Checking vs. Savings Accounts – What’s the Difference Between Them

You’ve decided to open a new bank account. You head down to your local bank or credit union, and the account manager offers you a choice of two types: checking or savings. 

How do you decide between them?

The answer depends on how you plan to use the account. Both kinds of accounts will keep your money safe because they’re both backed by the Federal Deposit Insurance Corporation (FDIC). But the two types have different perks that make them suitable for different purposes.

Checking vs. Savings Accounts: What’s the Difference?

In general, a checking account is where you keep cash for everyday use. A savings account is where you keep money you’re saving for a specific purpose, such as an emergency fund.

These two types of bank accounts serve different purposes because they have different features, as summed up here:

Checking account Savings account
Main purpose Spending Saving
Interest Sometimes Always
Withdrawal limit None Typically six per month
Minimum balance Sometimes Sometimes
Overdraft protection Yes, usually for a fee No

Checking Account

A checking account is a type of bank account that keeps your money accessible. It’s the account you dip into regularly to pay bills, buy groceries, or withdraw cash at an ATM. 

Features of a checking account typically include:

  • Paper checks, which you can use for payments to individuals and some businesses
  • A debit card, which you can use for purchases or cash withdrawals at an ATM
  • Online banking, which gives you access to your account through your browser or a mobile banking app
  • Online bill payment, which lets you pay bills directly from your account

Checking accounts give you unlimited access to your money. You can make as many withdrawals, transfers, and purchases as you want each month.

Many checking accounts also come with overdraft protection. If you make a withdrawal or payment that’s more than you have in the account, the bank will advance you the money. However, most banks charge a hefty overdraft fee for this service.

With the increasingly common exception of rewards checking accounts, checking accounts typically don’t pay interest. Some traditional banks and credit unions offer interest-bearing checking accounts, but the interest rate is nominal. Thus, the money you leave in your checking account doesn’t grow over time.

In fact, in many cases, your balance actually shrinks over time. That’s because checking accounts usually have a monthly maintenance fee. However, most banks waive this fee if you use direct deposit or keep a certain minimum balance in the account. There are some free checking accounts with no minimum balance requirement, but they’re increasingly rare. 

Savings Account

A savings account is a place to save your money for a rainy day. The main perk of a savings account is the interest you earn on your balance. The interest you earn per year on each dollar of savings is the annual percentage yield, or APY. 

Savings accounts generally pay more interest than checking accounts, but their actual APY varies. The ones that pay the best rates are typically labeled as high-yield savings accounts. Online savings accounts also tend to pay higher interest rates. 

However, these high APYs often have strings attached. Many savings accounts require you to maintain a certain minimum balance to earn the top interest rate. They may also require you to use direct deposit.

The biggest downside of savings accounts compared to checking accounts is that your money is less accessible. These accounts don’t come with paper checks or debit cards. Instead, they include a basic ATM card that you can use to make ATM withdrawals.

In addition, savings accounts often restrict the number of transactions you can make. Under federal law, a savings account must limit users to no more than six withdrawals or transfers per month. Banks aren’t required to charge a fee for going over this limit, but many banks do.

During the coronavirus pandemic, the Federal Reserve lifted this limit. As a result, it’s now possible to get a savings account with unlimited transfers. However, many banks still choose to allow savings account holders only six free transfers a month.

The Verdict: Should You Choose a Checking or Savings Account?

Choosing between checking and savings is mainly a matter of which matters to you more: earning interest or having easy access to your money. However, there are a few other factors to consider.

You Should Open a Checking Account If…

A checking account is a better fit if:

  • You Don’t Have a Lot of Money. Checking accounts don’t usually have a high minimum balance requirement. And you won’t be missing out on that much interest if you’re not keeping much money in your account anyway.
  • You Use a Debit Card for Most Purchases. Only checking accounts come with debit cards. If you prefer to pay for most purchases with a debit rather than credit, you need a checking account.
  • You Withdraw Small Amounts of Cash Frequently. A checking account has no limit on withdrawals. You can go to the ATM for $20 every day if you choose, though you may pay fees on those withdrawals.
  • You Sometimes Need Paper Checks. Even in the modern world, some companies would rather accept a personal check than a credit card payment. Also, some government organizations charge a fee for paying bills online, such as your water bill or property taxes. Paying by mail with a paper check is cheaper.

You Should Open a Savings Account If…

A savings account is a better fit if:

  • You’re Saving for a Specific Goal. Most checking accounts don’t pay interest, and even interest-bearing checking accounts pay only a tiny amount. Your money will grow faster in a savings account, especially a high-yield savings account.
  • You’re Opening an Emergency Fund. Money in an emergency fund is money you don’t plan to touch unless you need it. So you might as well stash it someplace where it can earn you some interest in the meantime.
  • You Prefer Credit Cards for Purchases. If you usually buy things with your credit card, you only have to pay the bill once a month. Even with two or three credit cards, you won’t risk running up against the six-transaction limit.
  • You Withdraw Cash Only Occasionally. ATM withdrawals also count toward the limit on transactions per month. However, if you only withdraw cash once or twice a month, that shouldn’t be a problem for you.

You Should Open Both If…

Choosing between checking and savings doesn’t have to be an either-or proposition. For many people, it’s worth having both types of bank accounts. 

Opening checking and savings accounts at the same bank or credit union makes sense if:

  • You Have Occasional Large Expenses. Some large bills, such as quarterly property taxes, only come up once in a while. If you have both types of account, you can leave the cash in your savings account earning interest until you need it. Then you can easily transfer it to your checking account to pay the bill.
  • You Sometimes Overdraw Your Account. Overdraft fees can be costly. A cheaper solution is to link your checking account to a savings account at the same bank. Then, if you spend too much, the bank takes the money out of your savings for just a small fee.
  • You Get Extra Perks for Having Both Accounts. Some banks offer special benefits for having a checking account and a savings account linked together. For instance, you may earn a higher interest rate on your savings or have certain bank fees waived.

Final Word

Keep in mind that checking accounts and savings accounts aren’t the only kinds of accounts you can open. And if your goal is to grow your money long-term, neither one is ideal.

In a checking account, your money won’t grow at all. It might even lose value due to monthly maintenance fees. Money in a savings account will earn some interest, but with interest rates as low as they are right now, it won’t be enough to keep up with inflation. So in terms of purchasing power, your money will still lose value over time.

To get a better return, consider other low-risk investments, such as high-yield money market accounts or certificates of deposit (CDs). These are FDIC-insured, so they keep your money safe while paying a little more interest. U.S. Treasury securities are another safe option.

If you can afford to take a little bit of risk, look into relatively safe high-yield investments, such as dividend stocks, ETFs, and mutual funds. With these investments, there is some risk of losing money in the short term. However, they generally pay better in the long run.

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