. If you frequently engage in daily transactions and need immediate access to your money, a checking account is your best bet. If you find that you typically spend most of what you have, a savings account can limit your access to funds, encouraging you to save more.
Lastly, you’ll want to take some time to compare account features and benefits. Look for account features that meet your needs, like online banking tools, mobile apps, or overdraft protection. Choose an account that provides the services you value the most.
Having Both Account Types Can be Advantageous
Remember that you can have both types of accounts and utilize them for different purposes, but you might have a more immediate need for one over the other. In fact, you may look at having both a checking account and a savings account as a strategic advantage in your financial plan. With this strategy, you’ll be able to use cash whenever you need to while still being able to grow your funds faster.
Ultimately, both types of accounts exist to meet the different needs of the consumer, which is why you’ll find that most people benefit from using both as financial tools. By managing both types of accounts effectively, you’ll be on your way to a brighter financial future.
Take the First Step
Understanding the differences between checking and savings accounts is an important first step when managing your money. Take some time to evaluate your financial goals and determine what matters most to you. If you still find yourself having questions about either type of account, speak with a banking professional who can help you get a better understanding of what will meet your needs. If you need help getting started, they can also walk you through the process of opening any account you’re looking for.
