How you use your money affects your financial future. The better habits you have, the more you will make.
You may agree that it’s not enough to just “earn more.” You also need to know how to use it wisely, to invest it.
Because money is useless until you give it a use, you should always put those dollars to work for you.
That doesn’t mean you have to be broke all the time. It’s not smart to spend everything you make or invest 100% of your income. You still need savings and emergency funds to protect from uncertainty.
But at the same time, you don’t want that money to just lay there for years. You want to store it somewhere you trust AND earn positive returns from it. And that’s why we use banks. Or at least that is what we did in the past. Nowadays, the alternatives are easier and more accessible for a financial layman.
There’s a right and a wrong way to use them. Ideally, you’re free to spend as much as you want from your bank account without paying anything. And if you want to save, you could earn a little bit of interest from that sum.
However, isn’t it rare that a bank charges you just for saving money, or keeping the account open with zero balance? Also, why should they charge you for spending while other programs reward you instead?
That’s what happens when you use banks the wrong way. To understand how it works, let’s find out the difference between checking and savings accounts.
The Difference Between Checking And Savings Account
When you first open a bank account, these terms may appear merely for guidance. With small amounts, you can really use both of them however you like, and you won’t notice a difference.
But with larger amounts, differences become evident.
I suppose you don’t want to spend your wealth paying for fees, especially when they’re so easy to avoid. But before we get into it, here’s the main distinction:
You use checking accounts to spend money and savings accounts to save money.
At least, that’s how banks intend you to use them. If you use them with that purpose, you get rewarded. Otherwise, you pay a fee, either fixed or percentage-based.
Let’s get into the features:
Checking accounts are designed for everyday use. Savings accounts exist to either protect money, invest, or accumulate for bigger purchases.
The former has low amount limits but allows for free, frequent withdrawals, if not unlimited. With savings accounts, your bank limits you to six withdrawals/transfers per month, allowing for higher amounts, if not unlimited size.
That doesn’t mean you can’t do more than six. But if you do:
- You’ll pay a flat/percentage penalty fees
- Your bank might turn your Savings into a checking account
Let’s say you buy something for more than you have in your checking account. Or maybe you forgot you had automatic payments enabled, and your balance is low. How do you pay then?
If your checking account doesn’t have enough in the balance, it will take money from your savings account. This protects you against insufficient-fund and return-item fees, which cost about $35 per transaction.
The downside is, $35 is the average price of the overdraft protection fee. But at least you didn’t miss those payments, which may have potentially hurt your credit score.
Savings accounts count as emergency funds. And because of it, they don’t have this protection feature.
You have fee-free ATM access for your checking account, and out-of-network ATMs cost an average of $2.50 per withdrawal. It’s unlikely, however, that you can withdraw cash from a savings account. You may be able to do a deposit though.
These ATMs still have daily limits, and they’ll charge you a percentage fee once you pass them. Even then, there’s still a maximum amount you can withdraw per day and month.
It’s about what account tier and brand you choose (Wells Fargo allows $300 per day while Chase allows up to $3,000). You can always increase those limits, but don’t expect it to be free.
Check out these ATM scams that you need to be aware of.
Annual Percentage Yield (APY)
Despite the liquidity, it’s not a good idea to base your emergency fund on your checking account. It may be tempting given that many banks offer welcome gifts for registering. But their APY is zero, or in the best cases, 0.05%.
The best savings accounts offer anywhere from 0.5 to 1% APY, which is almost 20 times more. That amount won’t likely make you rich, but it’s better to earn something than nothing, leaving your money at the mercy of inflation.
But that APY may still not be enough to combat inflation. So consider investing your money before storing it in this account type.
As for checking accounts, we don’t recommend keeping there more money other than what you need for immediate/monthly use.
Can You Get The Best Of Both Worlds?
Wouldn’t it be great if you got the APR of a savings account and the liquidity of checking accounts? You can get to a middle term with a new financial product: cash management accounts.
You can find these offered by brokerages and non-bank financial providers. They partner with other banks, offering decent APYs while making your money accessible for no cost, like a checking account.
Assuming the same benefits, cash management accounts offer between 0.20% and 0.40% APY. Not enough to beat a savings account but a lot better than 0.05%.
You can find the top six providers here.
What To Look For When Opening A Bank Account
There are still other factors you want to check, whether you prefer one or another:
- High Annual Percentage Yield
- No minimum balance requirement
- Low initial deposit (<$50)
- Available nationwide with physical branches
- Insured by the Federal Deposit Insurance Corporation (FDIC)
- Large ATM network
When opening an account, banks may charge you multiple fees. You’ll get a better understanding if you ask them directly, but here’s the general advice:
- To avoid monthly maintenance fees, keep a minimum balance in those accounts. You can often waive them by making at least one monthly transaction
- If you upgraded, remember you can always downgrade to a lower-tier
- You will pay $3-$25 per transaction if you make too many with your savings account. Use your checking account instead
- Use overdraft protection to avoid missing payments. If you don’t want to pay the fee, enable notifications to get an alert when your balance is low
- Wire transfer fees can cost $15-$50. Avoid these payment types unless you’re making a big purchase. Oftentimes, you can negotiate so that the seller pays for them or you split the 50%
- If you do credit card churning, it’s almost never a good idea to close accounts. It may cost $20-$50 if you close in the first 3-6 months. Banco Of America only allows you to open one account per lifetime. Downgrade your account instead
- When using out-of-network ATMs, withdraw the most money you can from a single transaction. It will charge a flat fee every time
The Bottom Line
It’s almost second nature to stay with one bank because of a better offer. But it’s rare that the same brand offers the best checking AND savings account at once. So don’t hesitate to work with more than one bank. You’re not supposed to send money from a savings account anyway, so you don’t need to work with the same company.
Remember that the FDIC covers up to $250,000 in the deposits in case a firm goes out of business. So feel free to try as many banks as you want.
Also, just because you found good rates, it may not always be like that. Whether it’s APR or fees, those numbers vary every year.