Checking vs. Savings Accounts: How to Earn the Best Interest

Keeping some money on hand is an important part of any sound financial strategy. And for most people, that means keeping money in an easily accessible checking and savings account. But as you decide how to split your money up between these two accounts, the amount of interest earned is likely a large deciding factor. Below we’ll discuss the pros and cons of each account type and how you could benefit from each.

What Is a Checking Account?

A checking account is an account associated with a bank that’s designed to be used for everyday expenses. When connected with a debit card, your checking account can be used to make withdrawals from ATMs, purchases at stores or automatic payments of monthly bills. Your checking account can also be used with checks, meaning when someone cashes a check you wrote, the money will be removed from your checking account.

Think of your checking account as an extension of your wallet - offering easy money on-hand to quickly withdraw as needed.

Pros of Checking Accounts

Checking accounts offer easy access to withdraw money, making it a reliable choice for making purchases or accessing cash. There is no limit to the number of times you can withdraw from your checking account per month, which means you’re free to use it as often or as little as you like.

Cons of Checking Accounts

Banks will typically offer little to no rate of interest on checking accounts. Because of this, these accounts are better suited for quick transactions than they are for long-term savings. Therefore, to maximize and earn the best interest on your money, consider only keeping the money needed for day-to-day or month-to-month expenses such as groceries, entertainment and recurring utility bills in your checking account. 

What Is a Savings Account?

A savings account is just as it sounds - an account designed to be used for saving money. For some, a savings account is used to cover anticipated or unexpected expenses. These are sometimes referred to as a rainy day, holiday or vacation fund. Unlike investments or bonds, a savings account allows users to access their money at any time.

In general, it is recommended that users keep around six to nine months worth of income in a savings account. If you’re keeping more cash than that in your savings account, you may want to look into putting your excess savings into a more active role, such as investments.

Pros of Savings Accounts

Because savings accounts are designed to hold money long term, banks tend to offer more generous interest rates than they do with checking accounts. The percentage will vary across institutions, but typically the best interest rates can be found at online-only banks.

Cons of Savings Accounts

In accordance with Regulation D passed by the Securities and Exchange Commission (SEC), users can only transfer and withdraw money up to six times a month from their savings account.¹ Going over this limit could result in a penalty fee, or your bank may ask you to switch your money over to a checking account.

Key Takeaways

It’s important to allocate your money based on the pros and cons of each type of bank account. In general, you’ll want to place money intended for long-term keeping into a savings account, as this will accumulate the best interest. However, you’ll want to be sure you’re keeping enough money in your checking account to cover upcoming expenses, or you risk facing a fee for over-withdrawing from your savings account. As you explore your options at various banks and institutions, be sure to consider possible account minimums, overdraft fees and, of course, the interest rates for each account type.

Having cash on hand is always important as you handle daily expenses and monthly bills. And as you strategize your bank account allocations, remember to stash away what you can in a savings account to help maximize your interest earnings.  

As always, we welcome any questions you may have about your finances. Reach out to Deb to review your situation and gain some perspective on what your options are.