Checking account vs. savings account: Choose one or choose both

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Tracking the flow of money through your bank accounts.

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Whether you’ve started your first job or your first well-paying one, now that you’ve begun making money, you need someplace to keep it. A reputable bank backed by the federal government is a solid choice.

Next, you’ll have to decide what type of account to open: checking or savings—or maybe both. Knowing the differences between these accounts can help you create a budget that works best for you.

Checking and savings accounts are types of bank accounts. When held in a bank insured by the Federal Deposit Insurance Corporation (FDIC) or at a credit union backed by the National Credit Union Administration (NCUA), your money is protected.

Money deposited in these accounts can be used to pay bills, buy things, and save for specific goals, although checking and savings accounts have distinct purposes. And you can earn money—savings accounts and even some checking accounts pay interest based on the monthly account balance.

Sometimes called a transaction account, a checking account is used for daily expenses. There are typically no restrictions on the number of withdrawals, transfers, and transactions you can complete each month. As long as there’s money in your account, you can use it to buy things and pay bills.

Many checking accounts come with a debit card, making it easy to buy groceries and other necessities, set up recurring bill payments, and access an ATM for cash withdrawals. Once you have a regular paycheck (and even if you don’t), you can also have your earnings automatically deposited into your checking account. Through direct deposit, your employer can transfer your pay straight into your checking account, so the money’s available without the extra step of cashing or depositing a paycheck.

A checking account is ideal for managing your regular income and expenses, including unexpected purchases (as long as you have enough in the account to cover them), and is a useful tool in helping to establish a monthly budget. Common uses for a checking account include managing your insurance premiums and housing payments and using a debit card to buy groceries.

A savings account is what the Federal Reserve refers to as a savings deposit account. Savings accounts pay interest on the monthly balance. The rate you receive, known as the annual percentage yield (APY), can vary considerably from bank to bank. Think of interest as the bank’s way of rewarding you for keeping money in the account. (Some checking accounts also earn interest, but it’s more common with a savings account.)

Unlike checking accounts, which don’t typically have transaction limits, savings accounts come with rules. You can make unlimited withdrawals at a bank branch or an ATM, but some other activities are limited to six transactions each statement cycle:

If you exceed the limits, you may be charged a fee, or your savings account might be changed to another account type. Because of the limits, many banks don’t issue debit cards with savings accounts; instead, they provide an ATM card. An ATM card provides access to cash and the ability to make deposits, but it can’t be used to make purchases or pay bills.

Although they’re not suited for daily purchases, savings accounts are ideal for setting money aside for a specific purpose. For example, you may want to build up an emergency fund, save for a down payment on a home, or set aside money to go on a big vacation. A savings account can help you move beyond day-to-day transactions to plan for the bigger picture.

As with all things personal finance, how much money you keep in your checking account or savings account is, well, personal. But there are some fundamental things to keep in mind as you decide.

Checking account: Review your budget and determine how much you need in order to cover your expenses with your income. Don’t forget to include transferring money to your savings account or other goal-based accounts, such as an individual retirement account (IRA). Once you have a good idea of how money flows through your account, decide how much of a buffer you need to feel comfortable. This amount could be $500, $1,000, $2,000, or more—whatever works for keeping a little extra to cover unexpected expenses.

Savings account: Consider the purpose of your savings account and be pragmatic. Chances are you’ll need some time to achieve your savings goals. If you want to set aside $10,000 for an emergency fund, for example, you may need to start small until you figure out just how much you can save each pay period. Similarly, if you need $2,000 for your next big trip, create a plan to transfer regular amounts until you reach that goal.

Checking and savings accounts can help you work toward your short-term and long-term goals while covering your daily expenses. Keeping checking and savings accounts at the same bank can be helpful, so you can transfer funds between accounts to easily manage your money.

Just keep in mind that the combined total of your checking and savings accounts will be insured by the FDIC only up to $250,000 for single accounts. If at some point you hold more than that amount at one bank, you may want to consider opening additional accounts at another bank.