Checking and Savings Accounts: How To Make Them Work Together

The prevailing financial wisdom states that you should pay yourself first. Reality dictates that you also need to pay others – such as your landlord or mortgage lender, the lender that holds your car note, your cell phone service provider, etc. So should you keep your money in a savings account or in a checking account? In most cases, maintaining both types of accounts makes the most financial sense.

A checking account provides ready access to your funds to cover day-to-day financial transactions. It is normal to pay your bills with a checking account rather than a savings account, because federal regulations limit withdrawals from savings accounts to six per month (although there are often ways to skirt that limit). Therefore, you need to have a checking account, or a debit card that functions as a checking account, to handle your personal finances in an efficient manner.

Savings accounts serve as storehouses for reserve funds, while remaining liquid to allow ready access whenever you need money. If you are planning a wedding or have a long holiday gift list, you would likely put money in a savings account rather than in a checking account. You would also likely collect your “rainy day” or emergency funds in a savings account, rather than a checking account, so that they could be readily available without being counted as part of your day-to-day available funds.

In general, if your income is steady and your debts are low or non-existent, you can afford to have less money in a checking account and more in savings. This is because your checking account will receive regular infusions of cash from your paychecks. If possible, your savings account should include enough funds to cover at least six months’ worth of expenses, while your checking account could carry only a fraction of what you need to cover your regular day-to-day costs for the same length of time.

If you have a steady income but are digging your way out of debt, you should concentrate on paying off obligations like high-interest credit cards. At the same time, you should not sacrifice your savings goals or maintaining ready access to cash. In such a scenario you might maintain enough to cover 10 to 15 percent of your daily expenses in your checking account and enough money for one or two months’ expenses in savings.

Freelancers and entrepreneurs must keep more money in checking accounts to minimize the risk of bounced checks. Because income from self-employment tends to be unpredictable, the only way to ensure that your expenses are covered is to maintain enough money in a checking account to cover 100 percent of those expenses. Any money that you can accumulate over and above that threshold should go straight to savings.

Homeowners should also maintain both checking and savings accounts, but should also have a larger reserve fund to cover the cost of any major repairs that arise. Depending on the value of your home, a household repair fund of five figures may not be unreasonable. This fund should be maintained separately from your regular checking and savings accounts.

Maintaining your checking and savings accounts in the same bank has several advantages, most centered on convenience. If you run short in your checking account, a simple phone call or online transaction is all that is necessary to replenish your account. Your bank may also offer incentives for maintaining multiple accounts that can add up to substantial financial rewards.

But maintaining a separate savings account in a different bank may prevent you from dipping into your savings account too often. If you choose an online bank, you may be able to score higher interest rates than your local bank can offer.

If you accumulate enough in savings, you should consider transferring some of those funds to a higher-yield Certificate of Deposit for 60, 90 or 120 days – or longer. Your access to your funds would be restricted, but your earnings once the CD matures are likely to far outweigh what you could earn in a regular savings account.

In this day and age, it is difficult to avoid the need for having a checking and/or savings account. While there are some other options available (like prepaid debit cards or alternative accounts like PayPal), the most widely accepted forms of payment continue to be cash, check, or debit cards – all of which come along with a bank account. For this reason alone, it is wise to be sure your money is safely and properly allocated into a combination of checking and savings accounts.

If you have questions regarding how you should be managing your assets, you can always contact a financial advisor for further advice.