What Is a Checking Account vs. a Savings Account?

Checking and savings accounts differ in key aspects, such as interest rates and withdrawal policies. Both types of accounts are intended to store your money securely. Still, a checking account is designed for everyday spending, whereas a savings account is better suited for achieving longer-term financial goals.

Explore the distinctions between checking and savings accounts in more detail.

Key Points

• Unlike savings accounts, checking accounts are intended for everyday financial activities.
• Savings accounts generally offer higher interest rates than checking accounts.
• There may be limits on the monthly withdrawals you can make from savings accounts.
• Many online banks provide checking accounts with little to no fees and higher interest rates on savings accounts.

Checking vs. Savings Accounts

What Is a Checking Account?

A checking account is a bank account that enables you to conduct credit and debit transactions. These accounts typically offer a debit card and the ability to write checks.

Withdrawals can be made in several ways, including cash withdrawals from a bank branch or an ATM, debit card purchases, checks, money orders, ACH transfers, and wire transfers. Similarly, deposits can be made through cash, checks, or money orders at a branch or ATM via mobile check deposit, ACH transfer, or wire transfer.

“If your goal is to access funds for daily transactions, a checking account is the optimal solution,” says John Bergquist, President at Lift Financial in South Jordan, Utah.

A checking account is ideal if you need to:

• Pay bills electronically or via check.
• Make purchases or withdraw cash using a linked debit card.
• Transfer money electronically to an account at a different bank.

Some checking accounts are interest-bearing, meaning the money you deposit earns interest if it remains in your account. These accounts are available at traditional banks, online banks, credit unions, and other financial institutions.

What Is a Savings Account?

A savings account is a deposit account that stores money you don’t need for day-to-day expenses. For instance, you might open a savings account to build an emergency fund, save for a vacation, or accumulate a down payment for a home. The security of a savings account, with its ability to store money for future needs, provides a sense of reassurance and peace of mind, making you feel safe and protected.

Savings accounts, like checking accounts, vary in interest rates and are offered by different financial institutions, including traditional banks, online banks, and credit unions.

Savings accounts typically offer higher interest rates compared to checking accounts. Banks provide savers with an annual percentage yield (APY) as an incentive to deposit and maintain funds in their savings accounts. The APY can vary widely between banks. As of August 19, 2024, the average national savings rate was 0.46%.

“An online savings account is often a better choice, offering nearly 20 times the interest rate of a traditional checking account,” Bergquist says. “The rate is comparable to what you might earn from a 10-year Treasury bond.”

Online banks often offer savers higher interest rates due to their lower overhead and operating costs. While rates vary significantly, some high-yield online savings accounts from banks and credit unions may offer up to 5.50% APY.

In addition to higher interest rates, online banks may charge fewer fees. For example, a traditional bank might impose a monthly maintenance or minimum balance fee for a savings account. In contrast, an online bank might not charge these fees.

Withdrawal Limits on Checking and Savings Accounts

One of the advantages of checking accounts is that there are typically no limits on the number of withdrawals you can make. You can use your debit card multiple times daily for purchases, cash withdrawals, and pay bills without penalties. However, this may be different with savings accounts. Initially, these restrictions were part of Regulation D, a rule enforced by the Federal Reserve.

According to Regulation D:

• Savings accounts, including share savings and money market accounts (MMAs), were limited to a maximum of six withdrawals per month. Exceeding this limit could result in excess withdrawal fees.
• The transactions that counted toward this limit included ACH withdrawals, overdraft transfers from savings to checking, online or phone banking transfers, debit card point-of-sale (POS) transactions, and transfers or withdrawals made via fax.
• Unlimited withdrawals from savings accounts were allowed if made in person, by mailed request, or at an ATM.

Even though the withdrawal restrictions under Regulation D were lifted in April 2020, some banks and credit unions may still impose excess withdrawal fees for savings accounts. It’s crucial to check with your financial institution to understand the rules and prevent unexpected expenses.

It is worthwhile to invest time in finding an account that aligns with your needs and lifestyle. For instance, if you’re aiming for higher returns, some banks offer better interest rates if you open a checking and savings account and link them together.

Checking vs. Savings Accounts: Which Is Better?

When comparing checking and savings accounts, one might be more suitable for your needs, or you might benefit from having both. Here are some essential questions to consider when choosing a checking or savings account:

• What fees are associated with the account, such as a monthly maintenance fee?
• Is there a minimum balance requirement?
• Does the savings account come with an ATM or debit card?
• Are there daily ATM withdrawal limits for checking accounts?
• Are there daily deposit limits for either checking or savings accounts?
• Does the account earn interest, and if so, what is the APY?

It’s also good to check if the bank offers special account opening incentives.

“Banks are highly competitive in a low-interest-rate environment, and they may offer incentives that make a checking or savings account more appealing,” says O’Donnell. For example, you can join a debit card rewards program that offers discounts or savings. Alternatively, you could use promotional offers when opening additional accounts, such as a money market or certificate of deposit (CD) account.

Finally, consider the type of access you require. Whether you choose a checking or savings account, consider whether the bank provides the online and mobile banking tools you need, the number of ATM locations, and whether branch banking is available if you occasionally require it.

Frequently Asked Questions (FAQs)

How Much Money Should You Have in Your Checking Account?

The amount of money you should keep in your checking account depends on critical factors. If your bank requires a minimum balance, you should maintain at least that amount to avoid service fees that could reduce your balance. However, keeping enough funds to cover one to three months’ expenses is generally a good idea. This ensures you have enough to manage living costs and bills in an emergency.

What Do You Need to Open a Checking or Savings Account?

To open a bank account, whether checking or savings, you’ll need to provide proof of identity, typically in the form of a government-issued ID such as a passport or driver’s license, proof of address, and your Social Security number. If your bank requires a minimum deposit to open the account, you must have those funds ready.

Which Savings Account Earns You the Most Interest?

While most savings accounts offer relatively low interest rates, there are ways to earn higher returns. Look for tiered accounts that offer better rates as your balance increases, or consider high-yield savings accounts that pay more when you deposit a higher amount, typically over $5,000. If you want even better returns, you might explore money market accounts, which combine features of both checking and savings accounts. These accounts invest your deposits in other financial vehicles while maintaining high liquidity.

How Do You Choose a Savings Account?

When selecting a savings account, several features should be taken into consideration. First and foremost is the interest rate, which determines how much your money will grow over time. Higher interest rates mean more earnings. Additionally, compare fees and withdrawal restrictions to find the account that best fits your needs.

The Bottom Line

Both checking and savings accounts play essential roles in managing your finances. While both types of accounts keep your money safe, they serve different purposes. Checking accounts offer the convenience of easy access to your funds for daily expenses. In contrast, savings accounts help you earn interest and safeguard your money for future needs. Before opening a checking or savings account, comparing rates, fees, and terms is crucial to finding the best option for your financial situation.