Many people wonder about the difference between checking accounts and savings accounts. Each account serves a unique purpose, and it’s best to use them the way they are designed. You should use your checking account for day-to-day spending, while putting away your extra cash in your savings account. This will help you avoid fees and maximize your earnings.
A checking account is designed for day-to-day financial transactions. A good rule of thumb is if you’re buying something, it should come out of your checking account, not your savings account. This is because checking accounts are your most flexible bank account, allowing to you deposit and withdraw money as often as you’d like without any fees or penalties.
When you use your debit card at the grocery store, that’s your checking account at work. If you decide to use your credit card at the store instead, and then pay off the balance at home later that week using a banking app, your checking account is back at work again. Pretty much any routine transaction you make, including subscriptions to monthly services, buying anything, or withdrawing money from an ATM, should take place using your checking account.
Checking accounts do not accrue any meaningful amount of interest for your money. This is their main drawback, since your money will lose value relative to inflation if it sits in a checking account for too long. That’s why the account is designed for day-to-day spending, where your interest rates don’t matter. If you want to save money for the future, you should look at a savings account instead.
A savings account is designed to put away money for long-term savings. You can perform deposits and withdrawals at the bank or ATM, as well as transfer money between savings and other accounts online. However, you can only do a limited number of transactions involving your savings account in any one month period. If you go over that limit, you will receive a fee for each additional transaction.
These transaction fees make savings accounts a very poor place to do your daily spending from. Instead, if you know you will need to withdraw money from your savings account, do it all at once rather than in little bits over time.
The real benefit of a savings account is that it offers interest on your money. The longer your money sits in the account, the more wealth you accrue. Unfortunately, even savings accounts don’t offer great rates compared to the old days, so you shouldn’t hold long-term investments such as retirement savings in one of these accounts. Instead, use your savings account to save up for once-in-a-while expenses like vacations or new technology.
Checking and savings accounts are mainstays of the banking industry, so make sure you understand how to use them. Use your checking account for day-to-day transactions and any spending you want to do. Use your saving account to put away money for longer-term savings. Your longest-term savings shouldn’t go in either account, but should rather go into the appropriate investment vehicle. If you understand these basic concepts, you are a checking and savings account master.