Want to know the differences and benefits of savings accounts, checking accounts, and CDs? If so, then you’re in the right place. We’re going to introduce you to these three types of accounts, what they are for, what the benefits are, and which ones are right for you. It can often be intimidating to choose among these and understand the true implications of your decision, but we make things simple. Before that, let’s touch on some broad concepts to lay the groundwork for this analysis and ensure you are prepared to learn about savings accounts, checking accounts, and CDs.
The Top Line
- Each of these have benefits to the consumer--savings accounts are beneficial for longer-term saving, checking accounts are best for day-to-day payments and withdrawals, and CDs are better for even longer-term saving.
- If you hope to grow your money and manage it effectively, you will need to know more about each of these.
- Many people use a combination of these types of accounts or have all three types. It’s important to know what your financial goal is to decide which may be best for you.
Savings accounts are the first account type that we are going to cover. These are perhaps the most common type of account for a consumer to have and are designed for medium- to long-term savings. Most banks offer savings accounts options.
What Are They?
Savings accounts are perhaps the easiest-to-understand account on this list. They are exclusively for savings and are intended to provide you with a trusted place to store your long-term savings that you don’t want to touch. Generally, these accounts are offered with low interest rates and don’t generally provide you with a debit or payment card to access the funds at a moment’s notice. However, you can easily transfer from your savings account into your checking if you need the cash, although transfers out are limited to six per month. Almost everyone has a savings account as a basic pillar of their savings plan.
Though a savings account doesn’t have all the features, convenience, and access that a checking account does, it does have some benefits. For most people, the main benefit of a savings account is that it provides them a place to safely and securely store their funds where they can be out of sight so that they are not tempted to spend them. This can be more easily accomplished with automatic transfers to your savings account, should you decide that is necessary for your savings plan. The other benefit of savings accounts is that they are adjacent to your checking account so that you can transfer them in when the funds are required.
Things to Know
One of the things that you should know about your savings account is that while it does make saving a bit easier and give you the ability to separate spending money from saving money, it isn’t going to grow with interest very fast or in some cases, at all. Generally, savings accounts will earn very low percentage points and in some cases, they earn none at all. However, this has started to change a bit with the emergence of high-interest savings accounts. If you are hoping to earn a bit of money with your savings, you should check out online banks that offer high-interest savings accounts.
In addition, savings accounts have a limit of six withdrawals per month. They are not designed for multiple transactions per month like checking accounts are.
Checking accounts are another common type of account that almost everyone has. Here is what you need to know about checking accounts.
What Are They?
If you have ever written a check, completed an ACH payment, received a direct deposit, or used a debit card, then you probably have a checking account. This basic utility account is versatile and typically packed with functionality. A checking account is designed to easily and securely store any funds that you’ll be needing to pay expenses and bills in the near future. Generally, people do not keep their long-term savings in a checking account because it is easily accessible with a debit or Automated Teller Machine (ATM) card or check.
There are many benefits to having a checking account, and they mostly have to do with convenience. A checking account is great because it provides you with on-demand access to your funds when you want to use them or spend them on something such as a purchase at the grocery store or paying for rent. You’ll usually have a debit card and checkbook to go along with you wherever you go to make it easy to spend this money as needed. An ATM card allows you to withdraw money from Automated Teller Machines which may be from your bank or another bank. This means that you may withdraw cash from almost any ATM machine that is convenient for you giving you ready access to cash.
Things to Know
Like is the case with savings accounts, checking accounts aren’t really designed to help your money grow. For that reason, many banking institutions offer low or no interest on money in your checking account. This isn’t necessarily a downside because checking accounts are not meant to have large amounts in them at any one given time, anyways. You should be aware that checking accounts are intended specifically for short-term storage of your money and frequent spending.
While many people are familiar with checking and savings accounts already, not as many people are familiar with a Certificate of Deposit, or a CD. CDs provide a great alternative to people who want the best of both worlds when it comes to storing money.
What Are They?
A CD is an investment vehicle that is designed to be very low-risk, but also lower interest. A CD is a loan that you provide to an organization for a guaranteed rate of return in a specified window of time. CDs are generally used for people that want to save money while also getting better interest at the same time, which is hard to do otherwise.
The benefits of a CD are that you can store money securely in a low-risk investment that has a guaranteed rate of return. When the company or organization pays it back, you will have more money than what you started with and all without the risk of a regular investment such as stocks. Often, interest rates for CDs are higher than those for savings or checking accounts.
Things to Know
One thing that you should be aware of if you are going to invest in a CD is that they generally lock your money for a specified period of time ranging from six months to several years. During this timeframe, you will not have access to your funds and they will be earning interest. If you withdraw the funds before the end of the timeframe, you will lose the interest accrued during the time the money was held. Generally, the longer the term of the CD, the higher the interest rate you earn.