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.
Checking vs. Savings Accounts
Checking accounts and savings accounts are both great places to store your money securely, but they have distinct features and purposes. In general, checking accounts are ideal for everyday transactions because of their easy access to withdrawals, transfers, checks, bill pay, and debit card purchases. Savings accounts provide higher interest rates in exchange for a limit on transactions per month, making them best for saving money long-term.
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 for 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 writing 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 0.07%, according to the FDIC as of April 2021. 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 April 2021 are around above 0.60 APY, according to rates compiled by NextAdvisor. 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 transaction 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 check-writing 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.
Why You Need Both
Checking accounts and savings accounts have very different purposes, so ideally, you should have at least one of each.
For everyday transactions, you should use a checking account. With a checking account, you can write checks, withdraw money, make debit card purchases easily and without limitations. Savings accounts limit you to six transactions per month, so relying on a savings account for normal usage would be very inconvenient. We generally recommend keeping one to two month’s worth of expenses in a checking account to avoid any accidental overdraws since overdraft fees can quickly add up.
Savings accounts are where you should store your money long-term. The money you’re not going to be regularly spending you want to keep in a savings account, ideally a high-yield one, to earn interest. Having a dedicated savings account can also help you avoid any unnecessary spending. Although other accounts, like CDs or investment portfolios, might give greater earnings, a savings account offers the quickest access to your money while still offering a good APY. It’s ideal for storing emergency funds or saving for a specific goal.
How to Choose the Best Checking and Savings Accounts
Choosing the best checking and savings account depends largely on your individual needs and financial situation. NextAdvisor has shared top picks for both checking and savings accounts, but here are some things to consider when deciding which option is best for you:
- Fees. Be sure to look out for any monthly maintenance fees, which can quickly cut into any earnings you make from interest. We recommend picking a bank with no maintenance fees (many of which offer the same or better interest rates than banks with fees), but if a specific bank you want to use charges a monthly fee, check to see if the fee can be waived. Some banks will waive a monthly maintenance fee if you keep a minimum balance or perform specific actions, like making regular direct deposits. Even if your bank doesn’t charge monthly maintenance fees, be sure to understand what other fees they charge — for example, overdraft fees or ATM fees — so you can avoid them.
- Minimum deposits. Some banks require a minimum deposit when you open an account, which can be a problem if you don’t have a lot of cash on hand. Generally, savings accounts are more likely than checking accounts to have minimum deposit requirements. Still, all the high-yield savings accounts on our recommended list have no minimum deposit requirements and no monthly fees.
- APY. Most checking accounts don’t pay interest, but when looking at savings accounts, the APY is an important consideration. The APY is how much interest you’ll earn on your balance, expressed as a percentage. The national average is currently 0.07%, but many online banks and high-yield savings accounts offer significantly higher APYs, around 0.60%.
- Convenience. Convenience is another factor to take into account when deciding between an online bank and a brick-and-mortar bank. Online banks tend to offer higher APYs and no monthly maintenance fees or minimum deposits at the expense of not having any physical locations. If going to a bank and being served in-person is important to you, an online bank may not meet your needs. But if you’re fine with customer service being offered online or over the phone, an online bank could be a better deal. It’s also important to note that while many online banks offer ATM access nationwide, it’s harder to make cash deposits. If you plan on making cash deposits regularly, a brick-and-mortar bank might be a better bet.
- FDIC or NCUA-insured. Before opening an account with any bank, make sure that it’s FDIC-insured. That means the Federal Deposit Insurance Corporation, or FDIC, will protect your money even if the bank goes out of business. The standard insurance amount is $250,000, and any reputable bank should be FDIC insured. The National Credit Union Administration, or NCUA, insures deposits held in credit unions like the FDIC does for banks.
Frequently Asked Questions
Are savings and checking account interest rates fixed?
Savings and checking account interest rates are determined by the bank, and they have the right to set and change rates at their discretion. In general, interest rate trends follow the direction of the national prime rate, which can fluctuate based on the economy or changes made by the Federal Reserve Board. When interest rates are low across the board — as they are currently — expect savings and checking account APYs to be low as well. But you can still find competitive interest rates with certain high-yield savings accounts.
Could I lose my money in a checking or savings account if the bank fails?
The Federal Deposit Insurance Corporation, or FDIC, is a federal agency that will insure your deposit up to $250,000 if the bank fails. The National Credit Union Administration, or NCUA, insures deposits for credit unions. Before opening any bank or credit union account, always make sure that it’s FDIC or NCUA-insured.
Should you have your checking and savings accounts with the same bank?
While having your checking and savings accounts with the same bank can offer certain conveniences, there’s no requirement to do so and no limit on how many different bank accounts you can open. For example, you might open a checking account at a brick-and-mortar bank to have easy access to cash deposits and withdrawals, but keep a high-yield savings account with an online bank to take advantage of higher APYs.
Typically, having your checking and savings accounts at the same bank makes it easier to transfer money between the accounts. Some banks might have special offers for those with multiple accounts, such as an increased APY. But if having your checking and savings accounts at different banks makes more sense for your personal situation.