What Is the Purpose of Different Types of Bank Accounts?

Individuals interested in growing their finances and establishing credit need to start with a bank account. Though this rudimentary first step may seem simple enough, many may struggle with the different types of accounts available. For most individuals, the question will come down to: what is the difference between a checking and savings account? If you are unsure which will suit your needs, consider some of the following things to keep in mind before finalizing your choice.

Selecting the Savings Account

Financial institutions, such as banks or credit unions will offer savings accounts to those who are interested in storing their funds safely. These accounts are primarily designed to hold onto an individual’s savings: the money that they do not plan to spend in the short term. Because these accounts are meant to remain relatively untouched over a few years, banks incentivize individuals to open them by providing them with regular interest on their account balances. SoFi states, ‘A savings account is an account held at a financial institution such as a bank or credit union—its primary purpose is to store your funds safely.’

Savings account interest rates will be higher than those on checking accounts. So for individuals who would like to build their holdings over time slowly, it can be a good idea to open a savings account if you have large financial holdings that you want to use to generate an income passively. 

If you do need to withdraw money, some of the most common uses for your bank’s savings account include emergency funds and meeting short-term financial goals. Because banks may impose per-month transaction fees on savings accounts, it is essential to understand your specific institution’s limits to make the most of your account in an emergency.

Selecting the Checking Account

Unlike a savings account, a checking account is used for short-term spending. Financial institutions will offer checking accounts for individuals who would like to keep their money somewhere without spending fees or limits to take care of everyday transactions. Because these accounts generally do not have withdrawal limits or fees, account holders are free to move their finances around as much as they would like. However, checking accounts rarely offer to generate interest on the money held within.

Individuals who open up a checking account will also gain access to a debit card, making it easier for them to access their money. For example, debit cards allow individuals to make purchases online and at retail locations and withdraw whatever cash they need from an ATM. 

Having a checking account will also make it easier for individuals to use paper checks and pay bills, especially online with the use of a debit card. In addition, because ATMs may charge additional fees if they are not linked to a specific bank, it is strongly recommended for individuals with debit cards to look into using their associated bank’s ATMs to avoid incurring extra charges.

Like with any other such investment process, it is strongly recommended that all individuals consider their short-term and long-term financial goals to determine which type of bank account will best suit their needs.