7 Differences Between a Checking and Savings Account
If you’re like most people, you probably have at least a checking account where you deposit any money you earn for safekeeping. However, a vast majority of Americans (71% to be exact) also have another account where they keep their money, known as a savings account. While the primary function of these accounts is the same, in terms of each storing a person’s money for future use, there are a number of distinct differences between them.
Checking and savings accounts are the most popular money-based accounts a persona can open and hold, but that doesn’t mean they’re used the same or share the same benefits and drawbacks. The main difference is the purpose of the account, although there are several more to keep in mind.
This article will list the seven differences between a checking and savings account, such as purpose, accessibility, withdrawal use, and more, so you can determine which is best for your needs and how to use both to your advantage. Read on to find out more on the seven differences between a checking and savings account.
Do All Banks Offer Checking and Savings Accounts?
The most popular companies people will go to for a checking and savings account are banks, and if you’re worried that only certain banks will offer one or both, don’t worry. This is something the two accounts have in common.
You will be able to open a checking and savings account with any banking company nationwide. It is extremely uncommon for a bank not to offer one of these accounts, but if they were to exclude one over the other, they would opt out of offering savings accounts because they are less accessible and versatile than a checking account. Many can’t even function without being connected to a viable checking account.
Typically, banks will offer both checking and savings accounts through a joint account so the client can easily transfer money between the two, making both accounts much more accessible.
While all banks will offer savings accounts to their clients, some might not offer every type of savings account. There are ultimately three different types of savings accounts a person can open and hold:
- Regular savings account: earns interest and offers quick access to funds.
- Money market account: earns interest and potentially provides check-writing privileges and ATM access.
- Certificate of deposit (CD): often has the highest interest rate and has the most limited access to funds.
The vast majority of banks have regular savings accounts, but whether they offer money market accounts of CDs depends on the location. As far as checking accounts are concerned, all banks will offer these as it is the ideal way to obtain loyal clients and business.
7 Differences Between a Checking and Savings Account
Now that we’ve established you can obtain a checking and savings account from any bank in some form, let’s get into the most significant differences between these account types.
Generally, the seven differences between a checking and savings account can be found in their:
- Purpose
- Annual percentage yield
- Average interest rates
- Withdrawal abilities
- Direct fund accessibility
- Debit card and check accessibility
- Potential fees
If you’re interested in opening a checking or savings account (or both) and are unaware of how these differences affect them, read on as we explain each in detail. By the end, you’ll know exactly what sets a checking account apart from a savings account and how these differences should guide your use of each account.
Purpose
This is undoubtedly the most important difference between checking and savings accounts and will almost always come up first when comparing the two.
Banks offer these two different account types because they aren’t intended to be used the same. A checking account is where you should deposit money that you intend to use in your daily life, such as purchasing groceries or gas. It is specifically meant to be used frequently, allowing multiple withdrawals every day.
A savings account’s purpose differs widely, as indicated by its name. The funds in this account aren’t meant to be used for everyday purchases; it’s meant to be saved and left untouched for the most part.
The overarching mentality of “saving” connected to this account type is the foundation for most of the differences on this list because banks want to help you save and allow this account to grow. Savings accounts should be used for long-term goals, emergencies, large purchases, or even big events like weddings or vacations.
If you obtain a savings account and intend to use it daily, not only will you find yourself having a number of issues (which we’ll discuss later on), but you’re also going against the account’s primary purpose.
Annual Percentage Yield
This difference gets into the nitty-gritty of banking that many people might not even be aware of when they open a checking or savings account.
Apart from their purpose, one of the most significant differences between a checking and savings account is their annual percentage yield (APY). In simple terms, an APY is the interest rate applied to the funds in your account for the entire year.
Now, we know several of you probably had a twinge of anxiety when you read the word “interest” because you’re used to the negative reputation that word has acquired, especially when it comes to credit cards. However, for once, interest works for you when referring to APY in bank accounts.
Essentially what happens is your account is assigned an annual percentage rate (APR) when you open it, and the longer your funds are in the account undisturbed, the more of the interest is applied, and the more money the account grows over time. For example, if your account has an APR of $0.01% and you deposit $100 that is left in the account for a year, you’ll earn an APY of $0.01 when the year ends. The higher the APR and the more you deposit, the more you’ll earn.
So, how does APY differ between checking and savings accounts? Well, generally speaking, savings accounts will have much higher rates than checking accounts because banks want to entice you to put large funds in savings accounts and leave them there (as per their intended purpose).
Because checking accounts entail frequent deposits and withdrawals, they won’t benefit much from high-interest rates, and so, they rarely have APYs, and if so, they are much smaller than a saving account’.
Average Interest Rates
One reason why the APY of a checking account is so different from a savings account is because of their average interest rates or APR. These rates will affect your account’s funds and contribute to their APY.
As we stated previously, checking accounts have very low to no APY, and this is because they have extremely low interest rates, averaging $0.04% as of 2021. This is why you’re likely to only see mere pennies applied to your account funds a year versus several dollars you could earn with a savings account.
Most savings accounts will have an interest rate of at least $0.06%, if not higher. It’s worth mentioning that you’ll likely have lower rates if you stick with brick-and-mortar banks versus online banks, where interest rates can be as high as $0.60%.
These are what’s known as “high-yield savings accounts” because they have significantly high interest rates to help your savings account grow rapidly and substantially as long as you keep depositing money and refrain from withdrawing it.
Withdrawal Abilities
Most of the differences we will discuss beyond this point will pertain to how accessible a checking and savings account is to the owner, starting with withdrawals.
Withdrawals refer to a person’s ability to take money out of their account and use it towards something (most likely a purchase). If having the ability to use your money is a priority for you, you’ll want to stick with a checking account because this isn’t a luxury savings accounts provide.
This difference goes back to the purposes of each account type. Checking accounts are meant to be used daily, and so banks allow you to withdraw money from them as frequently as you need as long as there are enough funds in your account to allow it.
Comparatively, since savings accounts are designed to help people save money, one obstacle banks will emplace withdrawal limits. These usually occur on a monthly basis and can vary largely between banks, but for the most part, savings account owners are only permitted a set number of withdrawals from their account within a set time frame. If they attempt to exceed these limits, they might receive a fine, or the request is denied.
In addition to the number of fees you’re permitted, the bank might have a limit on how much money you can withdraw within a set period, so knowing these restrictions is essential before opening an account anywhere.
Direct Fund Accessibility
Another important difference people should be aware of before opening these accounts and transferring funds is how accessible your funds will be.
One reason why joint accounts between checking and savings accounts are so popular with banks is that your checking account funds are frequently inaccessible directly. This means there’s no way to access the money in this account unless it’s transferred into a checking account first.
While this might seem overtly odd that you can’t access your savings account funds directly, it’s merely another obstacle banks create to help you save. The harder they make it for you to withdraw money from your savings account, the more likely you’ll leave it there. Therefore, needing to transfer it from one account to another might be enough to deter you from spending it unnecessarily.
So, if you want to be able to access your funds as much as you please, you’ll want to stick with a checking account.
Debit Card and Check Accessibility
This point goes hand-in-hand with the one stated previously regarding the accessibility of your account funds.
In addition to being unable to withdraw funds directly from a savings account, most banks won’t allow you to have a debit card or checks connected with the account either. Instead, everything goes through the checking account.
It’s incredibly rare for someone to open a checking account and not have access to a debit card, checks, or both. These tools help ensure you can access your funds for daily, essential purchases. A debit card alone allows people to access ATMs and withdraw cash from their checking account, which isn’t a common perk with savings accounts.
However, some banks will allow you to have this level of fund accessibility. The money-market savings account we discussed earlier is a perfect example of this since these accounts are specifically made to offer check-writing and debit card privileges.
Potential Fees
The final difference between checking and savings accounts we’ll discuss are the fees connected to each.
One fee that both account types actually share is carrying a minimum balance, although this is more prevalent with savings accounts than checking accounts. Regardless, banks will require their clients to have a set amount of funds in their accounts to keep it open, and if those funds aren’t present, they’ll be subject to a fee.
Fees checking accounts have the savings accounts won’t are ATM and over-withdrawal fees. Since most savings accounts don’t allow owners to have debit cards, they don’t have access to ATMs and won’t be charged fees if the user goes to another bank’s ATM.
Savings accounts typically won’t allow users to withdraw more funds than are in the account, so they aren’t subject to over-withdrawal fees you’ll experience with a checking account.
However, one fee savings accounts have that checking accounts don’t is excessive withdrawals. As we mentioned previously, savings accounts will have a limit on how many times you can withdraw funds or how much, and if users exceed these limits, they’ll be subject to a fee.
Final Thoughts
Overall, the most significant difference between a checking and savings account is their purpose. Checking accounts should be dedicated to everyday use and exclusively hold short-term funds, whereas savings accounts should be dedicated to saving and holding long-term funds.
Knowing the differences between these accounts is essential to ensuring you have access to the funds you need, aren’t paying unnecessary fees, and can benefit from interest fees as much as possible. So, before you open either account type, consider your priorities and needs to make sure you pick the one that fits best.
