Saving vs Checking Accounts - What's Better?

#3 AdviceBy_

Whether you’re a student or just started your career, you probably have some money saved up. You might have watched the Wolf of Wall Street or heard about investing but don’t know where to start. I created this four-part personal finance series based on my experiences to help maximize your saving (and spending) abilities! If you find this helpful, make sure you sign up above to get Part 2 delivered straight to your inbox.

Part 1: Savings vs Checkings Account (this one!!)
Part 2.1: Investing - Definitions (read here)
Part 2.2: Investing - Start Now (read here)
Part 3.1: Retirement Accounts - Roth IRA (read here)
Part 3.2: Retirement Accounts - 401k (read here)
Part 3.3: Education Accounts - 529 & Coverdell (read here)
Part 4: Credit Cards

Keep Your Money in a Savings Account (as opposed to checkings)

• Why? Savings accounts have higher interest rates (~50x higher) than checking accounts 

• What is interest? It’s the amount of money a bank gives you (at an annual rate but usually a portion of it is paid to your account each month) for keeping your earnings with them. 

• Do interest rates stay the same? Interest rates often change based on economic conditions. A year ago savings interest rates were as high as 2% but after COVID they’ve dropped down to ~0.50%. Checking account interest rates usually stay around 0.01%. 

• What does this mean for my money? Suppose you have $1000 in your bank account today. In a checking account, that would earn ~$0.10 of interest in one year. However, in a savings account, the same $1000 would likely earn ~$5 in one year. $0.10 vs $5 may not sound like a huge difference, but as you start making more money that gap becomes even larger. At $20,000 it’s a gap of $2 vs $100. You’re losing out on free money if you don’t use a savings account! 

• What’s the difference? Savings accounts usually impose a limit of 6 withdrawals per month to pay your bills, transfer money to other accounts, pay someone via Venmo, etc. As a result, savings accounts do not offer debit cards. You’ll want to make daily purchases using a credit card (to be discussed in detail in part 4 - subscribe above to receive it!). Checking accounts do not have a withdrawal limit. As a college student and young professional I’ve found it doable to stay within the 6 withdrawal limit. Earlier this year, the Federal Reserve temporarily removed the 6-time withdrawal limit for the foreseeable future. Even more of a reason to make sure your money is in a savings (and not checking) account!

• Bank recommendations? Not all accounts offer the same interest rates. I recommend opening a savings account with Discover or Marcus by Goldman Sachs as they are well known, offer high-interest rates, have no minimum balance requirements, and offer checking accounts as well in case you want to open one down the road when you have more monthly expenses. I use Discover and love their customer support and app interface. Both accounts offer a 0.50% savings interest rate currently. There’s a newer bank HMBradley which offers a minimum 0.5% savings interest rate but goes all the way up to 3.0% if you save at least 20% of your earnings a month. Worth checking out.

• When? I opened my own Discover account in my Sophomore year of college. Before that, I had my savings in an account under my parents’. Looking back, I could have opened the account as early as high school. 

• Additional tips? If you have a job, make sure your direct deposit is linked to your savings account. If your parents deposit a certain amount of money to your bank account to help you with expenses, make sure the money is being deposited to your savings account and not checking. This also means you’ll need to put your expenses on a credit card (sign up to get access to part 4), not a debit card. Get the extra interest, it’s essentially free money!

If you have any questions (regarding content, opening an account, etc) feel free to reach out. Subscribe above to get Part 2 (investing) delivered straight to your inbox!