Knowing the difference between savings and a checking account is crucial. While both are offered by banking institutions, they function differently. Checking and savings accounts have distinct features and are utilized for different things. In this guide, we’ll explore the key differences between savings and checking accounts, and help you determine which is most appropriate for your needs.
The difference between saving and checking accounts
A savings account is a bank account designed to help individuals save money for future needs and expenses. Savings accounts are a secure and low-risk way to earn interest on deposited money. Most banking institutions and credit unions offer savings accounts and typically include a higher interest rate than checking accounts. Better yet, savings accounts can be very useful if you’re in need of a loan.
When you open a savings account, the bank pays interest on your account balance. These interest rates vary depending on who you bank with and the type of savings account you enroll in. Some savings accounts include a minimum balance requirement and may charge fees if your balance falls below the minimum.
Savings accounts typically allow you to deposit and withdraw money as needed but may employ limits on the number of transactions you can make in a given month. Some savings accounts offer features like online banking, automatic transfers, and overdraft protection.
A checking account is another type of bank account but is instead designed for daily financial transactions. Checking accounts are intended for frequent deposits, withdrawals, and payments. Most banks and credit unions offer checking accounts and include various features and benefits.
To open a checking account, you deposit money and use the funds to make purchases and pay bills through checks, debit cards, and electronic money transfers. Many checking accounts offer overdraft protection, allowing you to make a purchase or payment even when you don’t have enough funds, typically for a fee. Various checking accounts may offer additional features like online and mobile banking, automatic payments, direct deposits, and a debit card.
Unlike a savings account, checking accounts typically don’t pay interest on your balance. Instead, the primary benefit of a checking account is its convenience and flexibility.
Tips for Choosing a Savings Account
1. Look for high-interest rates
Strong interest rates directly affect how much money you earn on your savings. A higher interest rate means you accrue more money on your balance over time. For example, depositing $10,000 into a savings account with a 0.5% interest rate earns you $50 in interest payments in a year. However, a savings account with a 1.5% interest rate will earn you $150 in that same amount of time.
These interest payments help you grow your money, manage your credit, and pay off debts.
2. Ensure there aren’t hidden monthly fees
Hidden monthly fees can eat into your savings and reduce your return on your savings investments. While some banks may advertise high-interest rates, they may also charge hidden fees in their fine print. Hidden monthly fees can include maintenance, transaction, and ATM fees and get charged regularly and deducted from your savings balance. Other hidden costs include minimum balance requirements and penalties for early withdrawal, which is why it’s essential to understand the terms and conditions of your account.
3. Review the minimum deposit amount
The minimum deposit amount determines how much money you need to open a savings account. Some accounts require a minimum deposit, while others do not. If you don’t have enough income to meet the minimum deposit amount, you won’t be able to open a savings account. Additionally, some savings accounts require you to maintain a minimum balance and charge you fees if you can’t, reducing your overall return on the investment.
4. Review the number of withdrawals you can make
Some savings accounts include restrictions on the number of withdrawals you can make per month without fees or penalties. If you make frequent withdrawals from your savings, you could pay more in charges than earning interest. Consider your savings goals and spending habits when choosing a savings account.
5. See how much of your savings are protected
If a bank fails or goes out of business, ensuring your savings are protected is essential. The FDIC is a government agency that provides deposit insurance of a certain amount per deposit and bank. By choosing a savings account that is FDIC insured, your money is protected up to the maximum insurance limit.
6. Look for little to no maintenance fees
Maintenance fees get charged by your bank to maintain your account and provide additional services. These fees vary by institution, and you want to select one with little to no maintenance fees to avoid unnecessary expenses. Review the details of various checking accounts carefully to ensure you understand the fine print.
7. See if they offer interest rates
Checking accounts with interest rates is a good option because they allow you to earn money on the funds in your account. If you keep a balance in your checking account, this is quite beneficial. Interest earnings offset other fees associated with your account, such as maintenance or ATM fees.
8. Check for withdrawal fees
Checking for withdrawal fees is essential to consider because these fees quickly add up and eat into your balance. Your bank charges withdrawal fees when you use an ATM outside your banking network or make specific transactions like wire transfers or cashier’s checks. If you frequently withdraw money, choose a checking account without withdrawal fees.
9. See if the bank offers a sign-up bonus
Some banks offer new customers a sign-up bonus who meet requirements like a minimum balance or setting up direct deposit. These bonuses can range from a few dollars to several hundred dollars, meaning you get ‘free’ money just for signing up. Sign-up bonuses are a valuable feature to consider when opening a checking account.
Choosing between a checking account and a savings account ultimately depends on your financial goals. If you want to earn interest and save money, opening a savings account will be your best choice. On the other hand, if you need a flexible and convenient account for everyday use, a checking account will work best for you. By understanding the difference between savings accounts and checking accounts, you can make an informed decision on opening a new account.