If you aren't exactly sure what the difference is between a checking account and a savings account, we can't blame you. What does "checking" even refer to at a time when most of your purchases are happening online? Does it matter whether your money sits in a checking or savings account when you're not using it
Yes! Big time. The purpose and functionality of a checking account varies in comparison to a traditional savings account in several key ways, and you should know those differences before opening a new account. It could make you richer in the long run.
Here are the major differences between savings and checking accounts, how they differ from alternate ways to spend money like a credit card, and which type of deposit account best meets your financial goals.
What's the difference between a checking and savings account?
What are checking and savings accounts? Let's start with basic principles.
Both savings and checking accounts are deposit accounts: bank accounts where you can deposit and withdraw money. Checking as we know it today started in 16th-century Amsterdam, when depositors began issuing written money orders. Fast forward to the 21st century and it may feel like paper checks are out of style, but they still make up 40% of business-to-business payments in the U.S.
Checking accounts have evolved to move money, in other words, whether that's from an individual to a business (paying your electric bill), or from a business to an individual (payroll). Savings accounts have changed less over time because their function is different: to keep money in one place.
Savings accounts typically have a higher interest rate than checking accounts. This means more money back to you each month compared with the same amount in a checking account.
Checking accounts usually have fewer restrictions on individual transactions, making it easier to move money around. Savings accounts often come with limits, whether that's on the amount of money withdrawn in a month, or the total number of transactions. Checking accounts rarely, if ever, come with these limits, which is why they're ideal for managing day-to-day debit card expenses.
How are checking and savings accounts similar?
As mentioned above, checking and savings accounts are both deposit accounts, and both are issued by banks and credit unions. As with any product, there is a wide range of different niche types of account, and your experiences will vary depending on whether you choose a local vs national bank, but the underlying functionality of each type of account will be the same across financial institutions
Banks and credit unions also offer another type of service and product that is fundamentally different from deposit accounts: consumer lending. This bucket includes all your loans and credit cards. Deposit accounts are your cash on hand, whereas the credit card and loans are different types of debt.
The money in every checking and savings account is insured at the federal level, either by the Federal Deposit Insurance Corporation (or FDIC, for banks), or the National Credit Union Association (NCUA, for credit unions). That makes money in either account a more secure bet than money put in the stock market, which is uninsured.
One advantage of having these multiple accounts is the integration available between them. While you can make a withdrawal from either account, there may be limits to how frequently money can be taken from your savings account. Savings accounts are structured to encourage deposits going in rather than withdrawals coming out. That said, if you find yourself unexpectedly low in your checking account, your savings account can serve as a source of overdraft protection to keep payments outgoing. It may involve fees, or setting up the service with your financial institution, but they can work together to provide the financial resources you need, when you need them.
Finally, both savings accounts and checking accounts offer many online banking options — more each day, it seems. Online bank accounts, whether savings or checking accounts, can make your financial life simpler and more streamlined in many ways, plus take a bunch of paper off your carbon footprint.
Are you a spender or a saver?
Do you view your bank account like a gas tank: fill it up on payday then pedal to the metal 'til next payday? You're a spender. Spenders tend to have a more emotional relationship with money, in both positive and negative directions.
Do you put every extra cent you can aside and enjoy watching it grow month after month, even though you don't yet know how you're going to spend it? You're a saver. Savers are more objective and detached when it comes to money. They treat their finances like a carefully tended garden rather than a gas tank.
The world doesn't really break down into neat binaries like that. You're probably somewhere in between. But it's important to realize your type and figure out what you need to change if you want to turn your financial situation around. This usually means moving more of your thought patterns and behaviors from the "spender" to the "saver" category.
Checking vs. savings accounts: Which is best for you?
So, how to choose between opening a checking or savings account? The answer depends on your money mindset: the way you think about money, and the beliefs you hold about it that shape how you earn, spend, and save it.
If you're early in your financial life — let's say one or two years in the work force — your earning and spending needs probably take up most of your money brain, and savings might be an afterthought. It's important to get a checking account that will let you easily set up direct deposit with an employer (cash in) and automatic payments for all those recurring adulting expenses (cash out). In this case a free checking account with cash back rewards based on usage could be ideal. Keeping a sizable minimum balance might be tricky when you are still establishing your income streams, so consider a checking account that does not charge a minimum balance monthly fee.
If you're above make-money-pay-rent in your hierarchy of financial needs, it might be time to start stocking an emergency fund, or a financial cushion to be extra safe. In this case a savings account with a higher interest rate (aka annual percentage yield, or APY) is a better, safer bet, because you don't want that money to move until it must. You may also be able to increase your minimum balance to the point that your checking account benefits from attractive interest rates. That won’t be as high as a savings account interest rate, but any account that generates additional revenue for the account holder is worth considering.
Depending on what your tomorrow looks like, you should be thinking about your money decisions today. Maybe you want to hustle through your earning years and retire early. If that's the case, you probably want to check out high yield money market funds or savings accounts that incentivize leaving your wealth mostly untouched.
Pssst... Why not both?
Just like you're probably not 100% a spender or saver, but a mix of the two, most people need both a checking and savings account: checking for the day-to-day, savings for the rainy day.
Maybe you need a high-yield savings account, a reward-packed checking account, or a personal loan that will help you consolidate your existing debt and make it a lot easier and more straightforward to manage.
Maybe you want a debit card that gives you rewards like a credit card — without the debt.
Or maybe you know now is the time to inch your way from spender to saver, and to create a base on which to build your future. What you need is a checking account with rewards and a savings account that squirrels away the extra cents you'd otherwise spend.
No matter your specific needs, Kasasa and our national network of community financial institutions are here to help you get your finances in focus, and to be proud of your money.
Discover more ways to be proud of your money in our previous blog post, "Neobanks: The impact of digital-only apps and services on the banking industry."