The line between checking accounts and savings accounts seems to be blurring. For example, many online checking accounts pay interest. Also, the interest paid on savings accounts currently is so low that people are wondering why even bother setting up and maintaining one of those. Yet, there are major differences between checking and savings accounts. Understanding those helps you make smart decisions about your financial affairs.
In essence, whether you have a traditional checking account housed in a brick-and-mortar institution or an online one operating solely in cyberspace, its purpose is to facilitate financial transactions. You use it to pay bills, withdraw cash you need, transfer funds, and deposit or have automatically deposited payments made to you. Those incoming funds could range from print paychecks to electronic payments from Social Security or PayPal. There are no limits on the number of withdraws, transfers, or deposits. The fees involved and any perks, such interest and bonuses, depend on the specific bank. Given the range of options, it could be worth your time to shop around for the best deal for your needs.
On the other hand, savings accounts, be they in your trusty bank branch or only online, are structured and regulated for “housing” funds that you hope you will not need to tap into for the near future. You might have a specific short-term goal such as saving for a down payment on a house or a child’s wedding. In return you receive interest. Unfortunately, at this time, most rates are under one percent.
If you sensed you would not be needing that money for a longer period, say a year or more, then you would probably choose a Certificate of Deposit (CD). In exchange for having those funds to use for a guaranteed period, banks pay higher return rates on CDs. Should you have to gain access to the cash sooner, you would likely pay a penalty.
In the U.S., savings accounts come under Regulation D, 12. That is what makes this sort of account so different from a checking one. Regulation D limits the amount of withdraws and transfers to six a month. That means that most people, with the average amount of bills to pay, cannot facilitate that through a savings account. Violations of Regulation D could result in a service charge or downgrade of the account to a checking one. However, there is no limit on the number of deposits. The terms and conditions, including fees and the rate of interest, vary among financial institutions. Some consumers are finding higher interest rates through online savings accounts.
Yes, checking and savings accounts can be linked. That can prevent overdraft charges in the checking account. However, the two are very different entities. Rarely can they substitute for one another. For example, those intending to “save” and maintain that level of funds usually cannot accomplish that in a checking account. On the other hand, savings accounts are not made to process the amount of financial transactions most Americans are responsible for.