Checking Account Interest vs Savings Account Interest

The facts are clear, consumers need a checking account for managing their expenses and a savings account for building an emergency money stash. Although there are both checking accounts and savings accounts that earn interest, there are some major distinctions between the two.

Savings accounts are a type of deposit account that earn a small but guaranteed rate of return and have the muscle of the federal government protecting the money on deposit. Many of these accounts only require a small minimum balance to be maintained. The amounts of withdrawal and deposit transactions are limited to 6 per statement by the federal government. Savings account interest rates fluctuate with the rate set by the Federal Reserve and current yield rates are between 2%-3%.

Not all checking accounts offer an interest rate on the deposits. When they do there is usually an extremely steep minimum starting at $10,000 that needs to remain on deposit at all times. Additionally, the rate of return on this money is pitiful, hovering between .5% to just over 1%.

Checking account interest rates and savings account interest rates differ greatly as a matter of in-house accounting. Once your money is on deposit, the bank handles both types differently in order to follow the laws set down by the federal government. The law mandates that the banks hold onto 0% reserve requirements for savings accounts, thus they can use your money more freely and pay you a higher interest rate for it. While checking accounts require a 10% reserve thus reducing the amount of interest they are willing to pay.

When organizing your finances keep it simple. Open both a checking account for your transactions and link it directly to your savings account to build a nest egg. Your hard earned cash should live up to its fullest potential and the interest on a checking account is not the best yield for your investment.