Knowing where to keep your money is a key part of personal finance. Most people rely on a combination of checking and savings accounts, but the balance between the two can affect your ability to pay bills, grow your savings, and handle unexpected expenses.
So, is it better to keep more money in checking or in savings? The answer depends on your financial habits, goals, and how you use each account. In this guide, we’ll break down the main differences between checking and savings accounts, when to prioritize one over the other, and how to find the right balance for your needs.
The Role of Checking Accounts
Checking accounts are designed for frequent, everyday use. They’re the accounts linked to your debit card, used for direct deposits, and often where monthly bills get paid from. The key benefit of checking accounts is accessibility. You can withdraw money, transfer funds, or make purchases without restrictions.
However, the trade-off is that most checking accounts earn little or no interest. This means money sitting in the account doesn’t grow over time. If your checking balance is much higher than what you need, you could be missing out on potential earnings elsewhere.
That’s where savings accounts come in.
The Purpose of a Savings Account
Savings accounts are built for one thing—saving. These accounts typically offer higher interest rates than checking, helping your money grow passively over time. They’re ideal for storing money you don’t plan to use right away, such as emergency funds, vacation savings, or big future purchases.
Unlike checking accounts, savings accounts may have restrictions on how often you can withdraw money. Some banks limit the number of monthly transfers or charge fees for excessive withdrawals. This setup encourages long-term savings, but it also means the money isn’t quite as accessible in a pinch.
Key Differences Between Checking and Savings
Understanding how each account functions will help you decide where your money should go. Here are the major differences to keep in mind:
Each account serves a different function. The trick is using them together effectively to meet both short-term and long-term financial needs.
How Much Should You Keep in Each?
There’s no universal rule for how much to keep in checking or savings, but general guidelines can help. For checking, it’s recommended to keep enough to cover at least one to two months of essential expenses. This might include rent or mortgage, utilities, groceries, insurance, and loan payments.
Let’s say your total monthly bills are around $2,000. Keeping $2,000 to $4,000 in your checking account offers flexibility and protection against overdrafts. Anything above that could potentially be moved into savings.
In your savings account, it’s smart to aim for at least three to six months’ worth of living expenses, especially for emergency purposes. This creates a safety net if you lose your job, face a medical emergency, or encounter other unexpected costs.
If you’ve already hit your emergency fund goal, you might consider other saving or investing strategies to grow your wealth further.
When to Prioritize Checking
There are situations where keeping more money in your personal checkings account makes sense. For example:
1. Irregular Income
If your income varies each month—like freelance work or commission-based jobs—it’s helpful to keep extra funds in checking to cover gaps between pay periods.
2. Upcoming Big Payments
Anticipating a major bill, such as annual insurance premiums or a large home repair? Keeping that amount in checking ensures you’re ready when the payment is due without the need to transfer from savings.
3. Avoiding Overdrafts
Some people prefer keeping a larger cushion in personal checkings to prevent overdraft fees or declined payments. This can be especially useful if you have multiple automatic bill payments scheduled throughout the month.
When to Prioritize Savings
In other cases, focusing on your savings account offers more benefits. Consider moving extra funds into savings when:
1. You’ve Covered Monthly Spending
If your bills are paid and your checking account has a solid cushion, excess funds may be better off earning interest in savings.
2. You’re Building an Emergency Fund
Emergency funds are typically stored in savings accounts so they’re separate from your daily spending. This helps prevent the temptation to dip into them for non-essentials.
3. You’re Planning for a Future Goal
Saving for a vacation, down payment, or education costs? Keeping those funds in a separate account (with some interest growth) helps you stay focused and reduces the urge to spend impulsively.
Using Both Accounts Strategically
Rather than choosing one over the other, the most effective strategy is to use both checking and savings accounts together. Here’s how to make that work:
Set a Monthly Budget
Track your income and expenses to determine your average monthly spending. This gives you a clear idea of how much should stay in personal checkings each month.
Automate Transfers
Once you know how much money you need in checking, schedule automatic transfers to savings after each paycheck. This “pay yourself first” approach makes saving easier and more consistent.
Monitor Your Accounts Regularly
Keep an eye on your account balances and adjust as needed. If your savings goal is reached, you might consider moving excess funds into a high-yield savings account or investment.
The Role of High-Yield Savings and Alternatives
If your current savings account earns little interest, consider switching to a high-yield savings account. These accounts—often available through online banks—offer significantly higher interest rates than traditional savings.
You can also look into money market accounts or short-term certificates of deposit (CDs) if you’re comfortable locking away funds for a set time. Just be sure the money isn’t needed for daily expenses.
Final Thoughts
So, is it better to keep money in savings or checking? The answer isn’t either-or—it’s about using both in a way that supports your financial goals. Your checking account should be your spending hub, with enough to cover monthly expenses and prevent overdrafts. Your savings account should grow over time, offering security and peace of mind for the future.
By finding the right balance and regularly reviewing your finances, you can make sure your money is working for you, not just sitting still. Keep your personal checkings account lean but safe, and let your savings account help you build toward what’s next.
