Keeping your earnings safe is a must — and there's no place more secure than a bank account. Storing your cash in a bank account ensures that your money is easy to access and, better yet, that your savings will fatten thanks to the magic of compound interest.
Opening a bank account should be everyone's first step into the world of managing their finances.
The two basic accounts most people need are a checking and a savings account. Although they may look similar at first glance, each account will help you with your finances in different ways.
Ready to secure and grow your money? Here's how to get the most out of your checking and savings accounts.
What is a checking account?
A checking account is meant for day-to-day transactions: Paychecks and other deposits go in, and bill payments and spending money go out.
When you open a checking account, you receive a debit card that makes it's easy to withdraw cash at ATMs and make purchases directly from your account.
Checking accounts also allow users to quickly set up online and automatic bill payments. And yes, you can still write paper checks from your account — which, after all, is how checking accounts got their name.
Most checking accounts offer little or no interest on your money, so they're are most ideal for spending or withdrawing money frequently. You won't want to save money in a checking account by parking it there long term. There's a better option for that.
What is a savings account?
A savings account is a bank account that lets you store money that you don't plan to spend immediately. But savings accounts do allow quick access to your money, if you need to dip into it.
Savings accounts are designed for parking money for a time and letting it earn some interest — which makes them ideal accounts for building an emergency fund or for saving your money for short-term financial goals.
There are many ways to transfer money out of your savings: You can do it at a bank branch, an ATM, via electronic transfer, by direct deposit or by using your bank's smartphone app or website.
Savings accounts do come with withdrawal and transfer limits. While most savings accounts don't cap how much money you can take out or send to another account at one time, they usually limit monthly transactions.
Differences between checking and savings accounts
Here's a quick look at the differences between checking and savings accounts.
|Checking Account||Savings Account|
|Minimum balance requirements||Varies by financial instituion.||Varies by financial institution.|
|Withdrawal restrictions||Varies by financial institution.||Typically no more than six withdrawals and tranfers per month.|
|Monthly fees||Sometimes. Varies by finanical institution.||Sometimes. Varies by finanical institution.|
|Interest||Minimal to none.||Yes. Varies by financial institution.|
|Access||Any time.||Any time. Use should be limited, otherwise charged a fee.|
|Other features||Online access, overdraft, automatic bill payments.||Online access, automatic savings.|
One major difference between these accounts is how often you can use them.
Checking accounts are intended for frequent, even daily use, and so the bank allows you to withdraw, spend and transfer money many times a month. Make sure to ask your bank how many transactions are allowed before an additional fee kicks in.
On the other hand, savings accounts are intended for you to leave your money in the bank and let it grow, so they only allow a few transactions a month.
This is based on Federal Reserve Board Regulation D, a law that says users can only make six withdrawals or transfers out of their savings accounts each month.
Another difference is that checking accounts generally have a very average low interest rate — around 0.06%, according to the FDIC — while savings accounts have higher interest rates, hovering around 0.09% on average.
Keep in mind that's very low, you can get savings accounts with interest rates as reaching up to 3%.
Both checking and savings accounts will allow you to access your money easily and keep it safe.
Are checking and savings accounts free?
There are free checking accounts, but you'll have to do your research to find them.
Many checking accounts charge a small monthly fee to keep your account open, and many have minimum balance requirements. This means if your bank says you must have at least $100 in your account and you go below that amount, the bank will charge you a fee.
Checking accounts also charge overdraft fees in the event that you don't have enough money in your account to pay for a transaction.
Savings accounts usually charge an annual fee to keep the account open, and some expect users to maintain a minimum monthly balance to avoid paying a monthly fee or to earn a higher interest rate.
The good news is that there are savings accounts that don't require you to keep a minimum balance.
To get the best account for your needs, make sure to ask your bank about all possible fees, minimum balance requirements and interest rates.
Which account is right for you?
While it’s best to have both accounts for optimal spending and saving, it all comes down to how you want to manage your money.
A checking account can help you easily manage your earnings, spending and bill payments, while a savings account can help you earmark any extra money you have for an emergency fund or for a short-term goal like a much-needed vacation.
If you qualify for either of these accounts, you'll have access to higher interest rates — which will help grow your money faster.
Remember: No matter which account you open first, it's a good idea to take the extra precaution of choosing an FDIC insured institution.
"Being FDIC insured means that the United States government protects you against the loss of your insured deposits if an FDIC-insured bank or savings associate fails," explains the FDIC.
In the unlikely event that your bank fails to keep your money safe, the FDIC will reimburse your losses up to at least $250,000.