Savings Account vs. High-Balance Checking: What's Best for You?

Having more than one bank account could work to your benefit.

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You'll often hear it's important to have money set aside for emergencies, whether it's sudden home repairs, car repairs, or medical bills. Plus, you never know when you might lose your job and the paycheck that goes with it. Having cash reserves could make it so you're not forced to rack up costly debt just to stay afloat.

You'll generally hear a savings account is the best place to stash your emergency fund. But is that really necessary? Couldn't you just maintain an extra-large checking account balance instead?

Technically, you can go that route. But here's why you may not want to.

It pays to have a separate savings account

Say you decide to save up $15,000 for emergencies. You could put that money into a savings account or keep it in a checking account and just not use it. You may prefer to go the latter route so you have access to all of your cash at once, and also, so you can look at a single balance and know how much money you have. While that logic does make sense, it pays to maintain a separate savings account for a couple of reasons.

First, many checking accounts don't pay interest, or pay minimal interest. Granted, today's interest rates generally aren't much to write home about. But usually, you'll earn a lot more interest on your money in a savings account than you will by keeping it in a checking account. And even during periods when interest rates aren't great, you might as well earn more interest than less.

What’s more, if you keep your emergency fund in a checking account, you might forget what that total is supposed to entail and dip in to cover non-emergency purchases. Or, you may simply be tempted to spend beyond what your paychecks give you. The whole point of an emergency fund is to be there for you in a pinch. Keeping that chunk of cash separate could really help you avoid giving in to temptation.

What if an emergency strikes and you don't have the money in your checking account?

Say your car breaks down and you need to write a check to cover your repair. If you have your emergency fund in savings, will you get tripped up?

As long as you have your checking account and savings account at the same bank, probably not. Usually, if you hold both accounts at the same institution, you can transfer money between them instantly. So say you need to write a $500 check for a repair. You can most likely log into your account, move $500 from savings to checking, and then hand over that money without a problem.

It's a good idea to maintain a cushion in your checking account in case your bills come in a little higher than usual from time to time. But your actual emergency fund is money you should keep in a separate savings account. Plus, you may want to set money aside for other big goals, whether it's taking a trip or buying a house. Separating that money is a good way to stay on target.