How to choose checking vs. savings accounts

Both checking and savings accounts are fundamental building blocks of your personal finances, but each has its own purpose.

Checking accounts are primarily used to manage your spending, so you can meet your short-term obligations; while savings accounts are for, well, saving, so you can reach your long-term financial goals.  

In most cases, you need both. The key is to pick the right ones and to use them as intended. 

What is a checking account?

A checking account is a waystation: a place in which to deposit income and from which to pay your bills. It helps you conduct the mundane financial transactions (direct deposits one day, credit card bills the next) that are a part of adult life. 

Checking accounts allow you to keep your money secure, monitor your transactions and easily access your funds whenever you need them. 

How it works

At its core, a checking account is a deposit account you can use at any time. 

It comes with a range of features, such as the ability to write checks, withdraw cash and make electronic transfers; thereby making it a versatile tool for handling your finances. 

You can also use a debit card connected to your bank to make purchases, and the money is deducted directly from your account, said Faron Daugs, certified financial planner and wealth advisor at Harrison Wallace Financial Group.

“But due to their accessibility and liquidity, checking accounts generally do not offer high interest rates and, in some cases, they may not offer any interest at all,” said Daugs.

Want to earn interest from your checking account? Consider the best high-yield checking accounts. 

Many checking accounts also come with fees, such as monthly maintenance fees and overdraft fees, which apply if you spend more money than you have in the account. To keep the account open, you may be required to have minimum balance in your account, which varies by bank.

If possible, you should consider a no-fee checking account. 

Pros and cons  

Advantages of having a checking account include:

• Accessibility: Easy access to your money, with the ability to withdraw cash from ATMs and make purchases with a debit card.
• Convenience: Make electronic transfers, write checks and manage your account online or through a mobile app.
• Safety: Your money is FDIC insured up to $250,000, so you won’t lose at least that much even if your bank fails.
• Bill Pay: Many checking accounts allow you to pay bills online or through a mobile app.

Some of the drawbacks of using a checking account include:

• Fees: Many banks charge monthly service fees, overdraft fees and non-sufficient fund fees on checking accounts.
• Low interest rates: Checking accounts typically have lower interest rates than savings accounts, if they’re offered at all, which means you’ll earn very little on the funds.
• Risk of fraud: Should a criminal hack into your bank account or use your debit card, you could be out the money until the situation is resolved. (Typically any liability is limited to between $50 and $500 if you act promptly.) If the same thing happens with a credit card, your cash isn’t at risk.

Types of checking accounts

There are several types of checking accounts available, each with their own unique features and benefits:

1. Basic checking account: This account comes with standard checking account features, including bill pay, debit cards and checks. These checking accounts may charge a fee for specific services or if your balance doesn’t meet the minimum.
2. Premium checking account: You can get bonus features with your account, like free checks and waived fees, in exchange for a higher minimum balance. 
3. High-yield checking account: This type of account earns interest on your balance, although the rates are typically lower than a savings account. It’s a good option for those who keep a higher balance in their account.
4. Student checking account: Banks often offer special accounts designed for students that frequently have overdraft forgiveness and come without a minimum account balance requirement. 
5. Business checking account: These accounts are designed for business owners, allowing for larger transactions and offering perks. 

What is a savings account?

A savings account is the grown-up version of a piggy bank; an interest-bearing account that’s designed to help you amass cash to pay for future financial goals.  

Known as a “statement savings account” in bank lingo, a savings account isn’t meant to be a transaction account. Unlike a checking account, you typically don’t write checks or make transactions directly from it. 

Savings accounts are a great option for setting aside money for a new car or vacation. It’s also the ideal place to build an emergency fund so you don’t have to go into debt if you have a sudden, large expense.

“The good news is that high-yield savings accounts have gained popularity in today’s interest rate environment, allowing individuals to earn significantly higher rates than just a year ago,” said Daugs.

How it works

When you open a savings account, you’ll deposit money into the account and earn interest on the balance. The amount of interest you’ll earn depends largely on the bank. You’ll want to compare interest rates at different banks to find out who offers the best deal. 

Some savings accounts will charge a fee should you make more than six withdrawals in a month. (For instance, Bank of America Advantage Savings charges a $10 fee per withdrawal once you’ve already made six.) 

Many savings accounts come with other fees, such as a monthly maintenance fee or minimum balance charges, though they can usually be avoided if you keep a certain average balance amount.

Pros and cons

Advantages to having a savings account include:

• High interest rates: Savings accounts generally offer higher interest rates than checking accounts, allowing you to earn more on the money deposited.
• Safety: Like checking accounts, savings accounts are also FDIC insured up to $250,000, so your money is secure.
• Place to store savings: Having a designated savings account can help you to manage your finances and work towards reaching your long-term goals.
• Less temptation to spend: Keeping your savings separate from your checking account can help you resist the urge to spend the money in your savings.

Drawbacks to using a savings account include:

• Limited accessibility: Unlike checking accounts, some savings accounts have restrictions on the number of withdrawals per month, which makes it less convenient to access your funds.
• Lower liquidity: Since savings accounts are meant for savings, the funds aren’t as easily accessible as a checking account. 
• Fees: Some banks charge fees, such as maintenance fees and excess withdrawal fees.

Types of savings accounts

There are several types of savings accounts available, designed for different styles of saving and based on your goals:

• Traditional savings account: This is a basic savings account, usually offered by brick-and-mortar banks, with no minimum balance requirements, but may have monthly maintenance fees. They may come with lower interest rates than other types of savings accounts, but may offer more convenience with banking branch access. 
• High-yield savings account: This type of account earns a higher interest rate than a traditional savings account, but may require a minimum balance. These accounts are often offered by online banks, which means it may be difficult to deposit physical cash. 
• Money market account: This account type usually earns higher interest rates than traditional savings accounts and still allows you access to your funds with checks and a debit card (up to a set transaction limit). It may require a minimum deposit and charge a monthly maintenance fee. 
• Certificate of deposit: With a CD, you deposit a set amount of money for a set period of time and earn a fixed, often above-average interest rate. Early withdrawals can result in penalties.

How to decide checking vs. savings

In most cases, you’ll probably want both a checking and savings account: A checking account to manage your money and bills, and a savings account to build up a long-term fund. 

When looking for the right account, you’ll want to consider convenience and affordability. It may be easier for you to open a checking and savings account at the same bank, so you can view and manage all your money in one place. 

For checking accounts, consider minimum balance requirements, monthly maintenance fees and options for waiving those fees. Understand how much access you’ll have to your money via debit cards and ATMs, and the online capabilities of the checking account, including bill pay and mobile banking.

When considering a savings account, research the interest rates. Determine whether the rate is fixed or variable, depending on the market and how often it adjusts. There may be bands of interest rates you can qualify for based on your balance. Understand the minimum balance requirements and if there is a limit on the number of transactions per month. 

Ultimately, by thinking in terms of short-term money (checking) and long-term goals (savings) you’ll add a structure to your finances that makes it easier to successfully manage your funds.