Checking vs. savings accounts
Understanding the difference between savings and checking accounts is important if you want to stay on top of your finances.
A checking account is sometimes called a “transactional” account because you can add and remove money at will. These days, few people use paper checks and instead opt to charge purchases on a debit card.
With a checking account you can withdraw an unlimited amount of money, up to what you have deposited in the account. Some checking accounts pay interest, but they are few and far between. If you do find a checking account that pays interest, make sure you understand the requirements, since many interest-bearing checking accounts require account minimums.
On the other hand, a savings account is designed primarily for allowing money to accumulate. According to the Federal Reserve’s Regulation D, you cannot make more than six withdrawals a month from a savings account. If you do, you can be penalized, and you run the risk of having the account converted from a savings account to a checking account.
Your savings account pays a modest interest yield on an annual basis. The higher your yield, the more likely it is that you will be required to meet minimums.
How to use checking and savings accounts in your finances
Both checking and savings accounts are very liquid because they are cash accounts. You can access the money quickly and easily.
On top of that, your cash deposits are usually protected by insurance. The FDIC protects deposits held at member banks and the NCUA protects those at credit unions. Before you put your money into any account, make sure the financial institution is properly insured and your money is protected in the event of an institutional failure.
Because your cash is so safe, you won’t see high returns. This is why checking and savings accounts make poor vehicles for building long-term wealth for retirement. Due to inflation risk, you are likely to lose money in real terms if you keep building in these types of accounts.
Instead of using checking and savings accounts to build wealth, it makes more sense to use them for more immediate needs.
Checking accounts are great for everyday expenses. Because you can access the money anytime without restriction, it makes sense to use checking accounts to manage the money you spend on things like groceries and gas.
Savings accounts are ideal as emergency funds. You can get to the money with a minimum of fuss, and use it to take care of unexpected situations. As long as you’re careful about the number of withdrawals you make in a month, they can work really well.
As you get ready to build wealth for the future or for retirement, investing might be a better choice for boosting your income.
