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Checking accounts and savings accounts seem similar and are often opened at the same time. But there are some important differences. If you’re new to banking you may have questions. Which accounts pay interest? Which have debit cards? Which one is best for paying bills? Should I have both types of accounts? This guide can help answer those questions so you can determine which type of account is best for you or even if you need both.
What Is a Checking Account?
A checking account is an account held at a financial institution that allows you to make credit and debit transactions. Designed to be used for everyday money management, they typically allow you to make an unlimited number withdrawals and deposits each month. Withdrawals can be made in a variety of ways, including:
Visiting a branch
Using an ATM machine
Using a debit card as payment
Writing a check
Making an online payment or transfer
Using a digital payment app (like Venmo or Apple Pay)
Via wire transfer
Deposits to a checking account can typically be made:
At an ATM
At a branch
Via mobile deposit
Making an electronic bank-to-bank transfer
Direct deposit
Via wire transfer
Checking accounts typically pay no or very little interest.
Pros and Cons of a Checking Account
Pros
Cons
Easy access
Little or no interest
Debit card
Not good for saving
Insured
Monthly maintenance fees
Direct deposit (and possibly early pay)
Other potential fees (e.g., overdraft, using an ATM outside network)
Track spending
Minimums
Pros
Checking accounts offer an easy and convenient way to make purchases and pay bills on a daily basis. You can easily access cash and make expenditures via a linked debit card. They also typically come with a paper checkbook, as well as a mobile app that allows you to deposit checks and make payments on the go.Checking accounts are also a safe place to keep your money. The Federal Deposit Insurance Corporation (FDIC) or National Credit Union Association (NCUA) insure these accounts. This means you’ll receive up to $250,000 per ownership category account holder, per institution, should the bank or credit union fail. In addition, you can typically set up direct deposit into your checking account right from your employer. Some banks even offer early direct deposit, where you can get your paycheck up to 2 days sooner.Finally, a checking account can be a good way to track your spending, since it offers a record of your deposits and spending, allowing you to see exactly where your money is coming from and where it’s going.
Cons
Checking accounts pay no or very low interest rates. And, because money is moving in and out on a constant basis, they generally aren’t good vehicles for savings.Fees can also be an issue. Some banks charge monthly maintenance fees, as well as fees for overdrafting the account and/or using an ATM outside of the bank’s network. Some banks also require you to keep a minimum balance in your checking account at all times. If you fall below this threshold, you may have to pay a fee.
What Is a Savings Account?
A savings account is a deposit account that’s designed for holding funds that aren’t earmarked for everyday use, such as paying bills or spending. This is where you likely put funds you’re saving for short-term goals, such as building an emergency fund, paying for a vacation, or accumulating a down payment for a home. These accounts usually pay interest to help your money grow over time, and the amount of interest paid varies from bank to bank. Online banks often pay a higher annual percentage yield (APY) than traditional, brick-and-mortar banks.The funds in a savings account are generally less accessible than the funds in a checking account. Checks can’t be written against them, and you’re often limited to six withdrawals or transfers per month. If you exceed the bank’s transaction limit, you’ll likely be charged a fee.Like checking accounts, you can find savings accounts offered at different financial institutions like traditional banks, online banks, and credit unions.Recommended:Banks vs Credit Unions Compared
Pros and Cons of a Savings Account
Pros
Cons
Earns interest
Interest not that high
Encourages saving
May need to maintain a minimum balance
No risk
No tax benefits
Funds are liquid
Transaction restrictions
Easy to transfer money to a checking account
Insurance limited to $250,000
Pros
Savings accounts are a good option if you are looking for a low-risk way to earn interest on your deposits. Like checking accounts, the money in the account is insured up to $250,000 in case of a bank failure, so you don’t have to be concerned about losing your money. Many other types of interest-earning accounts require you to take risks to earn returns.Another positive is that the money stays liquid and accessible. You don’t have to leave it untouched for a specific time period like you do with a certificate of deposit (CD).
Cons
On the downside, even high-yield savings accounts pay relatively low rates of interest. For example, with high-yield savings accounts right now, you may be able to make 2.25 to 2.96% APY (annual percentage yield), while the national savings average is 0.16%. And, unlike some other savings vehicles (like individual retirement accounts and college savings accounts), savings accounts don’t offer any tax advantages. As a result, savings accounts may not be ideal for long-term goals, such as retirement or saving for a child’s education. Also keep in mind that some savings accounts require a minimum initial deposit to open the account, as well as minimum balance requirements. If you fall below the threshold, you may not earn the expected APY and/or have to pay a fee.Savings accounts also typically have restrictions on how often you can make withdrawals or transfers. While federal rules restricting savings account owners to six withdrawals per month have been suspended, banks and credit unions can still cap the number of withdrawals or transfers you’re allowed to make and charge fees if you exceed the max. As a result, these accounts are not suited to managing your everyday finances.Recommended: Guide to Choosing and Opening a High-Yield Savings Account
Checking vs Savings Accounts: How They Compare
Let’s take a look at the differences and similarities between checking and savings accounts to help determine if one or the other – or both – are best for your banking needs.
Similarities
Both checking and savings accounts are FDIC- or NCUA- insured deposit accounts that offer a convenient place to store and use your funds. In both cases, the money can be easily accessed by going to a branch, visiting an ATM, going to your online account, or via a mobile app.
Differences
The main difference between a checking and a savings account is that checking accounts are designed for everyday spending, while savings accounts are designed for saving and growing your money. As a result, checking accounts tend to be better for regular transactions such as purchases, bill payments, and ATM withdrawals. They generally come equipped with debit cards, paper checks, overdraft protection, and other services for spending. The funds typically earn little to no interest.Savings accounts, on the other hand, are better for storing money for short-term savings, and pay higher interest than checking accounts. Some even offer tools to help you reach savings goals. Unlike checking accounts, they often impose a monthly limit on how often you can withdraw money without paying a fee. Here’s a quick side-by-side comparison.
Checking Account
Savings Account
Account type
Transactional
Nontransactional
Purpose
Spending
Saving
Transaction restrictions
None
Withdrawals/transfers often limited to six per month
Interest
None or nominal
Earns interest
Safety
Insured
Insured
Common features
Debit cards, checks, overdraft protection, online and mobile banking
Interest, online and mobile banking, savings tools
When choosing a bank or credit union to open a checking account, here are some factors you may want to consider.
Fees Since you’ll be using the account frequently, you’ll want to keep fees to a minimum. Some common fees to watch out for include: monthly maintenance fees, overdraft fees, and out-of-network ATM fees. Consider how you’ll be using the account, which fees matter to you, then look for a bank that doesn’t charge those fees or charges a minimal amount.
Minimum balance requirements Many banks require a minimum balance on checking accounts (or checking and savings accounts combined) to avoid monthly fees. Other banks require a certain dollar amount in monthly direct deposits to waive the maintenance fee. Before you open an account, make sure you can meet the bank or credit union’s minimum balance requirements. Or, look for an account with no minimums.
ATM network You’ll want to make sure the bank has a convenient network of ATMs. If you go out of network, you will likely get charged a fee from your bank, as well as the ATM operator.
Mobile banking Banking apps connected to your account allow you to check balances, deposit checks, and pay bills directly from your phone or other mobile device. Some also offer integration with peer-to-peer payment apps, such as Venmo or Zelle. If you plan to do some (or most) of your banking on the go, you’ll want to make sure the bank has a robust and user-friendly app.
Tips for Choosing a Savings Account
When choosing a bank or credit union to open a savings account, here are some factors you may want to consider.
Interest rates When comparing interest rates from different financial institutions, you’ll want to focus on APY, or annual percentage yield. This number tells you how much interest a bank account earns in one year. The higher the APY on a particular savings account, the faster your money grows. Keep in mind, however, that rates on savings accounts are variable and can change at any time. Also, many banks offer promotional rates for a limited time to entice new customers.
Fees Savings accounts may have monthly maintenance fees or penalties if your balance falls below a certain amount. These fees can easily negate the interest you earn, so you’ll want to keep them to a minimum.
Withdrawal restrictions While banks are no longer required to limit the number of monthly transactions, many have maintained the six-transaction limit, while others have increased the number of withdrawals and transfers permitted. It’s worth finding out what the bank's policy is on transaction limits.
Compounding methods Compounding interest is when both your principal and the accumulated interest earn interest. It helps your cash grow faster than simple interest, which pays interest only on the principal. In an account that pays compound interest, the return is added to the original principal at the end of every compounding period, Banks can stipulate that interest will be compounded daily, monthly, quarterly, semiannually, or annually. The more frequently your interest compounds, the greater your return.
Having a checking and savings account at the same financial institution has some advantages. These include:
Quick transfers When accounts are at the same bank, they will typically be linked, which makes it fast and easy to transfer funds from one account to another.
One statement All account information is easily viewed in one statement, web page or app.
Perks Some banks offer incentives for opening both a savings and checking account, such as a higher interest rate on savings and/or interest on checking as well as savings and waived fees.
Overdraft protection You may be able to link a savings account to your checking account as overdraft protection to cover a check or debt transaction that exceeds your checking balance.
However, there are also reasons why you might want to consider opening a savings account at one bank and a checking account at another. The biggest advantage to this is that you may be able to get a substantially higher interest rate by putting your savings in an online high-yield savings account rather than at a traditional bank. For example, with high-yield savings accounts right now, you can often make well over 2.00% APY (annual percentage yield), versus the national savings average of 0.16%.Even if your accounts are with different banks, it’s generally easy to transfer money from one to the other. However, the transfer may take a bit longer than if the accounts were linked at the same bank.Recommended: How Long Does It Take for a Check to Clear?
The Takeaway
If you’re debating between opening a checking or a savings account, it helps to remember this simple distinction: Checking accounts are best for spending money, while savings accounts have higher interest rates, so they're best for stashing cash.Other key differences: Checking accounts come with debit cards, while savings accounts generally don’t. Checking accounts have no limitations on how many transactions you can make each month, whereas checking accounts often limit you to six withdrawals/transfers per statement period. Finally, checking accounts offer no (or very minimal) interest. Savings accounts offer higher interest rates, with online high-yield savings accounts generally offering the highest APYs.
3 Money Tips
To get into the savings habit, consider having 10% of your paycheck directly deposited into your savings account. Or, set up a small automatic recurring transfer from your checking account into your savings account on the same day each month.
An emergency fund is a key financial safety net. Aim to have three- to six-months worth of living expenses tucked away in a separate account that earns interest, but allows you to access the money if needed (such as a high-yield savings account).
To set up a simple monthly spending budget, consider the 50/30/20 rule. This involves splitting your after-tax income into three categories of spending: 50% on needs, 30% on wants, and 20% on savings.
Frequently Asked Questions
Are checking or savings accounts better?
Is a debit card associated with a checking or savings account?
Are savings accounts any safer than checking accounts?
Photo credit: iStock/SDI Productions
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About the Author
Walecia Konrad
Walecia Konrad is an award-winning financial journalist with 25 years of experience in print and digital media. She is a graduate of Syracuse University and specializes in the topics of health care, personal finance, and employer-sponsored benefits. Konrad's work has been seen on CBS MoneyWatch, The New York Times, Money, SmartMoney, BusinessWeek, and Forbes. She has been the recipient of both a Pearl Award for Best Web Publication of the Year and a National Magazine Award for Personal Service.
