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The best financial plan is one that makes sense for your own personal circumstances. What works and makes sense for one person may not for another.
However, there are some evergreen financial strategies that will work around the contours of almost anyone’s life — and one of those is the necessity of bank accounts. At the bare minimum, you should have a checking and savings account to begin to meet your financial goals. They both have distinct functions and roles within your life, and they form the foundation upon which you can add other types of bank and investment accounts.
If you are unbanked — as in you don’t have any bank accounts currently — we recommend starting here with our guide for the unbanked. Otherwise, read on to see how you can maximize your checking and savings accounts.
A checking account is a transactional account, meaning it’s intended for regular cash transfers in and out. That includes purchases, written and deposited checks, online transfers and payments, ATM withdrawals and deposits, ACH direct deposits, automatic bill payments, wire transfers, and other regular transactions.
Think of it as home base — your primary account. It shouldn’t be where your savings are kept, as checking accounts tend to be a little less secure due to the risk of debit card fraud.
Checking accounts also don’t typically come with rewards in the form of interest, but some banks offer cash-back on some debit card purchases. Some online banks, like Ally, do offer interest-bearing checking accounts, though the tradeoff is that you can’t swing by the bank while running errands.
Many people tend to opt with whatever bank is most convenient, because choosing a bank can be confusing. Ally-Jane Ayers, co-founder of financial planning firm Brooklyn Fi, recommends looking into credit unions for a checking account. “That’s a great place to establish a relationship if you’re going to need a car loan or mortgage in the future.”
Ayers says online banks tend to offer ATM reimbursement as well, so they’re also worth considering. Ultimately, as banking continues its trek toward mobile-friendliness, location is no longer the most important factor. Ayers said, “The proximity to a Chase or Bank of America has started to matter less.”
Generally, a checking account is best for making purchases with a debit card and written checks, online transfers, recurring bill payments, ATM withdrawals, and direct-deposit income. It is best not to keep large amounts of savings (no more than one or two months’ worth of expenses to avoid overdraft fees) in a checking account, and while some accounts bear interest, they’re not the most reliable source for earnings.
Savings accounts are intended for just that — savings. Consider it a holding pen or a parking spot for any money intended for specific goals, like saving for a car, vacation, or other large expense.
The savings account is also critical for emergency funds. “I love online banks for emergency funds,” Ayers said. “Emergency funds should be in a savings account, preferably a high-yield savings account. Something you can access quickly and easily is important.”
For your savings, look for a high-yield savings account that offers a competitive APY and no minimum balance requirements or monthly fees.
The national average APY (annual percentage yield) for a savings account is 0.06%, according to the FDIC as of July 2020. Most establishment brick-and-mortars have savings account APYs that hover even lower—around 0.01%.
But you can get a much more competitive rate with an online bank. While interest rates have fallen due to the COVID-19 economic recession, you can still find online savings accounts with APYs far higher than your typical big box bank. The best rates as of July 2020 are at or above 1% APY, according to a NextAdvisor survey. We recommend going with a high-yield savings account with an online bank to maximize your savings.
Keep in mind, though, that the savings account can’t be used like a checking account. A federal rule called Regulation D restricts convenient transactions to six per month — meaning you can’t make more than six online transfers, outgoing third-party checks, ACH transfers, or overdraft transfers. Otherwise, your bank may slap you with an excessive transactions fee, which is often around $10.
Money market accounts and certificates of deposit (CDs) are options you can consider once you have at least one savings account in which you can put your emergency savings. Money market accounts are a hybrid between a savings account and a checking account; they come with checkwriting and debit card privileges but also typically come with a higher interest rate in exchange for a higher minimum amount to open an account. CDs are accounts where you lock up funds for a fixed amount of time to get a higher interest rate, and they are best for goals with a particular deadline attached. At this time, interest rates are lower across the board, and money market accounts and CDs are not as competitive against high-yield savings accounts as they were before, but they’re still worth looking into on a case-by-case basis.