Checking, Savings and Money Market Accounts

Checking, Savings, and Money Market AccountsChecking Accounts

The main feature of this account, which is held at a bank or credit union, is easy  access to the money inside the account.  You can write a check (paper or online) or use a debit card to make purchases using the money in your checking account.

Banks generally do not pay interest on money kept in a checking account, although there are exceptions.

As checking accounts do not normally pay interest, people tend to put relatively small amounts of money in checking accounts. A checking account is safer than stuffing money under their mattress, and its more convenient than carrying around lots of cash.

Checking accounts are insured by the Federal Deposit Insurance Company (FDIC) which means that if your bank goes out of business you are covered by the FDIC for up to $250,000 of deposits.  You can learn more about FDIC Insurance here.

Savings Accounts

Unlike checking accounts, saving accounts pay interest on funds. However, access to funds is less convenient and more limited  than with a checking account. Normally, you are not allowed to write checks against funds held in a Savings account, and the number of penalty free monthly withdrawals and money transfers are limited.

As the name suggests, people generally use savings accounts to deposit money that they do not need right away, but still want to have immediate access to should they need it.

Because money is not moving in and out of a savings account as frequently as a checking account, the bank has some additional flexibility in terms of what they can do with the money.  As a result, the bank will pay you a small amount of interest for allowing them to hold your money, and lend it out to other customers.  It is important to understand however that the rate of interest on a savings account is variable, meaning that the institution that holds your account can adjust the interest rate as they see fit.

Like checking accounts, savings accounts are the safest form of account, as they are insured by the FDIC for up to $250,000.

Money Market Accounts

A money market account (not to be confused with a money market fund) is similar to a savings account, with a couple minor differences. The funds you give the bank must be invested in short-term, high grade corporate and government debt. (With a savings account, the bank can loan the money out.) Furthermore, there are major legal restrictions from making more than 6 withdrawals or transfers per month, (only 3 of which can be by check) and they generally require a higher minimum balance than other types of accounts. In return for these differences, money market accounts generally pay a higher rate of interest than a checking or savings account.  Like savings accounts, money market accounts offer a variable rate of interest.

Some institutions will pay higher rates on money market accounts, if you have a certain amount of combined deposits including CDs with them.  Like checking and savings accounts, money market accounts are insured by the FDIC for up to $250,000.

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