The world is filled with places to put your money. Apps, cryptocurrency exchanges, and investment funds abound, trying to help you make the most of your money.
Most of us, however, need to start with just two basic types of bank accounts to keep our money in order: checking and savings. The features of checking and savings accounts are designed to encourage smart money management. But you can easily miss out on the benefits if you don’t know the best ways to use each one.
Learn the difference between checking and savings accounts to find out which is the best fit for you and how to use these types of accounts to ensure savvy money management.
The Basics: Checking vs. Savings
A checking account might be called a debit account, spending account, or transaction account, depending on your bank. Your checking account is designed for frequent transactions. It’s meant to hold your money short-term so you can spend it — for example, to pay bills, shop, write checks, or send money to friends.
You can also deposit and withdraw cash from your checking account. However, with the bulk of our financial lives going digital, you’re more likely to use a checking account like a digital wallet: It holds your cash reserves as you spend and you can pay people from it easily.
A savings account is a place to hold money you don’t intend to spend day to day. It has a separate account number from your checking account and doesn’t usually come with a debit card or checks for spending. Instead, you use the account to store money to reach financial goals, and you withdraw from the account in cash or into another account, such as your checking account, before you need to spend it.
Depending on the type of savings account your financial institution has set up, government regulations might limit the number of withdrawals you can make from a savings account per month. Bank accounts are regulated under the Federal Deposit Insurance Corporation (FDIC), which insures money in U.S.-chartered banks.
Key Features of Savings and Checking Accounts
The key differences between checking and savings accounts are the types of transactions they allow, interest rates you can earn, and withdrawal limits.
Debit and ATM Card Transactions
Debit cards let you pull money from the account without going to the bank or writing a check. They look like credit cards, and you can use them similarly to fund everyday transactions like buying groceries or gas, shopping, or paying for dinner.
You can also use a debit card to withdraw cash or check your account balance at an ATM. By contrast, an ATM card is similar and also lets you access your account at ATMs, but you can’t use it to pay for direct transactions as you can with a debit card.
Checking Account Debit Cards
Checking accounts typically come with debit cards to give you easy access to your money anytime from almost anywhere without going to a bank or ATM.
With competition increasing, especially with the growing popularity of online banks, many banks offer debit cards with rewards or cash-back programs similar to credit cards. You might get discounts with a network of retailers or earn a percentage of cash back for every debit card purchase.
Financial institutions earn money from retailer transaction fees when you swipe your debit card, so rewards are a way of giving you a portion of those earnings and encouraging you to continue using your card.
Savings Account ATM Cards
Savings accounts don’t come with debit cards, but you might get an ATM card that lets you withdraw cash and manage the account from an ATM. You won’t be able to use an ATM card for other types of transactions, like purchases at the register or online. Your bank may or may not count ATM withdrawals toward your monthly withdrawal limits.
A money market account is a type of savings account that comes with a debit card and checks. It earns interest like a savings account and imposes the same FDIC withdrawal limits, but you can get immediate, direct access to your money if you need it.
Most banks offer some kind of interest-bearing account, which lets you earn money just for keeping your money in the account.
That’s because your money is an asset to a financial institution. It lets the bank conduct its business, like making loans. It earns money and passes some of the proceeds back to customers to reward you and encourage you to keep your money in its coffers.
Checking Account Interest Rates
Traditionally, basic checking accounts come with low or no interest, typically around 0.001%. This is still the case for most legacy banks and credit unions.
You might earn a higher interest rate — still probably as low as 0.01% — for keeping a minimum balance, conducting a number of transactions, or upgrading to an account with a monthly fee. Otherwise, checking accounts aren’t built to earn interest, because you’re not supposed to hold a lot of money in them.
Online and challenger banks like Varo are changing this standard, though. They eschew overhead costs like bank branches and personnel by partnering with existing banks, so they have more room to pay interest on checking accounts. Some have offered as much as 1% or 2% interest on checking accounts — although that amount fluctuates significantly with the Federal Reserve rate, the rate at which banks lend money to other banks.
Savings Account Interest Rates
Savings accounts are the traditional interest-bearing product in consumer banking. You’re supposed to keep larger amounts of money in them and not withdraw it often, so you stand to earn a bit of money on them each year.
Still, those earnings aren’t spectacular. The FDIC tracks average interest rates for savings accounts weekly, and it sat around 0.04% in March 2021. At a high point in interest rates in 2019, that average reached 0.10%. A high-yield savings account might pay 1%, 2%, or more, depending on current prevailing interest rates.
Their relatively low yield makes them a poor option for long-term savings, though. For a higher yield — and, in many cases, tax advantages — put long-term savings into accounts designed for that purpose, like a retirement account, 529 college savings account, or a taxable brokerage account.
Like any consumer product, banks are competing for your business. With online banks disrupting the market with fee-free bank accounts, traditional institutions are scrambling to keep up, and fees are all over the place.
Look into fees when comparing bank accounts because this difference could save you a lot of money and prevent any surprises.
Checking Account Fees
Basic checking accounts traditionally come with a monthly maintenance fee, somewhere around $4 to $10 per month for a standard, no-interest, no-frills account. Most waive the fee if you meet monthly direct deposit, transaction, or balance requirements.
Legacy banks typically drop those fees for similar accounts for students and customers over age 65. Online banks tend to skip the monthly fee despite offering better features, like higher interest rates, ATM fee reimbursement, and budgeting apps.
Checking accounts may come with additional costs, depending on your activity, including:
- Checks and Checkbooks. Some banks give you a few checks or a checkbook for free when you open an account, but that perk is increasingly rare as our need for paper checks dwindles. You’ll buy checks from your bank or a third party if you want to have checks on hand. Most banks let you schedule checks online that they’ll send in the mail if you have to pay bills by paper check.
- ATM Fees. When you withdraw money at an ATM, you could pay a fee charged by the institution that owns the machine, plus a fee to your bank. Your bank usually lets you use its network ATMs for free. Some even reimburse you for fees charged by other banks.
- Paper Statements. If you don’t want to do your banking online, you’ll probably pay to have the bank print and mail you a statement.
- Debit Card Replacement. Your first debit card is free when you open an account, but you might pay to replace it if it’s lost or stolen.
- Overdraft and NSF Fees. If your account includes overdraft protection, your bank will cover you if you take your account balance below $0. It’ll charge a hefty fee — usually around $35 — for the service.
- Other Service Fees. Banks often charge fees for less common services, like a wire transfer, stop payment, or coin processing.
Banks include full fee tables online, so you can see exactly what you’d stand to pay before you open a checking account.
Savings Account Fees
Savings accounts tend to come with a monthly maintenance fee similar to checking accounts, between $4 and $10. They waive fees when you meet minimum balance and deposit requirements — which shouldn’t be tough to meet if you’re using your savings account as intended.
You also pay a fee per withdrawal for withdrawals beyond your monthly limit. The FDIC sets this limit at six withdrawals, but your bank can set it lower than that. The FDIC withdrawal limit for savings accounts has been suspended indefinitely in response to the COVID-19 pandemic, but banks aren’t required to lift their limits.
The Verdict: When Should You Use a Checking vs. Savings Account?
Checking and savings accounts have vastly different intended uses. Using them properly can help you save and earn money over time and achieve your financial goals.
You Should Use a Checking Account for…
- Paycheck Deposits. Set up direct deposit to receive your paycheck or other income directly into your checking account, so you can immediately use it to cover expenses.
- Day-to-Day Spending. Use your debit card when you’re shopping in person or online, buying groceries, hailing a cab, or doing anything else throughout your daily life that requires you to spend your money.
- Paying Bills. Write checks or schedule online bill pay to draw money from your checking account to make payments on rent or mortgage, utilities, subscriptions, and debt.
- Cash Withdrawals. When you need cash for daily spending, withdraw it from your checking account via ATM or at a bank branch.
- Paying Friends. Send money to friends and family within your institution’s mobile banking app or by connecting your checking account to a peer-to-peer payment app like Zelle, Venmo, or PayPal.
You Should Use a Savings Account for…
- Emergency Fund. Set aside funds to cover unexpected expenses or income loss in your savings account, where it can earn interest while it sits.
- Holiday Savings. Save small amounts all year to pay for holiday gifts and events so you don’t have to foot the bill all at once. Some traditional banks offer Christmas or holiday savings “club” accounts that set your money aside but don’t earn as much interest as a regular savings account.
- Short-Term Goals. Save for a down payment or other major upcoming expense in a savings account, where it’s harder to access and spend than cash in a checking account.
- Paycheck Deposits. Build your nest egg by sending a portion of your direct deposit right into savings, or schedule an automatic transfer from your checking into savings for each payday.
How Checking and Savings Accounts Work Together
When you keep your checking and savings accounts at the same bank, you could access features like:
- Overdraft Protection. Many banks let you connect your checking to a savings account to cover you in case you spend beyond your checking balance. Because you cover transactions with your own funds, the fee is usually much lower than typical overdraft fees.
- Loyalty Perks. Banks reward customers who use lots of their financial products. You might get reduced fees or higher interest rates if you have both a savings and checking account with your bank. You might also get lower interest rates on a mortgage or other loans you take out with that bank.
- Recurring Transfers. Automate your savings by setting up automatic transfers from your checking account into a savings account. You can do this between any accounts, even if they’re not at the same institution, but some banks make the process easy when they manage both accounts.
Pro tip: If you’re looking to set up a checking and savings account, one of our favorites is the CIT Bank Savings Connect. When you open both you will boost your earnings by receiving the highest possible APY from your savings.
Typically you want to limit your checking account to monthly expenses and move the bulk of your money into the right kind of savings account, where you could earn a better return and avoid overspending.
A word of warning: A savings account shouldn’t be the catchall for all the money you don’t need for expenses. Many other types of accounts are designed for specific savings goals and come with advantages you don’t get with savings accounts. Look into:
- Certificates of deposit (CDs) for short-term, high-yield savings you can’t touch for one to three years.
- Health savings accounts for tax-advantaged savings to prepare for medical expenses.
- Individual retirement accounts (IRAs) for high-yield, tax-advantaged savings you won’t touch until you retire.
Note that if you use a savings account with an online bank, it might not have all the features mentioned above. Banking apps facilitate saving differently, and many hold your savings in what’s technically a checking account based on FDIC definitions.
They might use a budgeting interface to separate your savings from your spending balance within a single account, or set up a second checking account to hold your savings at a different interest rate. Your money is still FDIC-insured and just as secure as with a traditional savings account; just make sure you can’t spend it too easily!