Maybe you already have a checking account, and you’re wondering if you should put some of your extra money into a savings account. Checking and savings accounts are both great financial assets, but each serves a specific (and very different) purpose. If you have plenty of money to pay your bills, and you’re keeping your checking account balance well above the monthly minimum, then opening a savings account (or a second savings account) is probably a great idea. Here’s a quick rundown of what both account types are good for, and how to use them.
Checking Accounts
In today’s world, having a checking account is perhaps the single most essential asset for keeping your finances in order. Originally created so that customers could write checks and pay for purchases wherever they were, checking accounts are now structured to make access to your money easier than ever. By linking your checking account up to a debit card, you’re able to make everyday purchases and withdraw funds from ATMs, no matter where you are. You can also use your checking account to pay bills by providing your routing and account numbers to a company or service. And if you want to make things especially simple, it’s easy to sign up for automated payments – upon authorization, the company will automatically withdraw funds from your checking account every month so that you don’t have to worry about paying your bills on time. With the right checking account and a balance consistently kept above the monthly minimum, you’ll pay no monthly fees and always have easy access to your funds. For those of us who are especially enterprising, some checking accounts even offer sign-up bonuses.
The only problem with checking accounts is that they provide little, if any, interest. The money you keep in your checking account will be readily available to you, but it will not mature over time. It’s best, then, to keep only what you need for everyday use in your checking account, so that your rainy day funds or leftover savings have a place where they can accrue interest. This is where a savings account comes in handy.
Savings Accounts
Savings accounts tend to have higher interest rates (or APYs) than checking accounts, making them a great place to keep any money you don’t need frequent access to. There are multiple types of savings accounts, each with their own unique drawbacks and benefits. Generally, savings accounts that allow for less access to your money will come with a higher APY: regular savings accounts, which allow you to make up to six withdrawals per month, never have interest rates over 2%; whereas Certificates of Deposit (CD’s), which penalize you for using your money before the deposit’s term is over, come with interest rates as high as 3%.
What type of savings account you get depends entirely on your needs and financial outlook. If you’re looking for a place to put your emergency funds, you should open a regular savings account so that you know you have a place to turn to whenever the unexpected happens. And if you want to get the most out of your savings account, it’s probably best to open one at the same bank where you have a checking account. By linking your accounts through one bank, you can easily transfer funds from one to the other, and protect yourself from overdraft fees – with linked accounts, your checking account will automatically withdraw from your savings account if you ever accidentally overdraw.
If, on the other hand, you already have a place to keep your rainy day funds and you’d like to establish an account for your extra savings, then you probably want to think about opening a Certified Deposit or a Money Market Account. These types of accounts are a great way to make a guaranteed investment with stronger long-term benefits. CD’s and Money Market Accounts, though, aren’t for everyone: certain types of withdrawals come with hefty, often burdensome, fees that can completely offset the benefits of having the account. So you don’t want to open one of these accounts unless you have a chunk of change that you’re absolutely certain you won’t need for a couple of years. Check out our article on the different types of savings accounts if you’re looking for more information – CD’s and Money Market Accounts can be amazing financial assets when used with proper care.
Having both a checking and a savings account is a great idea, since it means you can maintain easy access to the funds you need while the rest are accruing interest. Use your checking account to pay your bills and make your daily purchases, and your savings account as a sort of incubator for your remaining funds – the longer you leave your money in a savings account, no matter what type it is, the faster your savings will accrue interest. Do your research, find the accounts that are best for you, and store your money wisely–you stand to benefit a great deal.