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Opening a bank account? Here's what you need to know about checking and savings accounts, including key features, differences, and common definitions.
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.
|Feature||Checking Account||Savings Account|
|Best for||Regular use||Low-risk, low-yield savings|
|Withdrawal restrictions||Potential ATM limits||6 transactions/month|
|Fees||Overdraft, ATM, low-balance||Monthly maintenance, overdraft|
|Interest earned||Less than 1% APY||Less than 2% APY|
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 Deposited money can be withdrawn as cash from an ATM, used to pay for items and services directly via check or debit card, or transferred using a payment app like Venmo.
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:
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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.
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:
…for an account to be classified as a ‘‘savings deposit,’’ the depositor may make no more than six ‘‘convenient’’ transfers or withdrawals per month from the account.
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:
Common savings account fees include:
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.
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.
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.
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