What is a checking account
A checking account is a type of bank account used to cover daily and frequent expenses. In India, checking accounts are commonly known as current accounts. These accounts have no withdrawal or transaction limits, making them suitable for businessmen, traders, entrepreneurs, firms, and companies. The bank offers you a debit card and chequebook with the account to ensure easy withdrawals. You can make withdrawals at a bank branch or an ATM.
ACH transfers, wire transfers, and debit card purchases are also permitted on checking accounts. Online and mobile banking services ensure easy access to checking accounts at all times. Moreover, the difference in interest gains is a significant point in the checking vs. savings account debate. Checking accounts do not offer interest gains on the balance maintained since funds are readily available to the account holder whenever needed. Banks do not offer interest earnings on your current account balance to balance this extra liquidity benefit.
What is a savings account
Next on the checking account vs. savings account debate is understanding the features of a savings account. A savings account is a deposit account used to save money and grow the corpus at a nominal rate of interest. It is a safe investment avenue people use to park their savings that they do not need to use immediately. People can open savings accounts with different savings goals like building an emergency fund, saving up for a vacation, or accumulating capital for a down payment.
Savings accounts offer a debit card, chequebook, passbook, and Internet banking facilities to the account holder. While you can easily deposit and withdraw funds from the account, ATMs only allow a certain number of free monthly withdrawals.
Differences between checking and savings accounts
Understand the differences between checking accounts and savings accounts to see which one is a better fit for you:
1. Purpose of use
The primary difference between current vs. savings accounts is their usage. A checking or current account is more suitable for businesses that conduct frequent transactions. Savings accounts are ideal for regular citizens looking to save their idle funds and build an emergency fund for the future.
2. Interest payout
Funds in a checking account do not earn any interest. However, funds deposited into a savings account earn interest. While not as high as post office tax-saving schemes, savings account interest rates vary from 2.70%-7% p.a. The interest is calculated daily on the total balance and credited quarterly.
3. Transaction limits
Transaction limit is one of the most essential differences between checking and savings accounts. There are no limits on the number of transactions you can make using a current or checking account, making them suitable for business owners who need to make frequent transactions. Savings accounts allow about 3-5 free transactions every month. Post that, all transactions attract a service charge. Moreover, there is usually a cap on the number of free withdrawals you can make at the ATM.
4. Balance requirement
Checking account holders need to maintain a higher minimum balance compared to a savings account. In fact, you can even open a zero balance savings account and skip the minimum balance requirement and low balance penalties.
5. Overdraft facility
A current or checking account offers an overdraft facility that permits account holders to withdraw more funds than the available balance. This is a boon for entrepreneurs who need to meet immediate financial obligations. An overdraft facility is not an in-built feature of savings accounts. In other words, you cannot spend more than what you have in your savings account.
6. Suitability
A checking account is best suited for businessmen, traders, entrepreneurs, firms, and companies who require access to unlimited, charge-free business transactions. A savings account is suitable for salaried employees or those with a stable monthly income who wish to earn interest on their saved liquid funds.
Also read: Overdraft account meaning
Checking vs savings accounts – Which is a better option?
Deciding between a checking and savings account depends on your financial goals. Checking accounts are designed for daily transactions like paying bills and making purchases. They offer easy access to your money but typically have low interest rates. Savings accounts are ideal for growing your money over time. They often have higher interest rates but may restrict how often you can withdraw funds.
Conclusion
Both checking and savings accounts have their unique benefits, catering to different needs. Checking accounts, with their overdraft facility and unlimited transactions, are perfect for business owners who need to handle frequent, high-value transactions. On the other hand, savings accounts are designed to nurture personal saving habits, letting your money grow with interest, making them ideal for steady, goal-based savings.
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