What are Checking and Savings Accounts?

A checking account is like a wallet, while a savings account is like a piggy bank…

If you want to spend money, the easiest thing to do is use your wallet. You can carry the wallet around and take cash out when you need it. Getting funds out of your piggy bank is more difficult — You need to plan ahead, since you can’t carry your piggy bank around with you. On the other hand, it helps you save for the future. Similarly, checking accounts are more convenient for everyday transactions, while saving accounts are better for storing cash for the future.

Checking and savings accounts are both types of bank accounts, each with a different purpose.

Banks and credit unions design checking accounts to give their customers easy access to their money and make it simple to pay others. For example, most checking accounts come with checkbooks, debit cards, online bill payment, and other services that make transactions easy. Since they’re meant for frequent transactions, checking accounts rarely limit the number of withdrawals or deposits you can make.

Savings accounts are designed to help customers stash away cash for longer periods. It’s harder to use the funds to make purchases, and you’re limited to six withdrawals a month (less convenient options, like getting cash in person, are exempt from the restriction). In exchange, many savings accounts offer better interest rates than checking accounts.

Each financial institution sets the terms of its accounts, such as interest rates, fees, minimum balances, and features offered. Most banks and credit unions offer both checking and savings accounts, and many people opt to open both because their features are complementary.

You can open a checking account by visiting a bank, over the phone, or online. You need to contribute enough money to cover the minimum deposit requirement, if any. Typically, the bank will send you a checkbook and debit card that you can use to draw from the account.

If you receive a paper check, you can deposit it at the bank, at an ATM, or often on a mobile phone. The bank credits your account for the amount of the check. You can withdraw the money as cash, write checks against it, or use your debit card to draw from it at points of sale or ATMs.

You can also set up direct deposit with your employer so that you automatically receive paychecks in your checking account.

Some checking accounts charge monthly fees. Often, you can avoid them by maintaining a minimum balance or making a set number of transactions each month. Other costs might include foreign transaction fees or fees for using another bank’s ATM.

Another common charge is the overdraft fee, which happens when you try to spend more money than you have in your account. Your bank may let the transaction go through, which will put your account balance into the negative. The bank charges a fee for this service, so even a small purchase can become expensive.

Savings accounts are intended for longer-term storage of cash rather than regular transactions. You can open a savings account by visiting a bank, over the phone, or online. Minimum deposits sometimes apply here, too.

Most banks pay interest monthly on deposits in a savings account. Some institutions offer higher interest rates if you maintain higher balances. Online banks tend to offer higher rates, since they don’t have to pay overhead to maintain physical locations.

You can add money to your savings account by depositing it at your bank or transferring it from your checking account. You can take money out by making a withdrawal at the bank or an ATM or transferring funds to your checking account (there are limits on online and mobile withdrawals).

Some savings accounts charge monthly fees. Often, you can avoid them by maintaining a minimum balance.

The primary advantage of checking accounts is how easy it is to make transactions using money in the account. They come with things like debit cards, checkbooks, and online bill payment services that make it easy to send money to others. They also don’t limit the number of transactions you can make.

The downside of checking accounts is that most do not pay much interest. If you have a large balance in the account, you’re missing out on potential returns you could be earning on the money.

The primary advantage of savings accounts is that they pay interest on the balance you have in the account. That means you’ll earn money for keeping funds in the account, rather than just seeing the value of your cash erode over time due to inflation.

The downside is that there are restrictions on how many withdrawals you can make from a savings account. It’s also more difficult to move money out of the account and use it to make purchases compared to a checking account.

Typically, you cannot write a check against your savings account. If you want to earn interest on your deposits while retaining access to checks and a debit card, a money market account combines many aspects of both accounts. Keep in mind that you’re still limited to six outgoing transactions a month.

Some banks will allow you to use a cashier’s check to draw from the balance of your savings account. A cashier’s check is a way to provide funds guaranteed by a bank or credit union, which comes in handy in situations like paying a security deposit or down payment. Many banks charge a fee for this service.

Checking accounts typically come with debit cards, while savings accounts don’t. Debit cards let you make convenient cash withdrawals from ATMs or pay for things without carrying cash around. Some banks will link a savings account to your debit card, letting you withdraw money from your savings account at an ATM.

Deposits in savings accounts and checking accounts both receive protection from the Federal Deposit Insurance Corporation (FDIC). That makes them equally safe.

The FDIC insures up to $250,000 per depositor, per account type, at covered banks. If you open a checking or a savings account at a covered bank and it later closes, the FDIC will reimburse you for any money lost, up to the limits.

Because the insurance limit is the same for both types of accounts, neither is more secure than the other.

The amount that you should keep in your checking account varies with your typical spending habits.

Ideally, you want to keep enough money in the account to cover your expenses, while providing a cushion to avoid overdrafting the account. Tracking your spending for a couple months, as well as when deposits come in, can help you get a sense of how much you need to pay your bills and everyday expenses. You may want to avoid keeping too much extra in a checking account, since it often pays less interest than a savings account.

Typically, people keep their emergency funds in savings accounts, where the money can earn interest while staying relatively accessible. Many experts recommend that you have an emergency fund equal to three to six months’ expenses.

For example, if you spend $2,000 per month, you should aim to have $6,000 to $12,000 in your savings account. You may also want to keep funds you plan to use for big purchases in the next couple of years in a savings account, such as the down payment on a home or the deposit for a wedding venue.

There’s nothing stopping you from using a checking account like a savings account. If you want to store your extra money in the account for the long term, banks will be happy to let you do so.

But most checking accounts pay no or little interest. You’re likely to earn more interest on your money in a savings account. If you have a large balance in a checking account, you’re likely losing money due to the opportunity cost and inflation. For example, if you have $10,000 and put it in a checking account that earns no interest, you won’t gain anything based on your balance. If you put that same amount in a savings account paying 1 percent APY and compounding monthly, you’ll earn around $100 in the first year.