Difference Between a Checking Account and a Savings Account

Most consumers understand when they open a checking or savings account, they are in effect loaning money to a bank. They further understand a checking account is a transactional account, meaning when they need to pay bills they can write a check, or if they need cash, they can easily obtain it from an ATM. Savings accounts are designed for longer-term needs and in general, the funds are more challenging to access. Typically, a consumer needs to transfer the funds out of a savings account or visit the bank to access the funds since most savings accounts do not offer ATM access.

Why Have Both a Checking and Savings Account?

While nearly everyone has a checking account for the purposes of paying monthly expenses, not everyone has a savings account. One of the primary reasons for having both is to provide a firewall between funds that are easily accessible versus less accessible.

Since most of us write checks out based on the balance in our account, and use "extra" funds for spur-of-the-moment purchases, having to transfer funds from a savings account tends to limit impulse spending.

Savings accounts by nature make it harder to access funds, they make it more likely you will save funds for the future. For some, this may involve saving for more immediate needs, for example using a Christmas Club Savings Account. For longer term savings, or substantial amounts, a Money Market Savings account is generally a better option.

Why Not Keep All Funds in One Account to Earn More Interest?

One aspect of checking and savings accounts that many people do not know is they do not pay the same interest rates. Generally, a savings account pays a higher rate of interest than a checking account. This is because banks understand most people tend to keep funds in savings accounts longer than in checking accounts. If a consumer keeps all their funds in a checking account, they are far less likely to save. Conversely, if they keep them all in a savings accounts, they will have to make regular transfers out to accommodate their monthly expenses. Some savings accounts put limits on the number of transfers which may be processed without a monthly fee, making this unsustainable.