CBS News reported at the end of 2024 that only 10 states had a personal finance requirement at the high school level. This is alarming when you consider that a majority of Americans are expected to manage their funds throughout adulthood, and many have been doing so with minimal guidance for generations. This must change as increased education surrounding the basics of bank accounts can make all the difference when it comes to maintaining and building wealth.
Regardless of age, there is always an opportunity to learn more, and your local bank is the best resource. Whether you’re interested in a refresh on terminology or looking to strengthen your foundational knowledge, everyone can benefit from exploring the proper application of checking and savings accounts. Here are high-level insights on these two accounts every individual should know.
Understanding your personal checking account
A personal checking account is best used when it is dedicated to your typical living expenses. This will vary based on your personal situation and spending habits, with many financial experts recommending that you have roughly two months’ worth of funds set aside for daily living. These funds should be sufficient to cover anticipated expenses and bills, in addition to a small amount to provide leeway and avoid overdraft fees.
Some checking accounts require a minimum balance to be maintained, which prevents incurring monthly charges. There are also instances and periods of time when it makes sense to hold more funds within a checking account (e.g., tax season, ahead of vehicle maintenance, or annual insurance premiums).
However, keeping a large amount of money within a checking account in the long term could result in missing out on opportunities to increase your earning potential. This type of account typically comes with lower interest rates than a high-yield savings account. While this is important to know, high-yield savings accounts are for excess money that can be set aside in a separate pool for higher returns after you’ve first prioritized everyday expenses and emergency funds.
Understanding your savings account
A savings account is crucial for planning and achieving future financial goals. The usual recommendation is to have between three to six months’ worth of funds in this account that can be used to cover your living expenses in the event of a need. A savings account is also the pool of funds you should be able to pull from for infrequent costs (e.g., purchasing a vehicle, home renovations/down payments, or travel/vacation costs). As your income fluctuates or at a minimum on an annual basis, it is best to review your finances to build and maintain healthy savings habits.
To ensure you’re reaching your full earnings potential, we recommend selecting a high-yield money market account over a traditional savings account, as these often provide higher interest returns. You should also opt into automatic transfers from checking to savings so you're adding to these funds regularly. Another option to help you consistently add to your savings is to split direct deposits, so that selected portions of each paycheck are automatically deposited into your checking and savings accounts.
Finding balance across your accounts
Your checking account is all about accessibility. This is the source for supporting your living expenses and unexpected costs; however, if you consistently find a surplus sitting idle within the account, it is worth exploring higher-yield options. Shifting funds into your savings strengthens budgeting as you're able to watch your wealth grow and re-examine your financial behaviors before pulling from savings.
For more information on personal banking services, check out Merchants Bank’s checking, certificates of deposit, and money market offerings at www.bankmerchants.com.
