What Is the Difference Between Checking & Savings?

Checking accounts are commonly used for day-to-day deposits and purchases. Conversely, savings accounts are not generally used as often and should be thought of as longer term holdings. While it varies from bank to bank, generally speaking, checking accounts offer little to no interest for the deposits in the account. Savings accounts on the other hand offer interest payments for the deposit.

Access to funds

Checking accounts should be used for money that is needed quickly and easily. This should include basic amounts for rent/mortgage, utilities, grocery bills, etc., all of which are expected expenditures. It should also include an amount of contingency to cover small emergencies and to assure that checks will not be returned.

FDIC insurance

Both savings accounts and checking accounts are generally protected by FDIC insurance. Consequently, if the bank holding either form of account were to fail, the money in your accounts would be safe up to $250,000 until the end of 2009 and $100,000 thereafter.

Purpose for accounts

Savings accounts are best used for saving for major purchases, rainy day funds, and, to a limited degree, retirement savings. Checking accounts are used for quick access to funds. It is generally wise not to keep too much money in checking accounts, because they tend to have lower interest rates than savings accounts. Also, the presence of the money in the checking account may prompt unnecessary spending.

Connected savings and checking accounts

Some banks provide a service under which money is automatically transferred from a savings account to a checking account or vice versa. For example, one program automatically pulls money from a savings account into checking in order to prevent checks from bouncing. Another, automatically rounds purchases up to the next full dollar and transfers the change into the savings account as an inducement to save.

Limited role for savings accounts

Generally, savings accounts should not be a major component of long term savings. Retirement accounts of various sorts offer better tax efficiency and for most people, investments in stocks and bonds offer better long term returns. Consult a financial adviser and determine how much money should be in a savings account versus these other vehicles.