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Savings Account vs. Checking Account

How is a savings account different from a checking account and how do I know what I need?

A savings account is designed to be an account that you make deposits into and watch your money grow. It will be interest-bearing, and will only allow limited transactions, as described in the information you receive from the bank when you open the account. With a savings account, you should be dealing with money that you don't need for everyday living, typically. Because a savings account is not intended for daily use, you wouldn't be writing checks on it or using a debit card like you can a typical checking account. Access is more limited and many banks charge you a fee on your transactions, in addition to limiting them.

By way of contrast, a checking account is a transaction account. It is designed for you to be able to write as many checks as you need to write in any given month. It is the type of account you would put enough money into to be able to write checks for your bills. You may also obtain an ATM card and/or a debit card on this type of account to provide even more options for using and accessing your funds.

Some types of customers are eligible for a type of account that combines the best features of checking and savings. What we're referring to is a Negotiable Order of Withdrawal or NOW account. Only individuals, governmental units, and some types of trust and agent accounts are eligible for this type of account. A NOW accounts often will have a lower interest rate than a traditional savings accounts, but you can write checks from it. In terms of other options, also check out a Money Market Account. Usually it will pay a higher rate of interest than a savings account or NOW account, but it has very strict limitations on the number of checks from that account each month. Before you decide what type of account you want, think about how you will use it.
  • Does it need to earn interest?

  • Does the interest rate have to be the highest possible you can get?

  • Do you need ready access and do you want to write checks, use a debit card and have automatic withdrawals for things like a car payment, life insurance or a gym membership fee?
How you will use your account and the amount of money you will keep in it will help you determine what meets your basic needs requirement. The frequency with which you need to use it and how you often (and by what methods) you need to access your money will also be determining factors in the fees you may pay to have that account. With the information your bank will give you, just by asking for it, you can determine which of their products will best meet your needs so you can maximize access to your money with minimal fees. What you'll want to ask for is the bank's Truth in Savings disclosure for each of its accounts. (It's also call the account disclosure.)

Published on 7/28/06