Savings accounts vs. checking accounts: What’s the difference, and why does it matter?

Learning about finances begins with the basics, like understanding the difference between checking and savings accounts. Once you master the basics, you’re ready to use your financial know-how to get rid of debt, save for the future, and reach other important goals.

Checking account basics

A checking account is like a personal budgeting assistant. It's there 24 hours a day to let you know how much money you've deposited, which bills have been paid, and how much money is left until your next payday. It's designed specifically for frequent transactions. 

Financial institutions like banks and credit unions are a safe place to deposit, withdraw, and transfer funds. Almost all banks are insured by the Federal Deposit Insurance Corporation (FDIC), and nearly all credit unions are insured by the National Credit Union Administration (NCUA). When you bank with an insured institution, the money in the following accounts is protected against loss:

• Checking

• Savings

• Money Market Deposit Account (MMDA)

• Certificate of Deposit (CD)

Let's say you're selling a large piece of land and expect to receive $350,000. Before the sale goes through, you already have a total of $50,000 in deposit accounts at Bank A. The money is in several accounts—checking, savings, money market (MMDA), and a certificate of deposit (CD).

Here's how you make sure your money is protected:

• You learn that the FDIC covers up to $250,000 for each depositor at each financial institution they have accounts in.

• In the unlikely event Bank A fails, the FDIC would add up the money in all your accounts at that bank and reimburse you up to $250,000. 

• Since you already have $50,000 in deposits there, you know the most you want to put into your Bank A account is $200,000. 

• The property sale goes through and you receive a check for $350,000. 

• You deposit $200,000 into Bank A. 

• Now that your deposits total $250,000, you open another account at Bank B and deposit the remaining $150,000. 

• Knowing FDIC insurance will protect up to $250,000 in each financial institution you work with, you're confident that all your money is secure. 

Insider tip: If any of your accounts are jointly owned, the FDIC will reimburse both you and the co-owner up to $250,000 each. 

Key features of most checking accounts

• Check-writing privileges

• Debit card

• ATM card and ATM access

• Online banking services

• Mobile check deposits

• Direct deposit of your paychecks into your account

• Wire transfers

• Account alerts that help you monitor changes to your account

Different types of checking accounts

Through the years, banks have evolved. Today, to meet their customers' varied needs, banks offer more types of checking accounts. Those accounts include:

• Standard checking: This account provides all the basic features of a checking account but doesn’t usually pay any interest on deposits.

• Interest-bearing checking: This works like standard checking but you could earn interest on your account balance. Interest-bearing checking accounts aren’t widespread, so you might have to search for one. 

• Senior checking: This account is ordinarily available to older individuals and retirees. Perks may include waived monthly fees, interest earned on deposits, and even free checks. 

• Business checking: These accounts are specially designed for business owners. They allow business owners to keep personal and business finances separate. Some allow multiple authorized users and offer tools to make accounting and payroll easier. 

• Student checking: Finances can be challenging for young adults. A student checking account could help by offering low or zero minimum account balance requirements and services such as ATM fee reimbursement. 

Insider tip: Some banks charge monthly fees for checking accounts, but plenty offer checking without any fees. In other words, it pays to shop around before opening an account. Bank fees vary dramatically, and there's no reason to pay more than necessary for the banking services you need. 

Savings account basics

Unlike a checking account, a savings account is designed to hold money for an extended period. For instance, if you have a bill due at the end of the month, you'd deposit enough money in your checking account to cover the expense. If you have money you won't need right away, you could deposit it into a savings account where it could earn interest and grow over time. 

Here are some of the most common reasons people put money in savings:

• Build an emergency fund

• Save for something special, like a new car 

• Pay for holiday gifts

• Go on vacation

• Cover educational costs as they arise 

Savings accounts are designed to protect your money while it grows and give you access whenever you need it. Withdrawing money from savings is just as easy as withdrawing it from checking. 

Types of savings accounts

Like checking accounts, there's more than one type of savings account. They include:

• Traditional savings: A traditional savings account allows you to save money and earn interest on the balance. However, the interest rates paid on traditional accounts are typically quite low. Because it’s so low, it typically doesn’t fluctuate.

• High-yield savings: A high-yield savings account usually pays more interest than a traditional one. The interest fluctuates with the economy. Whenever the Federal Reserve raises interest rates, rates on high-yield savings accounts can soar. And on the flip side, when the Fed cuts interest rates, rates drop across the board, even on high-yield savings accounts. 

• Money market deposit account: Like a savings account, an MMDA is a deposit account. They're sometimes called hybrid accounts because they share some qualities of both checking and savings accounts. For example, many MMDAs come with checkbooks and debit cards. They also allow regular withdrawals. The interest rate fluctuates just like it does on a high-yield savings account.

• Certificates of deposit: With a CD, the idea is to leave your money in the account until it matures. If you don’t, you might forfeit the interest and even pay a penalty. The interest rate on a CD is fixed. The term typically ranges from 3 months to 5 years. 

The bottom line is this: Checking accounts are designed for frequent daily use, while savings accounts are meant to protect funds you don’t plan to use immediately. Whether you're focused on building a robust emergency account or boosting your credit score, it all begins with taking control of your bank accounts.