What are checking, savings, and high-yield savings accounts and why would someone use them? We’ve outlined below the quick take on each of these three accounts so you can determine which is best for your needs when it comes to checking vs. savings accounts.
Checking Account
Banks offer checking accounts, also referred to as transactional accounts, which are accounts that allow you to safely park your money with a financial institution, and easily access your money. Typically there are no limits on the number of deposits or withdrawals one can make on these accounts, meaning your money is “liquid”.
When depositing money into a checking account, this is referred to as a credit, while pulling money out is referred to as a debit.
A checking account is useful to store money that you will be using soon. Typically, most people use a checking account to store money that’s used to pay off everyday bills. The benefit of these accounts is that your money is safe and easily accessible, but these accounts will not put your money to work as there’s little to no interest offered for this account.
The typical methods to withdraw money from a checking account is through checks, debit card, credit cards, or wire transfers (Zelle, Venmo, wire transfer).
Professor’s Tip: Before opening a checking account, it’s extremely important to confirm that the financial institution is FDIC insured, which means that if the bank goes under, your money is insured for up to $250,000 and you will receive your money back.
Savings Account
A savings account is an account that you can safely store money and it will begin to earn interest on the principle. The bank pays you interest in exchange for you leaving your money in the account. Why would they do this? Banks make money by loaning money to other people and charging a slightly higher interest rate on those loans. It’s a win-win situation.
Unlike a checking account, savings accounts have limits to the number of deposits or withdrawals that can be made monthly as determined by federal law. The current standard is 6 transactions per month.
Typically, most people use a savings account to store emergency savings money (6-8 months of expenses) because it’s easy to liquidate if you need it, but you can still gain a modest return on the principle (which, yes, is considered taxable income and needs to be reported). It’s helpful to create separation between spending money (checking) and savings.
Professor’s Tip: It’s important to mention that because the typical inflation rate hovers around 2% and bank savings accounts are often far below 2%, the purpose of the account is not to grow your money and see a huge return, but rather, have enough money easily accessible in case of emergencies. If you hear someone claim you actually lose money in a savings account, the loss is referring to the lost value due to inflation.
Similar to a checking account, before opening a savings account, confirm the financial institution is FDIC insured to protect your assets in the case the financial institution goes under.
High-Yield Savings Accounts
My personal favorite, high-yield savings accounts are aptly named accounts that are quite similar to savings accounts but provide a higher interest rate relative to typical savings accounts. Traditional savings accounts return on average 0.01% interest on your money, whereas a high-yield savings account can return up to 2.15% return, or higher, for just having your money sit in the account.
These accounts tend to be online only (you can’t stop at a physical location to speak with someone) and they tend to return an average of 1.7% interest. You may wonder: what influences the rate of return? The interest rate is correlated with the Federal Bank interest rate, so as they increase or decrease the interest rate, banks will mimic the same movement in the return rate.
People tend to use these accounts for the exact same reason as a savings account – to store emergency funds or money that is needed in the near future because it is easy to liquidate. Similar to a savings account, the limit withdrawal number is 6 withdrawals within a month. Similar to the above accounts, confirm the financial institution is FDIC insured to protect your assets.
Professor’s Tip: To share a personal anecdote, I shut down my savings account with Chase that gave me a 0.01% return (whoop dee doo) and moved everything into a high-yield savings account. In a few months, I made an easy couple hundred dollars for doing literally nothing. This is another opportunity where you could be leaving free money on the table and a major consideration when choosing between checking vs. savings accounts.
It is important to note that it is the lowest risk for any return, however, this is a low return and it’s important to continue to learn and improve investment knowledge in order to really put your money to work.
Check out additional topics to make personal finance SLIGHTLY EDUCATIONAL on our Personal Finance page.
