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By Katie Pins
Checking and savings accounts are part of our daily lives. They both provide a safe spot and access to the funds we need, when we need them. However, their features are different and they’re meant for different purposes. We break down how each account is unique and when to use each one.
Checking accounts are used for payments and moving money frequently. They’re meant for everyday transactions such as spending, deposits, bills, cash withdrawals or even paying back a friend. Checking accounts usually earn less interest than savings accounts but don’t have a limit on the number of transactions you can make.
Savings accounts are used for – wait for it— saving. They’re meant for storing money for a longer time and earning interest. Savings accounts have a limit to how often you can make withdrawals and have higher interest rates. They’re not good for daily transactions.
Although a checking account is different than a savings account, you need both accounts so that you can reach your financial goals and spend in an effective way.
Since checking accounts are for frequent transactions, you have many options on how to access your money. The key is to maximize your money by avoiding fees.
Set up automatic payments: Never pay a late fee on your bills again with automatic withdrawals. You can even “pay yourself” by setting automatic transfers from your checking to your savings. This way your spending AND your saving are automatic. Set it and forget it.
Move your spending to your debit card: If you find you’re overspending on a credit card, you may want to try moving your spending to a debit card. This could help you avoid spending money you don’t have because your transactions come straight out of your account. Also, debit cards are great for peer-to-peer payment (P2P) apps such as Venmo because many of the apps don’t charge you for connecting your account to a debit card.
Utilize your fee-free ATMs: The best checking accounts either give you ATM fee rebates on out-of-network ATMs or have thousands of surcharge-free ATMs – or both. You shouldn’t have to pay to access your money, so before opening a new checking account, explore your options. You never know when you may find yourself at a cash-only restaurant without cash in your wallet.
Write those checks: Many new checking accounts come with a free box of checks. Take advantage of the opportunity, even if check writing is a rarity. You’ll find you may need a good old fashioned check when giving birthday or wedding gifts, or paying your rent. If you don’t want to carry around your checkbook, keep one or two checks in your wallet just in case.
Set up direct deposit: Your paychecks can go directly into your checking account each month thanks to direct deposit. It makes a huge difference by shorting the time it takes to access your money as well as simply being more convenient.
Since savings accounts are for helping you reach your financial goals, you’ll want to know the different features of a savings account.
Don’t open an account with a fee: If your savings account comes with a monthly service fee, run. You’re trying to save your money, and it will be that much harder if you’re paying $20 a month in fees. Even a $4 monthly fee will mean you’ll have $240 less in your account in five years. Every penny counts, no matter what your savings goal may be!
Take advantage of the interest rate: The interest rate, also known as the annual percentage yield (APY), on your savings account is very important and may be worth the switch to a new financial institution. Some accounts require things like a minimum balance to earn interest. Make sure you are meeting those requirements. If the requirements are unreasonably high or overly complicated, try shopping for a different account.
Keep track of your transactions: Federal law limits the number of withdrawals and transfers you may make from your savings account to six each month. (This does not include withdrawals or transfers made at ATMs.) So, if you know you have a lot of expenses coming up, plan ahead and try to lump your withdrawals together. Some savings accounts come with savings ATM cards that allow you to make cash withdrawals and even deposits at some ATMs. It’s nice to have when you need cash fast.
Open accounts for each savings goal: Similar to the envelope method of saving, having multiple supplemental savings accounts could help you see the progress of each of your savings goals. You could have an account for vacations, one for your bathroom renovation, and another for your emergency fund.
Nope, not all checking and savings accounts are created equal. In fact, different accounts can vary drastically in the amount of interest you can earn and the number of fees you could accrue.
The best checking accounts have no monthly service fees and fee-free ATMs or ATM rebates. Some checking accounts will even give you a high rate on your average monthly balance. So, if you forget to deposit a chunk of change into your savings, not all is lost. You’ll get some interest on that too.
The best savings accounts have a high APY and no monthly service fee. The average APY on a savings account changes but tends to be around 0.10%. Yikes! Pro tip: digital banks and credit unions tend to have the best rates and lowest fees. Just don’t sacrifice access. You’ll want to have ATM withdrawals and deposits as an option for when you need cash fast, plus great mobile and online banking tools to manage your money on your time.
What happens if a bank “goes under”? Most checking and savings accounts at banks and credit unions are federally insured up to $250,000. Banks are insured by the Federal Deposit Insurance Corporation or FDIC. Credit unions are insured for the same amount of money by the National Credit Union Administration or NCUA.
It’s very important to check that your financial institution is insured. Some places are not insured. So, if they go under, you could lose everything in your account – scary! Before opening a new account, check that your deposits are insured.
It’s nice to have the option to have both your checking and savings accounts at one bank, but it’s not necessary. If you’re only interested in opening one account, look for a bank or credit union that offers both, just in case. If you like one account, you may find that the other account is just as great too.
Katie Pins is a marketer fascinated with finance. Whether the topic is about the psychology of money, investment strategies or simply how to spend better, Katie enjoys diving in and sharing all the details with family, friends and Money Mentor readers. Money management needs to be simplified and Katie hopes she accomplishes that for our readers. The saying goes, "Knowledge is Power", and she hopes you feel empowered after reading Money Mentor.