When you’re opening a bank account, whether it’s at Bank of America or your local credit union, you’ll be faced with a common first question: Do you want to open a checking account or a savings account?
Checking and savings accounts are both valuable financial tools that are similar but have distinct differences. Most people benefit from having both, but it’s important to know the limitations of each, and how they can complement each other in your overall financial goals and habits.
Low-risk, low-yield savings
Potential ATM limits
Overdraft, ATM, low-balance
Monthly maintenance, overdraft
Less than 1% APY
Less than 2% APY
What is a checking account?
A checking account is a deposit account at a bank or credit union designed for transactional use. Deposited money can be withdrawn as cash from an ATM, used to pay for items and services directly via check or debit card, or transferred using a payment app like Venmo.
Pros of checking accounts
Checking accounts allow you to easily access your money, making them convenient for everyday transactions without the need for cash.
Being able to easily transfer or spend the money makes checking accounts very liquid.
Cons of checking accounts
Checking accounts don’t pay any interest (or very low interest, in rare cases).
Offer few advantages for storing money long-term, as you’ll be able to put your money to work in better ways with other types of accounts.
What is a savings account?
Savings accounts are safe places to store your money, as there is no risk of it losing value like there is with, say, an investment account like an IRA. As opposed to checking accounts, savings accounts always earn interest — known as the APY, or annual percentage yield — but it’s still lower than other investment vehicles.
This makes savings accounts a good option for money that you don’t need access to right away, but may need in a few months or years, or as an emergency fund. How much money should you keep in your savings account? That depends on how much money you have in other investment and savings vehicles, how much you’d need to cover an emergency expense, and your individual financial circumstances.
There are several different types of savings accounts:
Deposit accounts, which are the most basic and most liquid.
Certificate of deposits, or CDs, which are purchased for a length of time.
Money market accounts, which have a higher APY and larger initial deposit than a standard deposit account.
Pros of savings accounts
Your money is fairly stable in a savings account.
It offers a higher APY than a checking account.
Cons of a savings account
Interest is still relatively low compared to dedicated investment vehicles.
Federal regulations limit the number of transactions you can make from a savings account each month. This means they have low liquidity compared to checking accounts.
The difference between checking and savings accounts
Is it better to have a checking or savings account? Most people will benefit from having both: a checking account for everyday use and a savings account for longer-term storage. Both types of accounts are insured up to $250,000 by the Federal Deposit Insurance Corporation, or FDIC, (National Credit Union Administration for accounts with credit unions) and have their own uses and limitations.
Checking vs savings account uses
In general, checking accounts can be thought of as spending accounts; you can use debit cards at stores or withdraw cash from ATMs. Savings accounts are used for just that: savings. It’s harder to withdraw money from them, and they tend to earn interest at a higher rate than checking accounts.
There usually aren’t any restrictions for the number of withdrawals you can make from a checking account, but some financial institutions may have dollar limits on the amount you can withdraw on a given day.
Savings accounts, on the other hand, have a federally mandated six-transaction monthly limit, thanks to a Federal Reserve Board rule known as Regulation D:
Some times of transactions, like ATM and in-person withdrawals, don’t count toward this limit.
Minimum balance rules — the amount you must maintain in your account to keep it in good standing and avoid fees — vary depending on your bank or credit union. There may also be an initial deposit amount when opening either account.
Some accounts have a monthly maintenance fee (see below) that is waived as long as you maintain a minimum balance. Direct deposits of paychecks is usually an easy way to help stay about the minimum balance.
Common checking account fees include:
Overdraft fees when you withdraw more money than is in your account.
ATM fees, a small amount (usually two or three dollars) charged when you use an out-of-network ATM. Some banks may refund ATM fees at the end of a statement period.
Monthly fees for having a low balance.
Common savings account fees include:
Monthly maintenance fees that can be waived by maintaining account minimums, linking accounts, or setting up automatic transfers.
Overdraft fees if you transfer more money than is in your account. Many banks provide overdraft protection, for a fee.
Neither checking nor savings accounts provide much in terms of interest. Checking accounts commonly earn less than 1% APY, and while savings account interest is usually higher, it’s still less than 2%, even with an online savings accounts. Online banks usually offer higher rates of return.
According to the FDIC, as of October 2018 the national average interest rate for savings account is 0.09%. High-yield accounts do exist to help you earn a little more interest, but they may require a higher minimum balance.
Checking vs savings account questions
Not sure whether you need a checking account, a savings account, or both? Here are some questions you should ask about what type of account you need, and where you should look to open it.
What will I be using the account for?
Do I need quick access to the money in the account?
What are the fees and limitations involved with each type of account?
What is the APY, or the interest, offered by the financial institution?
Do I want my checking and savings accounts at the same financial institution?
Do I want to go with a bank or a credit union?
Do I want to go with an online bank, or one that’s primarily brick-and-mortar?
Common checking and savings account definitions
No matter which account you choose, there are a few important terms that you’ll need to know regardless to make sure you make the right choice and stay in good standing with your financial institution and are able to make the most of your money.
APY — Annual percentage yield, the amount of interest paid over the course of a one-year period.
Direct deposit — A system offered by most financial institutions that deposits recurring income directly to an account.
FDIC — Federal Deposit Insurance Corporation, an independent government agency that protects customers if their financial institution fails.
Interest — An amount paid on a sum of money.
Overdraft — A negative account balance.
Withdrawal — Taking money out of your account through check, debit card, or ATM.