While a savings account handles your savings and a checking account handles your spending, discovering a rhythm between the two can transform how you see personal finance from being overwhelming to being like a strategic game. Bills, paychecks, and spontaneous pizza orders represent checking account activity, whereas saving for an emergency fund, buying a house, or planning for future dreams provides the backdrop for the savings account.
However, that did not happen in a vacuum. Both accounts go through different types of activities in the banking world every day. Checking accounts are meant to be dynamic, so they have a high level of activity. You use a checking account to swipe, withdraw, transfer, write checks, tap a debit card and slide money in and out of your account with essentially no resistance. Banks’ business model assumes that people will use their checking account similarly to how they would use a busy street. As such, checking accounts do not pay their holders much interest because, typically, the money in checking accounts does not stay in one place long enough for banks to invest it in any meaningful way.
Certain traditional financial institutions have created hybrid products that allow consumers to earn high yield interest rates on a traditional checking account. This may sound confusing, but many of these products are offered by online banks that typically do not carry as much overhead (e.g. expensive leases on buildings, luxurious lobbies) as their traditional brick-and-mortar competitors. These online banks have lower costs associated with their banking operations, and therefore provide benefits (such as interest) to consumers via high yield checking accounts that are similar to those offered by savings accounts.
While the high yields on high yield checking accounts may seem quite an attractive offer, when comparing typical savings accounts to high yield checking accounts, you can clearly see the difference. The majority of banks impose a limit on how many times you can withdraw from your savings account, while there is no such limit on high yield checking accounts.
The rewards of high yield checking accounts are not only more financially beneficial than the rewards of savings accounts but will allow consumers to receive the same level of service and support from their bank without having to make any additional effort. While savings accounts will provide interest to consumers who are patient enough to leave their money in savings account for an extended period of time (possibly three to six months), a high yield checking account allows you to earn high yield interest for the short term.
FDIC Insurance Explained
Regardless of whether your cash sits in your checking account or savings account, it is always protected by the FDIC or NCUA up to $250,000, depending on whether you are. So even if your bank vanished like a magician’s act gone wrong, your money would still be safe there. If you have (somehow) amassed more than $250,000, the best thing you can do is spread the money around to various banks. Entertainment certainly has its place, but in all seriousness, piling up tons of money in one place is not wise; inflation steadily decreases it while you are at work or sleeping.
To help you out of the confusion of these hairy details, I recommend you also explore other accounts less known than checking and savings. The Money Market account really is a hybrid of the two. You will earn interest on your MM account, but you can only perform a limited number of transactions a month (usually 10, maybe 12), and there may also be higher minimum balance limitations placed on your MM account than on your Savings account. Cash Management Accounts are offered by investment brokers primarily and provide you with the convenience of a Checking account with the ability to earn interest on your Cash. Last but not least, Certificates of Deposit (CD) can be a good way to grow your money in the long run — locking up money for months or years and offering more favorable interest rates by actually being “working” money.
The introduction is out of place here. Checking and savings accounts do not have better or worse characteristics; the two should be thought of as tools that have very different functions. Checking Accounts tend to function quickly, noisily, with constant motion, while Savings Accounts operate quietly, methodically, and are set up for the money to stay in an account long enough for it to grow and breathe. Because banks will lend out money deposited into the bank in savings accounts, they will pay you interest on that money as a trade-off to you while they operate these lending operations.
The majority of customers will leave both accounts open, frequently at the same financial institution. The same bank is used to deposit the paychecks into the checking account, pay the bills out of the checking account and keep any money that should not be touched withdrawn from the savings account. Some people will put away some cash for an emergency to a savings account. Others will set aside cash for their house deposits, use their savings for travel and for future projects that they have not yet realized will require funding.
Choosing the Right Bank for You
While picking a place to keep your money, you should take into account the three most important things: No monthly fees, no minimum balance required, and the ability to earn interest. Usually, Credit Unions provide members with all these features. Online Banks tend to be very close but not as good. Traditional Banks are somewhat behind due to the added cost of maintaining their network of branches.
Yet, to relate this of where refer to where the article started but in reverse order…. The secret to managing your money isn’t knowing all of the rules; rather it’s understanding how the type of account that you are using affect your money so that you can have full control over your finances, and no longer feel as though your finances are controlled by a random series of accidents. Checking accounts allow you to spend, Saving Accounts allow you to save, and everything else after that simply fills in the gaps; Once you understand the role of each, you won’t just be a bank customer you’ll actually be the captain of your own financial ship.
