What’s the Difference Between Savings and Checking Accounts, and How Should I Be Using Them?

What Piggy said last week is very true: sometimes we’re so eager to lunge ahead and answer the most complex, interesting questions that we forget to cover the absolute beginner basics. So this week I’m going to take you to church (or, I guess, school) on the difference between savings and checking accounts.

These are the two most common kinds of bank accounts in America. So if you’re new to banking, the first account you get will likely be one of these.

The features of these accounts were very consistent for several decades. But the past few years have changed the dynamics of how we use savings and checking accounts. And as a result, we’re changing our advice on how and what they should be used for. And even those of you who are rock-solid on this topic are going to want to hear that! (We think.)

So let’s get into it!

What’s a savings account for?

A savings account is a bank account meant for long-term storage of money you intend to hold onto for a while.

The bank gathers up your precious savings and shuffles them together into neat, cozy stacks. Then they place them together inside a bank vault lined with straw to help your money keep warm. They give the money fresh water and cracked corn, turn the lights down, and let it go to sleep, safe and secure. Having met all of your money’s physical and emotional needs, your money will slowly begin to reproduce. Fresh, crisp new $1 and $5 and $10 bills are born, and the wheel of life turns ever onward.

… I mean, I think? I’ve never worked at a bank, but I’m pretty sure that’s how it works.

Savings accounts were designed as a place to keep large-ish amounts of money more safe and secure than at your home. Because banks invest a portion of the money they oversee, you do earn interest on it—the bank pays you for the use of your money. But because it’s a real no-risk investment vehicle, they won’t pay you much for it.

In fact, lemme just stroll over here and peek inside this gutter… ah, yep! There they are! Interest rates in general are about as low as they go right now. That fact should change the way you plan to use your savings account.

More on this in a bit.

What’s a checking account for?

A checking account is a bank account intended for short-term storage of money you intend to spend (rather than save).

Checking accounts make it fast and easy to transfer money between yourself and third parties, like other people and businesses. The normal expenses you know you’re gonna have every month—phone bills, groceries, hentai-print sweatsuits, rent—should come out of your checking account. You can move that money around in three ways:

1. Using a debit card to transfer the money electronically
2. Withdrawing the money as cash, either from an ATM or bank teller
3. Writing a physical paper check and waiting for the other party to cash it

You can make as many of these transactions as you want, so long as you have enough money in your account.

By contrast, the expected transaction history of a savings account is very short. In fact, federal law sets the maximum number of transactions to six per month. If you go over that amount, your bank could fine you, or close your savings account and move all of your money into a new checking account.

Please note that if you’re reading this at the time of its original publication (LOVE YOU, BGR NERDS), those rules have been temporarily suspended due to the COVID-19 pandemic. So for now, you may transfer away without fear of repercussion.

What about high-yield savings accounts?

Quick refresher of terms…

Let’s say Piggy asks to borrow $100 dollars from me. (No judgments, unemployment is rough. Donate through Patreon now before this hypothetical becomes real.) I say sure—but she’s gotta pay me back and buy me a delicious and refreshing iced coffee from Dunks, which costs $2. The $100 that I loan her is the “principal,” the extra $2 I get is the “interest,” and the “interest rate” on this loan was 2% because the iced coffee cost 2% of the total amount she borrowed. Got it? Good!

Now, nine times out of ten, when we’re talking about interest rates, you want the number to be low. That’s because we talk a lot about borrowing money—for student loans, car loans, home mortgages, and credit cards. If the number is low, the borrower is getting the good deal.

But when it comes to savings and checking accounts, you actually want the interest rate number to be high, because you’re not borrowing money—you’re lending it! Remember that banks aren’t just storage facilities for money that sits there, doing nothing. Banks use your money to make or secure their own investments. They have to pay you some money for that privilege.

That’s the only significant difference between a standard savings account and a high-yield saving account. (Excluding, perhaps, the convenience of brick-and-mortar locations, as they’re usually all-digital banks.) Other than that, all the same rules apply.

How are savings and checking accounts changing?

The main way that savings and checking accounts have changed recently concerns the interest rate.

It’s… low.

Really low.

We’re talking about a full Apple-Bottom-jeans-boots-with-the-fur situation. Interest rates are low, low, low, low, low, low, low, low.

There are many reasons why interest rates are low at the moment, but there’s an easy way to sum it up: nobody wants to be investing right now. In a hot market where everyone wants to go out and invest, banks offer higher interest rates to try to entice people to put lots of money in their savings accounts. This is because our regulatory system demands that banks balance risky investments with safe, predictable reserves: like your savings account! So they offer high rates of 4%, 5%, 6% or more to make investing with them appealing.

But during a crummy market, banks don’t want to go out and invest. They want to sit on a park bench, feeding the birds and trying on existentialism. They have no real reason to waste money offering their customers great interest rates, because they don’t need something to balance against a bunch of investments.

How to adapt your money strategy to keep up

You now know that interest rates on savings accounts are at an all-time low. The national average right now is less than 0.1%. Fucking yikes, dude!

You also know that money is designed to slowly lose about 2-3% of its purchasing value every year, because you read this article explaining inflation. (You… did read that article, right? RIGHT?? Guys, come on, I work hard on this stuff!)

For those reasons, we don’t recommend keeping large amounts of money sitting stagnant in savings accounts unless you plan to use it within about a year or two. That money will lose a chunk of its value year over year collecting dust in the interest rate bargain-bin that is the average savings account.

There are likely better uses for it. Paying off debts, starting your first-ever investment, or maxing our your retirement contributions will be a much more impactful use of those funds for most people in most situations.

That said, in troubled times like these, it’s wise to keep a thicc n’ juicy emergency fund on hand in case you get sick or lose work. And savings accounts are fairly ideal places to store emergency funds. Because unlike an investment account, a savings account can’t really go anywhere if the stock market shits the bed.

The same goes for situations where you plan to spend your savings soon (say, if you’ve saved up a down payment on a car or house). Even if the interest rates sucks, there are cases where it’s still kinda worth it for the security and convenience. But we would definitely suggest moving to the institution with the highest-yield savings account you can find, or checking your bank’s CD rates to see if that would be a better fit for you.

And there is never a good reason to keep more than necessary in checking accounts. Savings accounts always have better interest rates. So even in lean times, don’t keep more than you need to in your checking account.

Is one percentage point even worth it tho…?

Yes, sis, it IS worth it. These differences sound small, but every little percentage point helps!

The perplexing nature of compound interest is such that an extra percentage point here or there is the difference between handing out “fun-size” candy at Halloween and making it rain king-size candy bars. So if you can find better, do it today. For the children.

Here are more articles we’ve written that might help you develop your savings strategy:

• From HYSAs to CDs, Here’s How to Level Up Your Financial Savings
• Not Every Savings Account Is Created Equal
• How To Start Small by Saving Small
• When Money in the Bank Is a Bad Thing: Understanding Inflation and Depreciation
• Ask the Bitches Pandemic Lightning Round: “Is It Safe to Keep My Money in the Bank?”
• Ask the Bitches Pandemic Lightning Round: “Is This the Right Time to Start Investing?”

Maybe you’re having trouble motivating yourself to save even a dime. Maybe you find visualizations highly helpful and motivating. And maybe—just maybe!—you want to give back to the debaucherous proprietresses of this very blog. In that case, check out our savings goal coloring book!

If your bank is still offering a pretty good rate on savings accounts, we want to know about it! Drop your recommendation into the comments below so that others might benefit from your good fortune.