You probably know you need a better place to store your money than a sock drawer, but if you do not yet have a bank account, you may be asking yourself, “Should I open a checking or savings account?”
Before making a decision, it is important to know the difference between the two.
Basically, money you put into a savings account is meant to stay there so it can earn interest over time. Since the goal is to save money, it is harder to access your funds than it is with a checking account. To access your money, you will need to either transfer money into a checking account or withdraw cash from an ATM. The number of times you can complete these transactions will also be limited, as the Federal Reserve requires banks to limit the transactions you can complete with your savings account. You can make no more than six per month, and only three of those can be payments to people outside of the bank. You will be charged fees if you surpass this limit, and if you do so several months in a row, your account may be changed to a checking account.
The major benefit of a savings account is that you will earn interest on your balance, but the amount will depend on your financial institution. Another benefit to savings accounts is they generally do not charge fees if you do not exceed your monthly withdrawal limits.
A checking account is meant to be used for your day-to-day transactions, so there are generally no withdrawal restrictions. The downside to checking accounts is that most banks do not pay interest. Even if your checking account does pay interest, the rate will not be as high as that paid on savings accounts. The upshot is that you can access your money at any time. You can pay bills online or via a check linked to your account, and you can use your debit card to make purchases. Most banks also allow you to withdraw cash from an ATM at any time.
To avoid monthly fees with a checking account, most banks require you to meet certain criteria that differ from one institution to another. For some, you can have your paycheck direct deposited to avoid fees, while others might require you to maintain a minimum balance. Financial institutions may also charge fees for using ATMs outside of their network, for overdrafts, and for online bill pay.
Which is better?
In an ideal world, you would have both a savings and a checking account. The savings account would be used to store your money for emergency expenses and for long-term goals, such as vacations or major purchases. You would then use your checking account to manage your day-to-day finances and pay bills. However, if you only have the funds to open one account, your best bet is to start with checking. If you have your paycheck direct deposited, you can generally avoid fees. Then, you can pay your bills and purchase goods using money from your checking account.
However, there are a few important points to keep in mind. First, it is not a great idea to store large amounts of money in your checking account. If your debit card number is stolen, the thief could take money from your checking account. Unlike a credit card, where the issuer will likely immediately reverse the charges, your bank will not immediately return your money. In fact, they will likely launch an investigation, and you will not receive your funds until they conclude the matter, which could take five to seven days. Thus, if you are going to carry a large balance in your account every month, it is a good idea to open a savings account.
To lead a financially healthy life, you will eventually need a savings account. Most experts say you should save 20% of your income each month. Also, it is a good idea to save three to six months of your expenses so you can cover expenses in case of a life-changing emergency. That way, if something does come up, you can avoid slipping into credit card debt.
Some banks offer incentives for opening a checking and savings account at the same time, so you may want to speak with someone at your local branch about opening both accounts with the cash you have on-hand.