The traditional way to save for a rainy day has been to stash money in a savings account. Savings accounts generally are a safe and secure way to hold money for long periods of time. Savings accounts often generate interest which accumulates over time. Most people utilize these savings accounts to stash money away for a large purchase, holiday gifts or to go on vacation.
Checking accounts aren’t usually used to save money. In fact money in a checking account is meant to be spent now. Primarily checking accounts are utilized to pay monthly bills, groceries and other necessities. Although some checking accounts are interest generating when you leave a certain amount in the account, there are also fees for going below that amount.
Benefits of Savings Accounts
It is often said and is worth repeating that you should have at least six months’ salary saved for emergencies. You never know what could happen. Job loss is a common reason why you need to save at least a portion of your salary.
Savings accounts, even though they generate less interest than IRAs, CDs and 401Ks, are a safe way to ensure that you get your money back with interest. There are also less fees involved with savings accounts.
Drawbacks of Savings Accounts
Saving does have some drawbacks. You have minimal access to your money. Banks are required to limit transactions to no more than six per month with only three of those transactions to people outside the bank.
Most savings accounts don’t have check writing privileges or a debit card attached to them making it harder to withdraw easily. To gain access you must transfer money to another account.
Benefits of Checking Accounts
The obvious benefit of spending is having the things you need, being able to have shelter and food and being able to provide for others. Checking accounts are a convenient and often necessary way to cover normal every day expenses.
The freedom of being able to spend money is priceless. Checking accounts have the same security as savings account in that they are backed by the FDIC. This security ensures that you won’t be left out “in the cold” without funds. Checking accounts offer easy accessibility to your money at any time.
Drawbacks of Checking Accounts
Convenience often encourages overspending. Many banks discourage this practice by charging overdraft fees and non-sufficient funds fees. The easy accessibility encourages thieves.
Choosing Wisely-What You Need To Know
There are as you can see clearly major differences between savings and checking accounts. It is important for you to understand that there are also some similarities between savings and checking accounts.
- Both saving and checking accounts require you to hold a minimum amount in the account.
- Both saving and checking accounts require a minimum amount to open.
- Saving accounts that issue a debit card do charge a fee for using a non-networked ATM.
While researching the best bank to store your money in, you should ask the following questions:
- What fees are attached to this account? Banks should be transparent as to what fees they will charge you for using their bank.
- What is the minimum amount to open and maintain the account? It is important to note this as you will be required to pay a monthly service charge or other fees to keep the account open.
- What is the interest rate on the account? For many savings accounts the interest rate is really low. This could be a determining factor for you if you want a quick return. If you are planning to save for a long period of time, this won’t be a factor for you.
Saving for a rainy day can be easy when you figure out how much money you want to save and for how long you want to save it. Saving accounts are good when you have a major purchase, you need emergency funds or you are saving for a house or a car.
Having both a checking account for everyday expenses and a savings account for long term needs is a good way to manage money wisely.