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When dealing with banks, you’ll often encounter two types of accounts, checking and savings. Each of them has distinct features and advantages that may benefit you. However, you may not know the difference and which to open. Breaking each down can help you understand what account to open next.
What is a Checking Account Used For?
A checking account is best for daily transactions. It allows you to deposit and withdraw money as needed. It’s a liquid account that provides faster access through unlimited withdrawals and deposits, sometimes up to a cap. The limits that they have will depend on what that bank imposes. This liquidity is one of its advantages.
Do you need to take out cash from your debit card fast? A checking account is faster for setting up any payment system or withdrawing money.
Do you need to process a check? The checking account can have the money in the account faster than most.
Checking accounts are the best short-term accounts to store money before using them. You can place money there for your daily expenses and pay obligations like bills. The reason they’re best for short-term holdings is because of growth potential. These have lower interest rates, even with the tiers offered by banks.
What is a Savings Account Used For?
A savings account intends to store money that you won’t use right away. It doesn’t have many features for daily use, such as ATM withdrawals or checks. They’re best for the money you intend to set towards a long-term goal. Some of the most common reasons people use savings accounts are for:
- Emergency funds
- Home down payment
- Auto loan down payment
You can still access money within a savings account, but they have limits. Based on Federal regulations, you can only withdraw fixed times a month. Some institutions charge a fee if you go over the limit. Here are some of the actions that are a part of the transaction limit:
- Debit card transactions
- Checks and overdraft transfers
- Transfers made through a mobile device or computer
- Automated clearing house (ACH) transfers
- Electronic funds transfers
Differences Between Checking Accounts and Savings Accounts
One of the key differences between the two is the withdrawal limit. Since checking accounts are made for daily transactions, you can use them unlimited times per month or up until the limit the bank has set. Most savings accounts only have a limit of six before you get charged extra for each transaction. Money is easier to access in checking accounts, and some features may not be accessible to savings accounts at all.
For example, some banks don’t allow debit withdrawal or check processing with savings accounts. There might also be a restriction to registering it on a digital payment platform like Apple or Google.
However, if you want to store money long-term, you want it to compound over time. That way, your money is working for you in storage. Checking accounts are not ideal because of their very low-interest rates. Money will hardly grow in checking accounts as it’s for daily transactions.
Savings accounts have better growth over long periods. As the money stays there, it gains interest which accrues. It’s the reason why emergency funds and larger purchases have these accounts for storage. While you’re building the money you need, you’ll avoid spending it on other necessities because of the withdrawal limit.
Should I Use a Savings Account for My Emergency Fund?
Yes, a savings account is one of the best places to put an emergency fund. Choose one with a high yield, and the money will accrue higher interest rates. Not only that, but you’ll also earn interest on deposits. You should also find accounts with little to no minimum balance requirements apart from interest rates.
Some banks also offer other benefits from choosing them. It can depend on the bank, but you’ll see things such as:
- Limited time higher interest rate offers
- Extra deposit on the account
- Easy access to the account with any added charges
Do Savings Accounts and Checking Accounts Have Minimum Balances?
The minimum balance on both accounts will depend on the bank involved. You’ll find that their terms vary, and some will even offer you zero minimum to entice you to open an account with them. If you’re concerned about minimum balances, you should go with one that has the best terms.
When you withdraw below the minimum and stay at that level for an extended period, you’ll often incur a charge. The bank can charge from the remaining balance or when you choose to deposit on the account. Again, these terms can be flexible, and banks have different approaches to these rulings.
It’s best to ask about these from the bank before settling on opening an account. That way, you won’t encounter any unwanted surprises.
Are Savings Accounts and Checking Accounts FDIC Insured?
The FDIC is an insurance company specializing in banks. In case an issue occurs, they will provide coverage that can help the clients get back the money the bank owes. Nearly all banks carry FDIC for their insurance, and you are free to ask the bank before you open an account.
The FDIC covers checking and savings accounts, apart from other bank products. The coverage is up to $250,000 per depositor per bank.
Will I Lose Money if My Bank Closes Down?
One of the worst-case scenarios for a bank client is when the financial institution they’re relying on shuts down. When a bank can no longer render its services, it will face losses, especially investments. However, this does not affect savings or checking accounts in any way.
It’s because most banks today have insurance that covers these accounts. They pay a hefty sum to ensure that they’ll have money backed up to cover all their clients’ needs in case of a meltdown. The FDIC is one of the institutions that provide insurance. It’s critical to check a bank’s coverage, especially if you’re holding money there long term.
Wrapping It Up
When deciding between savings and checking accounts, it’s best to choose based on your needs. Checking is better if you’re looking for something to handle daily transactions. If you want to save money long-term, savings will provide better growth rates.
Most bank account holders have one of each and transfer money between them. Ideally, you should gain access to both short and long-term accounts. The bank’s programs, features, and other offerings may also sway you to choose between one or the other. Whatever you decide, make sure to do your research and weigh the benefits of each.