Checking vs. savings account: What's the difference?

About 96% of U.S. households have at least one checking or savings account, according to a 2021 survey by the Federal Deposit Insurance Corporation (FDIC). That's more than 126 million households. So, there's a good chance most people are at least familiar with the basics of checking and savings accounts. But the differences in how checking and savings accounts work can be confusing. There are subtle advantages and tips to consider so you get the most from your banking experience.

Let's take a deeper look at the ins and outs of checking and savings accounts and discuss how your bank accounts can help you work toward your specific financial goals.

Checking vs. savings accounts at a glance

Here's is a quick rundown showing the general differences between these two types of bank accounts. Keep in mind that features can differ by institution and the specific kind of account you decide to use.

What is a checking account?

A checking account is simply a place to hold your money where you can access it easily by withdrawing cash, writing checks or making purchases. Some banks charge a maintenance fee, which may be waived if you meet certain requirements like maintaining a specific balance or regularly making deposits. Checking accounts can often be used to receive a direct deposit from your employer, transfer money or connect a debit card for making purchases. Savings accounts can also receive deposits should the owner want a portion part of their direct deposit to checking and another part to savings.

Some checking accounts have special categories, such as student checking accounts. They may have special fees and features geared to help with basic and more complex financial needs. It's a good idea to look into which particular kind of account is right for you.

Reasons to use a checking account

A checking account is often the starting point in establishing a relationship with a financial institution such as a bank or credit union. While deciding between a checking or savings account, these are some of the reasons to use a checking account:

• Online bill pay. This can eliminate paper statements and allows you to pay credit card bills from wherever you are, whether at home or on the go. It also provides an added layer of security and convenience that helps with paying bills on time.
• Ability to track transactions. Checking accounts have statements detailing every transaction that can be viewed on paper or electronically. This allows you to monitor trends in spending, validate income and catch payment errors.
• Debit cards. With a debit card, transactions such as purchases and withdrawals are deducted from what's already in your account. Debit cards can make purchases or use of an ATM quick and easy.

What is a savings account?

Savings accounts are intended more for longer-term savings goals than for everyday expenses. People most often use them to save for special purchases or goals such as an emergency fund or a vacation. The goal is to not spend the money on everyday purchases.

Some financial institutions require you to keep a minimum account balance and charge a fee if you don't. They may also limit savings account withdrawals or transfers to a certain number per month. But the tradeoff for both of these is that you'll usually be paid a competitive interest rate for leaving your money in the account. When you shop around to open a savings account, check the benefits available along with account requirements and fees.

Reasons to use a savings account

• Higher interest earned. You'll generally get a higher interest rate with your savings account than with your checking account. In general, the longer your money stays in your account, the more interest it earns.
• Creating an emergency fund. Having a designated account for emergencies reduces the temptation to spend money as part of your regular expenses. Most experts recommend saving three to six months of expenses in an emergency fund. Interest-bearing savings accounts are the perfect place for that.
• Fund overdraft protection. Savings accounts can be linked or anchored to checking accounts to help cover any accidental overspending, helping customers avoid being charged any overdraft fees.
• Expand your banking relationship. Some banks consider your total relationship or assets when determining things like fee rebates or lending decisions and may offer loyalty advantages for using multiple accounts and services.

Features shared by checking and savings accounts

While they both serve their own purposes, checking and savings accounts have many overlapping features and benefits. These features vary by product and bank, but some common ones include:

Direct deposit

Direct deposit is recurring deposits of income to your bank account, such as your paycheck from your employer. This is usually set up early in your employment, when you provide your account details to your workplace. You get the added benefit of not having to visit a branch in person or wait for a paycheck to clear, making the funds available faster.

Automated payments and transfers

Automated payments are prescheduled transactions on a certain date that pay a recurring bill from your bank account to a vendor or to a savings or investment account. Recurring bills could include electricity, phone, car payments, your gym membership, gas, cable or streaming subscription. If you purchased your home, you may be able to set up your mortgage for automatic payment, too. Automated transfers between accounts could also be set up for savings goals, retirement goals or investments.

Mobile banking apps and notifications

Many banks provide an app for you to access your checking and savings accounts. These apps typically have a notifications capability, a little digital nudge to alert the account holder about changes. Notifications usually include information about deposits, withdrawals or overdrafts. But they may also help you know when checks are cleared, a failed purchase, a purchase made without your authorization or a suspicious change to your profile or login information.

Alternatives to checking and savings accounts

For more aggressive or complex savings and investing goals, a checking or savings account may not suffice. Now that you understand the difference between checking and savings accounts, the following account types are potential alternatives:

• Individual retirement accounts (IRAs). Most IRAs are offered through brokerages with funds being invested in the market. However, some banks offer IRA savings accounts and IRA certificates of deposit (CDs) for conservative investors who want more flexibility and access to liquidity for their retirement funds.
• CDs. CDs offer fixed or variable interest rates for a predetermined period. This allows customers to gain a little more interest on savings for a certain term, with the flexibility to roll over their CD at the end of the term or reclaim the money for another purpose. While CDs don't make the best emergency fund vehicles, they can be used for medium- to longer-term savings goals, such as buying a car or a home or planning for an addition to the family.
• Brokerage accounts. Some banks have broker affiliates where customers can invest money for long-term growth or retirement. Brokers have licensed financial professionals who provide guidance on available options and go over potential risks involved with investing. It's important to note that investments are not FDIC-insured like bank accounts are.
• Money market accounts (MMAs). MMAs earn interest like savings accounts but have a variable Annual Percentage Yield (APY). The APY is typically higher than a traditional savings account. Some MMAs may have a limit on the number of transactions you can make per month, making this a better option for those who don’t need frequent access to the funds in their account.

Benefits of having both checking and savings accounts

Maintaining both a checking and a savings account is a smart financial strategy that leverages the strengths of each account type. While checking accounts facilitate everyday transactions and easy access to funds, savings accounts support long-term financial goals by encouraging consistent saving habits. By integrating both accounts into your financial plan, you can enjoy the benefits of seamless money management without having to choose between them. If you can meet the minimum balance requirement for a savings account, adopting a “both/and” approach ensures greater financial flexibility and stability, enhancing your overall financial health.

Ready to open a checking account? Citizens has options for all your banking needs.