Distinguishing Checking and Savings Accounts: Tips for Selection.

The functions of savings and checking accounts may overlap, but they are essentially different. It is critical to comprehend their unique purposes and have both in managing your money over the short and long term.

Checking accounts facilitate your daily monetary activities, such as paying bills, amassing your salary through direct deposit, and withdrawing cash from an ATM. In contrast, savings accounts are ideal for accumulating an emergency fund or saving for a specific purpose, such as a holiday.

Here are the specific differences between the two accounts and why it is essential to have both:

  • Checking account Savings account
  • Primary use Spending Saving

Interest Rates are insignificant or minimal. Varies by bank.

Common fees Monthly maintenance fee, overdraft fee, out-of-network ATM fee. Monthly maintenance fee, minimum balance charge, savings withdrawal limit fee.

Minimum balance Differs by bank. Differs by bank.

Limits on transfers None. Six each statement cycle, in most cases.

A checking account is commonly used in everyday transactions such as making transfers, debit card purchases, or writing checks and comes with a debit card, checkbook, and mobile payment features such as Zelle. Nevertheless, banks often do not pay interest on funds in checking accounts, meaning that money in such accounts does not grow. Three essential features to consider when shopping for a checking account are the absence of monthly maintenance fees (or an easy way to waive them), free access to a significant ATM network, and low or no overdraft fees. You may also want to check for account sign-up rewards and earn $100 to $500 or more.

In contrast, savings accounts are restricted, making them ideal for achieving financial goals. Checks can't be written against these accounts, and generally, you are limited to six withdrawals or transfers per month. Savings accounts offer the potential to earn interest, particularly high-yield savings accounts, which typically have higher APY than checking accounts. Therefore, you can store money in such an account for an extended period, allowing it to accumulate and grow.

When choosing a savings account, you should consider the following factors:

    A high APY: the higher the APY, the more money you can earn. Note that savings account APY is variable, and banks can raise or lower the rates at any time.

    Minimum Balance: Certain savings accounts require a high minimum balance to be maintained in order to earn APY. It is important to choose an account with a minimum balance requirement that you can easily maintain.

    Fees: Opt for accounts that do not have monthly maintenance fees or have simple ways to waive them. Similar to checking accounts, you can also receive a bonus by just opening a savings account.

    Do Checking and Savings Accounts Accrue Interest?

    Checking accounts are usually transactional accounts and not intended for saving purposes, hence they generally do not earn any interest.

    Savings accounts usually accrue interest. When searching for the best savings account, it is important to select one that offers a high APY, allowing your savings to grow maximally.

    Due to the Federal Reserve raising interest rates several times in 2022, many banks have increased their savings account yields. The highest rates can typically be found at online banks and credit unions.

    Please note that rates on checking and savings accounts fluctuate, and the bank may adjust the rate amount depending on market situations.

    What is Regulation D and How Does it Affect Savings Accounts?

    The number of withdrawals or transfers from savings accounts is usually restricted to six per month for consumers, owing to Regulation D. This Federal Reserve mandate distinguishes between transactional and non-transactional accounts, with savings accounts falling under the latter. Therefore, the number of transactions is restricted, and any exceeding the limit are subject to fees.

    However, in April 2020, the Federal Reserve relaxed this rule in response to the coronavirus pandemic. Banks are now permitted to suspend the regulation, allowing customers to make over six withdrawals or transfers from their savings accounts each month. Nonetheless, banks are not required to suspend the regulation, and many still adhere to the limit.

    Regardless of whether the regulation is suspended at a particular bank, be mindful of the number of withdrawals or transfers allowed from your savings account. If the bank imposes a limit and you exceed it, you will incur a fee.

    Are Checking and Savings Accounts Safe to Store Money?

    The bulk of deposit accounts are insured by either the Federal Deposit Insurance Corp. (FDIC) for banks or the National Credit Union Administration (NCUA) for credit unions.

    If a bank fails, the FDIC guarantees that depositors' money will not be lost. The insurance covers up to $250,000 per depositor, implying that jointly owned checking or savings accounts of up to $500,000 would be covered. FDIC coverage is supported by the U.S. government, implying that if you open an account at an FDIC-insured bank, you can rest assured that up to $250,000 of your funds are safe.

    In the same vein, the NCUA covers the balances in checking and savings accounts of credit unions. Similar to FDIC insurance, NCUA insurance covers up to $250,000 per individual, per account type.

    To ensure that your funds are secured by the federal government, ensure that your financial institution is insured by either the FDIC or NCUA. You can verify if a bank is FDIC insured by using the BankFind Suite. For credit unions, check the NCUA's searchable database of insured credit unions. Some banks may be insured by the state instead of the federal government.

    Is it Advisable to Have Checking and Savings Accounts at the Same Bank?

    While it might seem convenient to have your checking and savings accounts with the same bank, there are some considerations you should keep in mind.

    There are benefits to having both accounts at the same bank, including the convenience of viewing all your account information in one place. Additionally, you may be able to link your savings account to your checking account for overdraft protection, which can prevent you from accruing debt when you exceed your checking balance. Some banks also offer special perks for customers who link both accounts, such as waived fees or higher rates.

    However, by limiting yourself to one bank, you might miss out on better rates and deals offered by different institutions. For instance, one bank could have a vast network of ATMs where you can withdraw funds from your checking account for free, but its savings accounts could have low Annual Percentage Yields (APYs). Alternatively, an online bank may have competitive rates for savings accounts, but no brick-and-mortar branches. In these circumstances, separating your accounts between various banks could be more rewarding than keeping them with the same bank.

    The Bottom Line

    Both checking and savings accounts are integral to your financial well-being and should meet your individual needs and preferences. Consider your priorities and goals when selecting banks and account types. For instance, if growing your savings is your primary focus, high-yield online banks may be an excellent choice. On the other hand, if loyalty to one bank is important to you, it might be worthwhile to have both accounts with the same institution.

    As you weigh your options, it is crucial to make use of search tools to verify that your bank is insured against losses, and to look out for minimums and fees that can be avoided. Increasing your savings rate is crucial, as it leads to better payouts over time.

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