Checking & Savings Accounts

When you open a bank account, you're likely to do so by opening a checking or savings account. Banks often require an initial minimum deposit of $50 or $100 to open either type of account but don't impose minimums for subsequent deposits.

Banks often require you to keep a minimum average monthly balance in your checking account. If the balance falls below the minimum, the bank often charges you a fee. If your average balance hovers around the required minimum, an online bank account is likely to make it easier to keep an eye on your average monthly balance. To estimate how much a required minimum balance costs you:

Calculate the opportunity cost of a checking account. A required minimum balance imposes an opportunity cost: What are you giving up for the convenience of having a checking account? Consider a bank that requires an average monthly balance of $1,500 for a checking account. If you can earn 2% a year in interest in a savings account, maintaining this checking account means giving up $30 in potential interest income. If you keep larger balances, you're sacrificing additional interest income.

Use a sweep account to invest excess funds. A sweep account moves funds that exceed the required minimum balances into a higher interest-bearing account at the end of each day. Ask your bank about setting up a sweep account.

Checking and savings accounts represent a major share of the liabilities held by banks and other deposit-taking institutions. They use these liabilities to make loans and other investments. Checking and savings accounts are also the workhorse accounts for customers to make deposits, pay bills and withdraw cash from ATMs.

As the amount of EFT and other electronic-payments transactions have grown rapidly over the past few years, the distinction between checking and traditional passbook savings accounts has become less important. Banks today are as likely to let you pay bills electronically from a checking account as they are from a savings account.

A money market account is a super-charged depository account that combines features of a traditional checking and savings account. Like checking and savings accounts, MMAs are federally insured for up to $100,000. MMAs pay a higher interest rate, or yield, than regular checking and savings accounts and include check-writing privileges. However, MMAs require higher deposit minimums, often in the range of $10,000 to $100,000.

Checking and savings accounts are insured by the Federal Deposit Insurance Corp. (FDIC) for up to $100,000 per depositor per institution. Because checking and savings deposits offer the most liquidity of federally insured deposits, they also pay little or no interest. If you want to earn a higher interest rate on your deposits, you may wish to consider investing in MMAs, money mutual funds or certificates of deposit.

Checking, savings and MMA deposits are included in the broadest measures of the U.S. money supply, which greases the wheels of the U.S. economy. (For statistics on the money supply, see the Web site of the Federal Reserve.)

Interest rates that you earn on all of these deposits are influenced by yields on Treasury bills or short-term corporate IOUs. Yields on these instruments are, in turn, influenced by the Federal Reserve's decision to cut or raise the fed funds rate as part of its monetary policy.

This information should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.