I'm a former banker, and there are 5 reasons I keep most of my cash in a savings account instead of checking

Eric Rosenberg

Feb 5, 2020, 04:42 IST

I'm a former banker, and there are 5 reasons I keep most of my cash in a savings account instead of checking

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The author is not pictured.

Savings accounts generally come with higher interest rates than checking accounts, which earns you more on your balance.
Saving for a major purchase in a high-yield savings account, such as a house or car, means you earn interest on your large balance, helping it grow even faster.
Separating your money into savings accounts protects it from accidental or easy spending and can help you save for financial goals.
Find out who has the best high-yield savings account right now »

If you are paid with direct deposit or by check, the destination for your regularly scheduled income is likely a checking account. Checking accounts act as a financial clearinghouse where money goes in and out of your life. However, checking isn't the only type of bank account you should have.

A savings account is often the first bank account many of us have as kids. As adults, savings accounts offer several benefits including higher interest rates, a buffer between your spending money and other funds, and help managing your cash flow.

Here's a look at five reasons you should keep money in a savings account instead of checking.

Earn a higher interest rate

Many checking accounts don't offer any interest at all for your deposits. Of those that do, the majority offer rates that are pretty low. For example, I love my Schwab Bank checking account, but it typically pays about 0.02% to 0.04% interest. It's better than nothing, but not by much.

I keep about a month's expenses in my checking account and put the rest of my cash in savings. Most sits in high-yield savings accounts at Ally Bank, Capital One, Simple, and SoFi, where it earns up to 20 times more than it would in my checking account.

Fewer fees and minimum balance requirements

The best checking accounts in the US are free with no minimum balance and no recurring fees. Not all banks follow those guidelines, however. And for checking accounts, the rules can be stringent. To qualify for free checking, you may have to keep a certain balance, use your debit card a minimum number of times per month, or jump through other hoops.

Savings accounts are made to just keep your money safe while it slowly grows with interest. While Federal Reserve regulations limit savings accounts to six withdrawals per month, you should otherwise find it easier to avoid fees with a savings account.

Some banks do have minimum balance rules to avoid a fee. If that's the case, you should consider switching banks to one that won't charge you to keep your money there.

Avoid the temptation to spend

Spending money from a checking account is second nature to many people. While many savvy spenders use a credit card and pay off the balance from their checking, other people use a debit card and ATM to quickly and easily withdraw from checking. If the money is in savings, however, it isn't as easy to spend and takes away some of the temptations of frivolous purchases.

I consider my savings accounts to be walled off from my checking and daily spending needs. Most of my cash is in an emergency fund. I save for property taxes and insurance in a dedicated high-yield savings account. I keep a little cash in other savings for months when big bills come in or other short-term financial goals.

Keep your emergency fund safe

I briefly mentioned my emergency fund in the section above. This is one of the most important uses of a high-yield savings account.

According to data from the Federal Reserve, about 40% of Americans can't afford to pay for a $400 emergency with cash; 27% would have to borrow or sell something to come up with the money in an emergency, and 12% said they can't cover an emergency like that at all.

Medical bills, home repairs, and broken-down cars often cost well over $400, so that's just a baseline for comparison.

Most experts suggest saving a minimum of three months of expenses in an emergency fund. For people who are self-employed or don't have a stable income, it's wise to double that to a minimum of six months of expenses in savings where you can't easily touch it.

Steadily save for a major goal

If you want to buy a home, car, or make any other major purchase, it's a good idea to save up for it first. Where should you save so you don't accidentally spend the money on something else? A high-yield savings account of course!

I pay $13,000 in property taxes and homeowner's insurance every year. I put away $250 per month in a savings account to cover those bills and avoid spending that money on something else. The same strategy works saving for a wedding, car or home down payment, or anything else.

Save more and save often

One of the most common regrets among Americans in a wide range of age groups is not saving enough when they were younger. I've never come across someone who regretted saving as much as they did. It's almost always better to save more if you're able.

Getting on a regular savings schedule is the best way to avoid spending your money in the wrong place. If you can set up automatic transfers from your checking account or split your direct deposit into multiple accounts, you're able to save every month without even thinking about it.

Whatever you do, don't avoid or neglect your savings or keep too much money in a checking account. If you can automatically save every payday in a high-yield savings account, you're making a great decision for your long-term financial future.

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