Having a bank account is essential, but it can be difficult to figure out what kind of account you need and what makes them different. The primary purpose of a checking account is for cash withdrawals and regular use of funds. On the contrary, a savings account is meant for putting money aside for later.
This article will dive deeper into the key differences between these two types of accounts.
If you are just getting started, learn how to open a U.S. bank account.
Having a checking account gives you easy access to your money. Overall, they are a helpful way to store cash for regular spending, but there are various ways to utilize them.
Most people use a checking account to withdraw money for everyday transactions.
There are a few ways to withdraw, deposit, and use the funds in your checking account.
If you need cash, you can physically withdraw money from an ATM using a debit card. These withdrawals can be completed all over; however, you can expect to pay ATM fees if you use an out-of-network machine.
You can also use debit cards for making point-of-sale transactions. A debit card gives you easy access to your account to buy things as you need when you are not using cash.
It’s important to note that debit cards are not the same as credit cards. Whether you withdraw cash from an ATM or use your debit card as a payment option, you can only spend what you have deposited into your checking account. You are not borrowing money.
Another way to pay using the money in your checking account is with paper checks. You can order a checkbook to write out checks as payment when you open a checking account.
Again, the funds are coming from your checking account, so you need to have enough money deposited to complete any transactions. Otherwise, your check will bounce.
If you don’t know how to write a check, here is a step-by-step guide.
You can have your wages deposited directly into your checking account. Instead of receiving a physical paycheck, these funds are virtually transferred to you.
The only physical proof of payment you may receive is a pay stub or statement, but many businesses are going paperless. Using your checking as a deposit account is a helpful way to make sure your account never runs low.
You can pay bills from your checking account through the mail with physical checks or electronically using online or mobile banking.
All you have to do is log into your account from your computer or mobile device and make a full or partial payment toward your balance due. You can even set up automatic payments so that you don’t need to log in each month to pay your bill—instead, it’ll automatically deduct the funds from your account.
Checking Account Fees
In some cases, you’re expected to maintain a minimum balance in your checking account, or you may be charged fees. Check with your bank or credit union for details.
You’ll also want to ensure that you have enough funds in your checking account when you’re making payments. If not, you may be charged with an overdraft fee for insufficient funds. However, you might have signed up for overdraft protection through your bank or credit union. With overdraft protection, you can still use your card, but you’ll ultimately need to pay account fees until you replenish your checking account.
A savings account is what the name implies: it’s a deposit account intended for the money you don’t want or need to spend right away. Unlike a checking account, from which you withdraw funds regularly, this money is typically intended for safekeeping over a long period and often for a specific purpose.
You may decide to use your savings account to support long-term financial goals, such as a down payment on a home or college tuition for your children. Or, you may use it as an emergency fund, which is money saved for significant and often unforeseen expenses, such as car trouble or medical bills.
The number of withdrawals you could make from your savings account used to be limited to six “convenient” withdrawals or transfers per month. However, the Federal Reserve Board recently lifted this limit due to financial strains caused by the COVID-19 pandemic.
Types of Savings Accounts
There are various types of savings accounts aside from the traditional account described above. We will review:
- High-yield savings account
- Certificate of deposit account
High-Yield Savings Account
A high-yield savings account is a bank account that typically earns higher interest rates than a standard savings account. While traditional savings accounts may earn you as low as 0.01% on your balance, a high-yield account can earn you somewhere in the range of 1% to 2.2% at the time of this writing.
Online banks often offer high-yield savings accounts, which can pay more to their customers since they have fewer overhead costs. Some credit unions and traditional banks may have them available as well.
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Certificate of Deposit Account
A certificate of deposit account (CD) is a savings account that is held for a fixed period, at a fixed interest rate, with a fixed withdrawal or “maturity” date. These accounts pay you higher interest rates than traditional savings accounts to lock your money in for a predetermined term length.
CD terms most commonly range from three months to five years, and until that term ends, you can’t access your money without paying a penalty. These term lengths are one of the most significant differences between this type of account and a traditional savings account, which you have more freedom to access.
People typically use CDs for long-term personal finance goals. So, if you have money that you don’t need for some time and want to earn greater interest, they may be for you.
Money Market Account
Money market accounts (MMAs) give you the ability to make transactions with a debit card or check.
MMAs often have higher interest rates than traditional savings accounts. They are also insured by the FDIC.
MMAs may require large upfront deposits to open an account. They often have minimum balance requirements, too.
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