When putting money in a bank and managing accounts, it can be helpful to understand the differences between checking and savings accounts. Most banks and credit unions offer both types of accounts, and they serve different purposes. There are also special rules and regulations that govern each type of account. Most depositors find it beneficial to have at least one checking and savings account.
What is a Checking Account?
When most people put money in their bank, they are using a checking account. A checking account allows a depositor almost unlimited access to the funds they put in the account, and they are generally the most useful account type. Checking accounts are designed to handle frequent deposits and withdrawals without penalizing the depositor. Most debit or ATM cards are linked to a checking account. True to the account’s name, paper checks also link to a checking account.
Financial institutions primarily offer checking accounts as a service to customers. Banks don’t generally make any money from checking accounts, and some banks may charge service fees for having a checking account. From the bank’s perspective, a checking account is a way to attract customers to the bank in hopes that they will use other services like savings accounts or loans. Since the bank considers funds in a checking account to have low reliability, they generally do not offer interest on the money because they will not use it to back loans.
A checking accounts is extremely useful for everybody. It keeps money secure and allows for easy electronic access to funds. Many banks also provide customers with free tools to track savings and spending, which can help with managing a budget. Having a checking account also makes it easier to get paid. Most employers today prefer to pay through direct deposit rather than traditional paper checks. Direct deposit is difficult or impossible without a checking account.
What is a Savings Account?
A savings account is a different kind of deposit account that allows a person to save money in a secure place and take advantage of interest the bank may pay on that money. Savings accounts generally have higher minimum balances and are not designed to be used for frequent withdrawal. In fact, most banks have strict limits on the amounts of withdrawals that can be made from a savings account per month and will begin penalizing a depositor who goes beyond this limit.
If a person needs money from his or her savings, it is better to move a large amount of it into a checking account once and then spend from the checking account. Savings accounts are also frequently used as overdraft protection funds for checking accounts. If a depositor overdrafts their checking account, it triggers an automatic transfer from savings and prevents penalties and charges associated with overdrafts.
Banks consider savings accounts to be a slightly more secure deposit investment compared to checking accounts. For this reason, banks are willing to provide a small amount of interest payment to a savings account as an incentive to keep larger balances in the account. The bank my then use some of these funds to back loans. Keep in mind that even if the bank is using the funds to back a loan, this has no direct effect on the depositor or the account balance. It is merely the bank’s internal workings.
Savings accounts are generally good ways to keep money saved and far more secure than using physical cash or a safe. Depositors interested in making more interest, however, may want to consider moving their money to a deposit account with a higher yield. Sometimes high-yield savings accounts can be used but they have much higher minimum balances. A certificate of deposit is a similar type of account, but unlike a savings account the money placed there cannot be accessed for a certain period of time. The advantage is that the interest for a CD is much higher.
Money Security in Banks
Some depositors fear that they may lose control of their money if it is held by a bank. There is actually very little risk of this. All types of deposit accounts, including checking and savings accounts, are insured by the Federal Deposit Insurance Company or FDIC up to a certain amount—currently $250,000. If a person begins to hold a balance beyond this limit, they can always open another account because each account is insured independently.
This insurance is a government service designed to increase consumer confidence in banks. If the bank is robbed or even if the bank itself collapses, the government will pay out the value of accounts held at that bank. This has never happened on a large scale, but the existence of the FDIC helps to increase depositor confidence.
Anyone 18 years old or older can legally open a checking and savings account in their name. It is a good idea to have such an account when you get a job or begin saving money.