A checking account is an everyday banking product that acts like a basic “piggy bank” to hold your money. A savings account is one where you can set up recurring deposits and make withdrawals with no mind towards maintaining a minimum balance. Still, you get the benefit of earning interest (compound interest) on your investment. What is the difference between savings accounts and checking accounts?
Savings accounts with higher interest rates tend to be offered by banks;
however, they are not linked to checking accounts–checking account transaction fees would make it impractical for people to keep large amounts of money in these bank accounts.
Yes, you can use a checking account as a savings account.
This is because you can link this type of bank account to your primary checking account and essentially treat it like a savings account.
There are many ways that people utilize bank accounts. You would do well to understand how they function before using them. Can you use a checking account as a savings account? Can I use my checking account as a savings vehicle? Can you have one without the other, or vice versa? Those are all excellent questions with pretty simple answers. Checking and savings accounts serve two different purposes but can be linked together in most instances. When each purpose is understood, it becomes easy to determine if they can work together individually.
The basics of saving
Before learning if it is possible to use a checking account as a savings vehicle, some basics must be established. First and foremost, a savings account is where your excess cash goes after it has been earned. This money will then sit in your account for an extended period while it accumulates interest.
In the simplest possible terms, this means you deposit some amount of money into the bank regularly so that it builds up over time. It operates much like compound interest but usually at a lower rate. Most banks offer some interest rate to clients who maintain large balances in their accounts or have other special features available to them. Therefore, maximizing each dollar’s value becomes advantageous shortly after being deposited into the account. The basics of checking
On the other hand, checking accounts are designed to be used quickly. You can access the money in your checking account by writing a check or using an ATM card. A checking account is not meant for holding onto cash for extended periods like a savings account. Often there is no interest rate associated with these transactions because they are supposed to be completed expeditiously. Although it is possible, you would generally want to maintain separate accounts due to the different fees and purposes each serves.
Even though some banks offer special rates on their deposit products, most consumers go with the best interest-bearing account they can find. This is especially true for separate checking and savings accounts, where you may be better off with two different institutions if the rates offered are significantly different from one another.
Keeping the two types of accounts separate allows consumers to maximize each dollar’s earning potential, but there is one way in which they can work together. When an individual has multiple accounts at the same institution, the bank may link them together. This allows them to transfer funds, which saves the hassle of transferring money via paper check or an ATM card.
Additionally, it may make drawing interest off your combined balances more efficient because overdraft fees are less likely to be charged if you maintain large amounts in both accounts.
Let’s do some quick math.
One of the easiest ways to see if it makes sense to combine multiple accounts is by simply looking at the interest rates of each offer. For example, let’s suppose your local credit union offers an interest rate of 1.7% for its savings accounts and 10% APY on its money market accounts.
A checking account is designed to be used as a primary way of storing your money, while savings accounts are meant for the long term. Checking accounts have higher limits and generally offer better interest rates than many savings accounts. You can use them both interchangeably if you want an easy place to store your cash that’s accessible immediately when needed versus saving it in more traditional methods like CDs or bonds.