Checking Account

What is a checking account?

A checking account is a bank account used for everyday spending. It’s the account where your money is most often flowing in and out. There are usually no limits on the number of transactions per month in a checking account. You can access your money by writing a check, using your debit card, or initiating an automatic transfer.

Usually there is no interest on a checking account. Some banks offer a small interest rate, but even so, there is very little benefit to letting your money just sit in a checking account. That’s why it’s meant for spending.

How Much Money Should I Keep in My Checking Account?

The short answer is “enough, but not too much.” You want to keep enough in your account so that you will always have money there if you need it, and you don’t run the risk of overdrafting. But you don’t want an excess of money in there either. Every extra dollar in the account could be earning interest somewhere else.

My suggestion is this:

1. Take your monthly expenses.
2. Add $1,000 for any immediate emergency.
3. Add $1,000 for an extra buffer.

So if your monthly expenses are around $3,000, I recommend aiming to keep around $5,000 in your checking account. I think this works well for a single person. If you are married or have a family, you might want to add more for the emergency and buffer amounts. Ultimately, you should be comfortable that you’ll always have money in there when you make a payment. But too much money in there comes at an opportunity cost.

Opening a New Account

Factors to Look For

If you’re thinking about opening a new account, there are some things to consider:

• Minimum balance: Many banks require that you keep a minimum balance in the account. Some offer multiple accounts with varying minimum balance requirements. Make sure you can always meet the minimum balance or else you’ll have to pay a fee each month.
• Number of checks: Some banks will provide you with a certain number of checks with the account.
• Interest: Most accounts have no interest rate, but some accounts will have a small rate.
• Fees: Service fees and overdraft fees are common. Hopefully you never have to pay an overdraft charge.. But these are things to consider in case they do happen.
• Convenience: Depending on your account, the ease of withdrawals and ATM access may differ.

Best Places to Open an Account

If you earn or spend money, you probably already have a checking account. But maybe you’re looking for a better place to keep your spendable money. Here are my three favorites.

Discover

• No monthly fee
• No minimum balance
• 1% cash back on debit card purchases
• Great mobile app

Ally Bank

• No monthly fee
• No minimum balance
• 0.10% APY on account balance

Capital One

• No monthly fee
• No minimum balance
• 0.20% APY on account balance
• Great mobile app

Savings Account

What is a Savings Account?

A savings account is where your money is pretty easy to access, but there are limits on how often you can do it. You can only make six transactions on a savings account per month. Because of this, it’s not the account you want to use for everyday spending. Generally it's where you want to keep money that you can easily get if you need to, but don't expect to need it often. Money in a savings account usually earns some interest, but at a pretty low rate.

How Much Money Should I Keep in It?

A savings account is the place to keep extra funds in case of emergency. Generally 2 - 6 months of expenses is a good barometer for how much to keep in it. You can also use this account for savings for a major purchase like a car, a house downpayment, or an engagement ring. If that’s you, then obviously you’ll want the 2 to 6 months of expenses, plus the additional amount as you save for your big purchase.

If you have high-interest debt from a credit card or personal loan, for example, then I recommend focusing on paying that off before opening a savings account. Getting out of high-interest should basically be your highest financial priority.

If you have low-interest debt like federal student loans, your money will do better for you if you pay towards the loan rather than put it in a savings account. The 1 to 4 percent interest you get from a savings account is probably lower than the rate on your loan. But you'll still want something in savings in the event of an emergency. Aim for about 2 or 3 months of expenses in that case.

If you have a family or if your job is volatile you may want to aim for closer to 6 months of expenses in your savings account. That way you are secure and protected in the event of a devastating job loss.

High-Yield vs Traditional Accounts

You'll find that there are two types of institutions that offer savings accounts: traditional banks and online high-yield accounts. Traditional banks are those like PNC, Bank of America, and Chase - they have many brick and mortar locations and have been around for decades. Online banks are those like Discover that don't have physical branches.

Because online banks don't have the costs associated with running a physical branch, they are able to offer interest rates that are much higher, sometimes 30 times the national average. Because of this, you should go with a high-yield savings account. You’ll have a lot more money that way.

Opening a New Account

Factors to Look For

When you're opening a new savings account, there are a few factors to weigh:

• Interest rate. As I said above, the interest rate can vary dramatically. It generally can be as low as 0.01 percent to as high as around 4 percent. I recommend looking for an account with an APY of at least 3 percent.
• Minimum balance. Some accounts have a minimum balance; others don't.
• Promotions. Some accounts may offer a bonus for signing up and depositing a certain amount.
• Fees. Some accounts may charge a fee for a transaction or if you fail to meet requirements such as a minimum balance.
• Convenience. Some savings accounts come from traditional regional banks, while others are online. Depending on your preference, one of these may be more convenient than the other for accessing and managing your savings.

Best places to open

Because of the much higher interest rates, I recommend going with a high-yield online savings account. There are a lot of good options out there, and here are my favorites. You can also check out a more detailed review of these if you like.

Summary of Differences

Here is a summary of the differences between a checking and savings account. You will need both types of accounts to effectively manage your spending and saving. I’ve provided some guidelines for how to get started with each account, so the next step is yours to take.

	Checking Account	Savings Account
Used for	Everyday banking transactions - deposits and withdrawals	Saving for a major purchase or an unexpected emergency.
Interest earned	Very little or none.	Some. High-Yield, online accounts will have much higher rates.
Withdrawal limits	Usually none, but can depend on your bank.	Federal limit of 6 transactions per month.
Monthly charge	Sometimes, depending on your bank - generally if you fail to meet certain balance or deposit requirements	Sometimes, depending on your bank - generally if you fail to meet certain balance or deposit requirements
Additional fees	Overdraft fees Foreign transaction fees ATM fees Money orders Checks	Exceeding the withdrawal limit
Ideal Balance	Monthly expenses + $2,000	2 - 6 months of expenses + any savings for a major purchase