Navigation
Exploring the two most common types of bank accounts and how they serve different needs.
Imagine you have 100 forever. But what if you put it in a bank where it could either be ready to spend instantly or actually grow into more money over time?
A checking account is designed for money that is 'on the move.' Think of it as a digital wallet. Its main purpose is liquidity, which is a fancy word for how quickly and easily you can get to your cash to spend it. When you use a debit card at a store or write a check, the money comes directly out of this account. Because the bank has to keep this money ready for you at any second, they usually don't pay you much (if any) interest for keeping it there. It is the perfect tool for buying groceries, paying for a movie ticket, or grabbing a snack.
1. You have 15 using your debit card. 3. The bank instantly subtracts the 50 - 15 = $35. 5. You have immediate access to that pizza because your money was liquid!
Quick Check
If you want to buy a video game today at the mall, which account should you use?
Answer
A checking account, because it provides high liquidity for immediate spending.
A savings account is for money you don't plan to spend right away. Its main goal is to keep your money safe while helping it grow. Banks encourage you to leave your money alone by paying you interest. Interest is a small amount of extra money the bank adds to your account as a 'thank you' for letting them hold onto your cash. However, savings accounts have lower liquidity. This means there might be limits on how many times a month you can take money out. It’s the best place for 'goal money,' like saving up for a new bike or a college fund.
1. You put 5\%100 \times 0.05 = 100 + 5 = 5 just by letting your money sit safely!
Quick Check
Why do banks pay you interest on a savings account but usually not on a checking account?
Answer
Banks pay interest on savings accounts because they use that money to provide loans to other people, and they want to reward you for keeping your money in the bank for a longer time.
Understanding liquidity is the key to banking. Imagine a sliding scale. On one end, you have cash in your pocket—this is perfectly liquid because you can spend it this second. A checking account is very close to cash. A savings account is less liquid because it takes an extra step to move that money before you can spend it. Banks balance liquidity and interest: the harder it is to get your money (lower liquidity), the more interest the bank usually pays you. Managing both accounts helps you stay ready for today while building a better tomorrow.
Imagine you want to save 40 every month for your phone bill. 1. You should put the 600 in checking, you might spend it by accident! If you put the phone money in savings, you might hit a withdrawal limit. Using both is the smartest strategy.
Which term describes how easily you can access and spend your money?
If you have $200 you want to save for a car you will buy in 5 years, where is the best place to put it?
Checking accounts usually pay more interest than savings accounts.
Review Tomorrow
Tomorrow morning, try to explain to a family member what 'liquidity' means using the example of a water tap versus a frozen lake.
Practice Activity
Look at a list of 5 things you want to buy. Label each one as a 'Checking' purchase (needed within a week) or a 'Savings' goal (needed months from now).