Given all of the services that banks provide, it might surprise you how many people aren’t utilizing them.
According to estimates from the 2015 FDIC National Survey of Unbanked and Underbanked Households, only 68% of U.S. households were fully banked (had a bank account and did not use alternative services outside the banking system during the previous 12 months). Seven percent of U.S. households (9 million households) were unbanked (had no checking or savings account). Another 19.9% of households (24.5 million households ) were underbanked (had a bank account but also used services outside the banking system—such as payday loans, money orders, check-cashing services, pawn shop loans, etc.—during the previous 12 months).
The advantages of having both a checking and a savings account
Having an insured checking account and an insured savings account is one of the first steps to better managing your money.
- Benefits of a checking account:
- centralize and record your deposits, withdrawals, and other transactions
- pay your bills in one place through automated bill paying or automated paper checks (or a combination of both)
- keep a record of bill payments and other payments to serve as proof of payment
- have easy access to cash through nearby ATMs or in-branch withdrawals
- have a place to direct deposit paychecks
- Benefits of a savings account:
- earn higher interest than through a checking account
- facilitate savings goals by separating your accounts
- minimize the temptation to spend money earmarked for savings
- Keeping your money outside the banking system is much riskier (especially if your money isn’t in a secure place) and more expensive in the long run (due to higher fees for alternative services).
- If you are staying away from banks because of the cost, try to familiarize yourself with the bank’s fee structure and see if there are ways that you can reduce or eliminate these fees. (See discussion of fees below, under “Features of a checking account.”) You can also call the bank or sit down with one of their employees to discuss ways to minimize fees.
- If bank hours or locations are inconvenient for you, online solutions have made banking easily accessible 24/7.
Overview of checking and savings
- A checking account is a deposit account that allows the account holder to make withdrawals via:
- a debit card to get cash at an ATM
- a debit card to pay for purchases
- electronic transfers
- Checking accounts are highly liquid and accessible, and they can be used for routine everyday spending as well as other common monetary transactions.
- A savings account is a deposit account at a bank or other financial institution that usually earns higher interest than a checking account.
- Funds in a savings account are liquid and accessible, but a savings account should not be used for money that is needed on a daily or regular basis due to federal regulations limiting the number of certain monthly transfers and withdrawals. (See further details below under “Features of a savings account.”)
- Savings accounts are a good place for:
- an emergency fund (6-9+ months of expenses to be used for financial emergencies as a result of a job loss, health issue, etc.) (See “How much to put aside in an emergency fund?” and Step 6 in “10-Step Financial Fitness Workout.”)
- a cushion of at least $1,000 for unexpected one-off expenses such as needing new tires for your car or replacing a laptop. (In the “perfect world,” this is in addition to the funds in your emergency fund.)
- funds you want to set aside for a particular purpose such as buying a house or going on a dream vacation.
- funds that you want to earmark for general savings by separating them from your checking account.
Features of a checking account
- Checking accounts come with different types of fees, some of which can be waived. This is often achieved by meeting certain daily or monthly minimum balance requirements, or receiving a minimum monthly direct deposit amount.
- Make sure you understand what fees will be charged by your bank so that you can take steps to avoid them, if possible.
- Fees can include:
- monthly maintenance fees
- overdraft or insufficient-funds fees
- fees to use ATMs at certain other banks
- fees for wire transfers, money orders, and cashier’s checks
- foreign transaction fees
- fees for paper statements
- fees to open an account
- Some banks offer free or reduced-fee checking accounts for students while they are in school, in the hope that they will continue to use those banks upon graduation.
- Many checking accounts pay interest, but the rates are typically lower than the rates on savings accounts.
- Online checking accounts usually have higher interest rates than traditional checking accounts, so it is a good idea to check this before opening an account.
Using a Checking Account:
- Even if you don’t use checks on a regular basis, it is still important to know how to write, endorse, deposit, and cash a check. (See “How to write a check, deposit a check, or cash a check.“)
- Checking accounts can be used for online bill payments, to automate monthly recurring bills, or to pay bills on an individual basis.
- Checking accounts can be used to transfer money to other people at the same bank or at other banks.
- Checks can be deposited by the account holder at an ATM, at the branch with a teller, or through the bank’s mobile app.
- Checking accounts can have limits on the amount of daily cash withdrawals that you can make from an ATM.
- Whether you use online banking or paper statements, you should review your checking-account statement every month to make sure that there are no unauthorized transactions and that everything looks correct.
- You also need to make sure that you always keep sufficient funds in your checking account to cover all pending checks and other withdrawals (especially those that are automated).
- The standard deposit insurance coverage for checking accounts at FDIC-insured banks is $250,000 per depositor, per FDIC-insured bank, per account ownership category.
- For a description of FDIC deposit account coverage, see How Are My Deposit Accounts Insured by the FDIC?
Features of a savings account
- Interest rates on savings accounts can vary significantly from bank to bank, so do some comparison shopping before you open an account.
- Online savings accounts may offer higher interest rates than savings accounts from banks with a physical presence because the brick-and-mortar banks have more expenses to cover.
- The differences in interest rates can be significant, ranging from below 0.1% at some banks to over 2.0% for certain online accounts.
Rules and Limitations:
- Federal regulations limit the number of certain types of transfers and withdrawals from savings accounts to no more than six per calendar month or statement cycle. Therefore, make sure to read the fine print and know the rules that apply to your account.
- Some savings accounts have minimum balance requirements to avoid fees, so check the terms carefully.
Automate Your Savings:
- You can automate your savings by instructing your bank to transfer a set amount of money from your checking account to your savings account on a regular basis (weekly, monthly, bi-monthly, quarterly, etc.). Basically it’s a “set-it-and-forget-it” savings strategy. (See “How to set up automatic savings at your bank.“)