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Do you ever find yourself wondering, "Should I keep money in savings or checking?" It's a common question, asked by many. Some people like to keep cash easily accessible to pay bills and in case of emergencies, but leaving too much cash in a checking account means that you're missing out on earning interest. And while savings and checking are the two most common types of bank accounts, it's good to consider all of the options.

When to Use a Checking Account

A checking account is a vital part of your financial life — think of it as your main bank account. It's where your salary or wages get deposited, and it's the account you use to make everyday purchases and pay your bills. Most checking accounts allow a nearly limitless number of transactions in the form of paper or electronic checks, debit card use, and automatic transfers. In exchange for this convenience, you usually earn little or no interest on your balance. Try to keep one or two months' worth of living expenses in this account — in case of emergencies and also to avoid maintenance or overdraft fees.

When to Use a Savings Account

After covering your immediate living expenses with the money in your checking account, it's wise to store any extra funds in a savings account that offers a higher interest rates. In exchange, savings accounts typically limit the number of transactions you can make per month. For example, you may be limited to six per month before any fees apply. A savings account is the perfect place to store an emergency fund of, ideally, three to six months' worth of living expenses. It's also a good place to save for short-term goals, like a new car, a dream vacation, or a down payment for a house. For more significant savings balances (think $5,000 or more), consider using a money market savings account that offers a higher interest rate.

Other Accounts to Consider

If you have extra cash after covering immediate living expenses, a substantial emergency fund, and short-term goals, consider these accounts:

  • Individual Retirement Accounts (IRAs): Even if you're already contributing to a 401(k) plan through work, you can still save up to $5,500 a year ($6,500 if you're at least 50 years old) in a traditional or Roth IRA. Funding it with mutual funds will likely produce higher returns, but withdrawing before age 59½ usually incurs hefty tax penalties.
  • College Savings Accounts: If you have kids, it's never too early to start saving for their education. Two options to help you save include state-run 529 college plan accounts, which offer high contribution limits, and Coverdell Education Savings accounts; these offer investment flexibility and a contribution limit of $2,000 per year. Either account will help you save on your taxes while accumulating money through interest.
  • Certificates of Deposit (CDs): If you have extra money that you don't anticipate needing for a fixed period, then consider a CD. These accounts render your money inaccessible for as little as seven days to as long as ten years. In exchange, they usually offer a higher interest rate than regular savings accounts. You'll usually pay a penalty if you withdraw the money early.

Savings and checking accounts are the foundation of personal banking; using them in combination allows you to manage your basic financial needs. As you set financial goals, you'll have a better idea of what other types of bank accounts to use.

This information and recommendations contained herein is compiled from sources deemed reliable, but is not represented to be accurate or complete. In providing this information, neither KeyBank nor its affiliates are acting as your agent or is offering any tax, accounting, or legal advice.

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