Checking Vs. Savings Account: Why You Need Both

If you want to set yourself up to reach your financial goals, it’s best to have a working understanding of the most common tools at your disposal.

Let’s walk through some of the features of checking accounts and savings accounts to see the various ways that each can set you up for financial success. We’ll also discuss tips that can help you know how much money to put into each account.

What Is A Checking Account And Why Is It Important?

A checking account allows easy access to your everyday spending money. Account holders can use debit cards to withdraw cash from their bank and ATM as well as at some retail stores, or they can use checks. They can also get money orders and make wire transfers.

Financial institutions typically allow checking account holders to:

• Set up direct deposits and automatic bill payments
• Use online banking
• Use apps for an array of banking services

These are key services that make day-to-day life far easier.

Checking Account Requirements And Interest Rates

In many cases, banks have a minimum balance requirement for account holders.

Checking and savings accounts typically pay account holders some interest, but letting the bulk of your money sit in a checking account has little benefit. As of late August 2023, the average interest rate for checking accounts through U.S. financial institutions was about .07%. Credit unions may offer higher interest rates than banks, but that’s not always the case.

Quick Tips For Choosing A Checking Account

Different types of checking accounts are available, so the key is finding the one that suits you best. A checking account with a high interest rate and a low minimum balance can be a good value for bank customers. You might also want to check your bank’s ATM fees and foreign transaction fees.

See if you might incur any service fees and verify that the bank is Federal Deposit Insurance Corporation (FDIC)-insured.

What Is A Savings Account And Why Do You Need One Right Now?

A savings account in an interest-bearing bank account that serves as a place for customers to set aside money for longer-term financial goals that go beyond monthly bill payments. These goals might include saving for a car, saving for a down payment on a home, building an emergency fund or planning a major life event.

Along with being a place to stockpile money for future needs, a savings account can provide overdraft protection if you have a checking account at the same institution. So, if you withdraw too much from your checking account, the savings account can help you avoid an overdraft fee by automatically transferring funds to your checking account.

While you can’t use checks with a savings account, you can typically use mobile apps and websites to manage the account.

Quick Tips For Choosing A Savings Account

When deciding on a savings account, look for a high annual percentage yield (APY). This can help your account balance grow while requiring no additional effort from you. As of October 2023, some accounts paid an interest rate of more than 5.25%.

Higher APY savings accounts may require a higher minimum balance, however. Some banks also impose withdrawal limits on savings accounts. As with a checking account, ask about any maintenance fees the bank might charge and whether the bank is FDIC-insured.

Also, inquire about different types of savings accounts and see whether certain banks are offering perks for opening new accounts.

At A Glance: Checking Account Vs. Savings Account

Deciding whether to open a savings versus a checking account? Here’s a quick look at the main similarities and differences between checking and savings accounts. Interest and access to your funds are the biggest areas where these two types of accounts diverge.

How To Open An Account

If you’re planning to open an account, you’ll want to have a few items handy:

• Funds for a minimum deposit
• Government-issued identification (driver’s license, passport, state-issued ID)
• Social Security number (SSN) or Individual Taxpayer Identification Number (ITIN)

The 50/30/20 Rule: Having A Checking And Savings Account Is Key

A specific plan for budgeting, saving and spending paired with savvy use of checking and savings accounts can lead to a healthy financial situation. A budgeting method such as the 50/30/20 rule can be a great way to start funding your accounts.

In short, the 50/30/20 rule suggests breaking your after-tax income into three categories:

Needs: This category includes groceries, housing, health care, transportation and minimum debt payments, with the goal being to use no more than 50% of your after-tax income on these needs. For convenient access, consider making your checking account the place where you deposit this money.

Wants: Here, you’ll devote 30% of your after-tax income to purposes such as dining out, entertainment, hobbies and travel. As with the needs category, your checking account is a good place to stick the money you’re setting aside for wants.

Savings: Finally, the plan recommends dedicating 20% of your take-home pay to savings, investing, emergency funds and paying debt faster. Your savings account is the best place for money designed to start an emergency fund or help with bigger, long-term purchases. It might be best to first use pretax dollars and potential employer matches from a 401(k) account for retirement funds.

Automation Can Make Financial Success Easier

It’s typically easy to arrange for paychecks to go into different accounts, including those you’ve identified for short-term spending and those designated for longer-term savings. In many cases, employers can deposit percentages of a recurring paycheck into different accounts.

You can also use financial tools such as the Rocket Money^SM app to automate moving money between accounts. This can make budgeting for your needs, wants and savings one less responsibility you need to handle on your own.

The Bottom Line: You’re Better Off With A Checking Account And A Savings Account

Having a checking account along with a savings account allows you to effectively manage your personal finances, especially when you pair them with direct deposit or financial apps. Add a budget based on solid financial principles, and you’ll have a strong financial foundation.

Want to save time by automating repetitive financial transactions? Download the Rocket Money app to automatically deposit funds for needs, wants and savings.