Savings and Transactional Accounts

Savings and transactional accounts are categories of accounts found at financial institutions such as banks and credit unions. The accounts in each category serve different purposes and have different benefits. For example, savings accounts, which can include standard savings accounts as well as money market deposit accounts and certificates of deposit (CDs), are intended for long-term savings and thus frequently allow the funds within to grow by accruing interest. While an account holder is usually permitted to withdraw money from a savings account, the number of withdrawals is typically limited. Transactional accounts, on the other hand, are intended to be used to conduct everyday business, and as such, they rarely have withdrawal limits. Checking accounts are the most common type of transactional accounts in the United States, and they typically allow account holders to carry out transactions using checks, debit cards, and electronic fund transfers as well as cash withdrawals. While many transactional accounts do not accrue interest, certain specialized types do.

Background

There are many benefits to having a bank account of some kind, be it a savings account or a transactional account. Bank accounts allow individuals to complete numerous financial transactions that are often essential to everyday life, including paying for goods or services using checks, a debit card, or electronic funds transfers; receiving payments via direct deposit; and accessing funds from nearly anywhere. Having a bank account also allows an account holder to take advantage of any interest or rewards offered by his or her bank as well as to establish a relationship with a bank that may prove beneficial if he or she wishes to obtain a loan at some future point.

Perhaps most important is the additional security offered by a bank account. Although banks do occasionally suffer from financial troubles and security breaches, money stored in a bank is far safer than cash hidden at home or carried around, which has no guarantee against theft, destruction, or other loss. This is largely due to federal efforts to protect account holders from such losses. During the Great Depression, when a wave of bank failures caused many Americans to lose both their money and their confidence in banks, the US government created the Federal Deposit Insurance Corporation (FDIC) to ensure that such an event would not happen again. As of the early twenty-first century, the FDIC insures the deposits at nearly every bank in the country. While FDIC insurance does have limits—the agency insures only up to $250,000 per depositor, account category, and bank, and does not insure investment products such as mutual funds—for many Americans, it provides significant peace of mind. Whether a bank is FDIC insured is therefore often a crucial factor when one decides to open an account.

The ease of online banking and payments has made bank accounts more popular and necessary than ever, especially since some businesses do not accept cash. As such, the number of Americans without bank accounts is less than 5 percent. Not having a bank account occurs for a variety of reasons, including lack of access, distrust of the banking system in light of the 2008 global financial crisis, and, perhaps most common, the inability to open a bank account due to a poor banking history. Individuals who have struggled with financial issues such as overdrafts and bounced checks often find it difficult to open bank accounts, even if their financial situation has improved. In response to this issue, some banks offer "second chance" savings and transactional accounts intended for use by individuals whose banking history makes it difficult for them to open accounts. Such accounts typically operate the same as their standard counterparts, although they may charge additional service fees or require higher minimum balances.

Overview

The banking industry of the United States has evolved significantly over the centuries, in terms of overall procedures and specific offerings. Some varieties of savings and transactional accounts have a long history in US banks, while others are more recent offerings. Each type of account has its own unique benefits, allowing each individual to choose the accounts that best meet his or her needs.

Savings accounts, as their name suggests, are designed for saving money and thus intended to hold funds for an extended period of time. Because of this, frequent withdrawals from savings accounts are discouraged, and federal regulations limit the number of withdrawals, including transfers, allowed per month to six. If an account holder exceeds that limit, the savings account will often be converted into a transactional account. In light of the intended purpose of savings accounts and the long-term nature of their deposits, many banks allow the money in such accounts to accrue interest, allowing account holders to increase their funds while keeping them in an FDIC-insured account rather than a potentially risky investment product. Some savings accounts can be linked to transactional accounts, such as checking accounts, as a form of overdraft protection.

Several types of savings accounts are typically available to American consumers. Standard savings accounts usually have a low interest rate and minimum balance and may offer various benefits or rewards to account holders who meet certain conditions. Banks often charge a monthly fee for standard savings accounts, although some elect to waive the fee if the account balance is above a minimum amount. Some banks offer accounts tailored to saving for particular goals, such as vacations or holiday gifts, but they generally do not differ significantly from standard savings accounts in anything but name.

While many consumers are satisfied with standard savings accounts, some prefer the opportunity to earn additional interest on their savings. Money market accounts are savings accounts that typically offer higher interest rates. Although some such accounts allow account holders to withdraw funds, even using checks, many money market accounts allow fewer withdrawals than standard savings accounts. They may also require a higher minimum balance and have higher fees than their standard counterparts.

Certificates of deposit (CDs) are also sometimes considered savings accounts. When one opens such an account, one essentially deposits a certain amount of money for a specific period of months or years and cannot withdraw that money early without incurring a penalty. In exchange, the account holder received a significantly greater amount of interest than offered by most other savings accounts. Some banks, particularly those online, offer high-yield savings accounts with interest rates higher than those typically associated with standard savings and money market accounts but lower than those of long-term CDs. An account holder may be required by maintain a high minimum balance to be eligible for the best interest rate.

Unlike savings accounts, transactional accounts are intended to be used to conduct regular business and therefore rarely have restrictions on the number of withdrawals, transfers, or other transactions performed. The most common form of transactional account in the United States is the checking account. Checking accounts offer account holders the ability to write and deposit checks as well as perform transactions through a variety of other means. Account holders are often issued an automatic teller machine (ATM) card or debit card to use with their checking accounts. While an ATM card is used to withdraw or deposit cash or checks at an ATM, functions that are possible for savings accounts as well, a debit card allows the individual to spend money directly from his or her account and is typically accepted at any business that accepts credit cards. Funds in standard checking accounts accrue interest in some cases, but the interest rate is typically minimal. In most cases, an account holder can withdraw money from his or her checking account at any time, although some accounts may have waiting periods, minimum balances, or other requirements.

As of the twenty-first century, most banks have online applications that allow customers to make online payments and transfers while also offering access to one's account information. These apps also allow for "tap-and-go" payments as well as connection to other wallet applications, such as Apple Wallet.

A negotiable order of withdrawal (NOW) account is a transactional account that is similar to a checking account in that it allows the account holder to make various transactions, including via checks. Unlike checking accounts, however, NOW accounts typically offer higher interest rates, thus combining some of the benefits of checking and savings accounts. Requirements for NOW accounts differ among banks, and some may require account holders to have a minimum balance, pay regular fees, or provide advanced notice of withdrawals. Though these accounts were once popular, they since became antiquated.

When opening a bank account, one should consider which type of account best meets one’s needs based on a number of factors. For example, if an individual plans to withdraw money from an account regularly, perhaps to pay bills, then he or she should choose a transactional account. Whether the individual should choose a checking account or a more specialized account such as a NOW account will depend on which kinds of accounts his or her bank offers, whether he or she wants to earn interest on funds in the account, and whether the account holder plans to have a minimum balance in the account at all times. Individuals planning to save money must compare the interest rates offered and carefully consider whether they may need to access the money in the near future. If an individual will not need to access the money and prefers a higher interest rate, a CD may be the ideal choice, while in other cases, a standard savings account may be more appropriate.

Bibliography

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