Many people are confused by the different types of bank accounts confused—specifically when it comes to checking and savings accounts.
There are some important distinctions, and while they have different uses, both should probably be a part of your financial plan.
What is a checking account?
A checking account is a standard type of bank account, and likely the one that you are most familiar with.
Checking accounts are typically used as everyday spending accounts. Many people have their paychecks deposited directly into their checking accounts, and then use them to pay their bills and other expenses.
Customers typically do that by writing checks or using an online or mobile banking feature that lets them pay bills electronically. While checking accounts can have numerous features, many banks charge customers monthly fees for these accounts if they don’t maintain a minimum balance.
What is a savings account?
Whereas a checking account is generally used on a day-to-day basis, savings accounts are designed to save money. Customers typically use them for an emergency, or rainy day fund, or to achieve some other savings goal.
Remember, there could be banks fees and federal taxes on interest accrued by the money you have in a savings account.
Keeping your money in a savings account is a great way to keep it liquid; That is, it’s easily and quickly accessible. That’s one reason a basic savings account could be a good place to keep your emergency fund.
You can also have additional savings accounts that align with your goals. You can have an account to save up for a down payment on a house, for example, or for a new car.
Checking account vs. savings account: What’s the difference?
A checking account and savings account may seem similar on the surface. Both accounts hold funds for you to use when needed.
Also, neither type of account is likely to earn substantial interest. They typically aren’t very risky, either.
The main difference has to do with the way you intend to use each account. A checking account is frequently designed for day-to-day spending. Savings accounts, on the other hand, are designed to hold money for longer periods of time.
To make things simple: a checking account is for short-term spending and a savings account is long to medium-term saving.
How do checking and savings accounts work together?
Having separate accounts can make budgeting and saving easier.
When you create a monthly budget, you should be able to see if your checking account will have a surplus. If so, that money can be moved to a savings or investment account. When an emergency pops up, you can rest easier knowing you will be able to tap into your savings instead of relying on credit.
Make saving easy
Whether you are saving up an emergency fund or for your retirement, stashing small amounts away can pay off later. Don’t believe us? Take a moment to play with the Stash Invest investment calculator.
You can also put your savings on autopilot with Auto-Stash.