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Checking Accounts vs Savings Accounts: Which One to Choose

Checking Accounts vs Savings Accounts: Which One to Choose

It is essential for individuals to have both a checking, and savings account to manage their finances, and to learn how to save money. In order to get the best out of both of these accounts, you should know the differences between a checking and savings account. This article will teach you all you need to know about these accounts and how to manage them.

Checking Accounts

A checking account is best described as a financial account that allows you easy access to your money for daily transactional needs such as purchases, expenses, bills, as well as withdrawals and deposits. Every checking account should provide you with a debit card that you can easily use to make purchases, deposits and withdrawals.

All money in your checking account should be highly liquid, meaning you have easy, and instant access to all of the funds. Checking accounts allow you to write checks that will be deducted from your account.

Checking Account Fees

Checking accounts are usually accompanied with a monthly fee which is based on the multiple criteria such as:

  • number of withdrawals
  • number of deposits
  • number of monthly transactions
  • overdraft protection
  • maintaining a minimum balance

Checking Account Interest

Checking accounts pay very little to no interest, therefore there is no sense of maintaining high balances in the account. You should only keep enough money in your checking account to cover your expenses, as well as some funds for any unexpected expenses. You should keep an average of $2000 to $3000 in your checking account and no more then that.

Choosing A Checking Account

Most banks will have a few different checking account packages to choose from. When choosing a checking account, choose one with your interests in mind. The more expensive the  monthly fee, the more features it will have, however you must ask yourself if you really need all the features. For example, some checking accounts might come with free checks, hard copy statements, unlimited transactions etc. and charge $12 per month. If you do not see yourself needing checks, hard copy statements, and using your account very frequently, then opt for the lower price checking account package instead.

Free Checking Accounts

Many people see a free checking account and jump right on board without reading any of the fine print. If you are just using the checking account for the bare necessities then yes, a free checking account can defiantly be the way to go.

Regular Checking Account

This type of checking account usually comes with the monthly fee, however it usually has more features such as overdraft protection that you might not see with the free checking account. This account might pay some interest, however it is usually such a small amount that it really does not make much of a difference.

Checking Account Necessities

There are some services that you should be able to do with a checking account. These include:

  • access to online banking
  • ability to pay bills with checking account
  • ability to withdraw funds at any time without penalty(if you withdraw from your own bank)

Overdraft Protection

Many checking accounts will come with overdraft protection. This can be very useful and it is highly recommended to choose a checking account with this feature. If your checking account balance has insufficient funds, the overdraft will allow any transactions to still go through even if you do not have enough funds to cover the costs. This can be very useful if you are short money a week or so, or have an unexpected expense. This feature will save you money on overdraft fees which can be really expensive.

On average, an overdraft fee is approximately $25 per item that overdraws your account. If you have just two transactions overdraw your account, you could be looking at $50 in fees, so the overdraft protection is well worth it.

Also this feature will prevent you from having to dip in to your savings account to cover the overdraft, which will take up one of your monthly savings account transactions.

Savings Accounts

A savings account is best described as a financial account that allows you safely store your money that you do not need for every transactions. Furthermore, savings accounts allow you to earn modest interest rates to grow and accumulate your money. Savings accounts are not intended for use of purchases or any daily transactional needs.

While you should be provided access to your savings account with your debit card, you should not use it often as there are usually fees for withdrawing or using your savings account for purchases.

Saving Account Fees

Savings accounts generally do not have high fees and many times, maintaining a certain minimum balance will waive the fee altogether. Some savings accounts will charge a fee for the number withdrawals or transactions drawn from the savings account.

It is important to know of a federal law called Regulation D. This law states that U.S. banks must limit customers to six saving account withdrawals and transfers per month. If you exceed this limit you run the risk of having your transactions declined, as well as an excess activity fee.

Interest Rates

Savings accounts pay higher interest rates then checking accounts making it wise to carry a majority of your balances in your savings account. The more money you have in your savings, the more you will make on interest.

The amount of interest earned on savings accounts varies greatly based on your bank, and the type of savings account you have. Generally the rates ranges from 0.5% to 1%. This might not seem like a large amount however it can help you slowly accumulate your savings. Consider this scenario: if you have $10 000 with a bank paying a .70% interest rate, you will earn  $70 per year on interest. Now if you have $25 000 with a bank paying .70% you will earn $175 per year on interest.

Online banks (banks without actual brick and mortar locations) will usually pay higher interest rates then traditional banks, mainly because they have a lot less overhead expenses. Some online banks with higher interest savings account include

  • Ally Bank
  • Nationwide Bank
  • Discover Bank
  • Bank 5 Connect
  • Schwab Bank

Choosing A Savings Account

Most banks will have savings accounts that offer just a few different saving packages. Usually there will be a high interest savings account, followed by a normal/regular paying savings account. The high interest savings account will usually require a higher minimum balance that must be maintained to waive the monthly fee. When choosing a savings account, take note of the required minimum balance and be sure to choose one that you will realistically be able to maintain. Do not be tempted to choose the higher interest account if you know there is a good chance you will not be able to consistently meet the balance requirement.

How To Use A Savings Account

As previously mentioned, you should not use your savings account for everyday transactions. Your savings account should be used to accumulate your money over a period of time, as well as being used to regularly transfer money into the savings account. The best way to do this is to set up a recurring automatic transfer. This transfer will automatically transfer a specified amount of money from your checking account to your savings account. For example, you could set up a bi weekly automatic transfer where every two weeks $250 is transferred into your savings account without you having to actually manually perform the transfer every two weeks. This way without even thinking about it, you will save $500 per month into your savings account. This will add up over time, and is a good way to accumulate money.

Your savings account should have a purpose, meaning you are saving the funds for a large future purchases such as a car, or it can be savings for a rainy day.

If you have larger amounts of money saved, you should consider investing some of the money into a GIC, which pays higher interest rates then a savings account.

Below is a chart detailing the common fees you will see with checking accounts versus a savings account.

  Checking vs Savings Account Fees and Costs 
Checking Savings
monthly feeexcessive withdrawal fee
overdraft feeminimum balance requirement
paper statement feebalance inquiry fee
out of network ATM Feeonline transfer fee
Check image service feenon network ATM fee
online bill payment feeannual fee
Non sufficient funds (NSF) fee 
check order fee 
stop payment fee 
cashiers check fee 

Keep In Mind

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When looking to open a checking and savings account, make sure you open both accounts with the same bank. It can be confusing if you have a checking account with one bank, and a savings account with another. You will be more organized if you have all your funds with the same bank.Furthermore, when opening an account, shop around among different banks as well as credit unions. Different banks offer different features that might be better suited for your needs.

About The Author

Ben Todd

Ben was a seriously broke graduate student with bad credit who after finding himself rejected for any sort of credit card or loan for most of his adult life, finally decided to get his financial life in order. ' He spent several years reading as many financial advice books and blogs as he could. And suprisingly, Ben found he actually LIKED the topic of personal finance; after fixing his own finances, starting his own successful work at home website business, and using his earnings to get out of debt, created to help others do likewise!

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