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I have recently become financially independent (21 yo student in US) and I am starting an independent bank account. I noticed that the interest rates on savings accounts are significantly higher than those of checking accounts. Why is this the case?

What stops me from keeping all my money in a savings account then transferring a monthly allowance to my checking account after interest is generated at the beginning of every month?

And why don't banks allow for debit cards to be connected directly to savings accounts, they seem like basically the same thing from the bank's point of view.

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    Take a look at high yield money market accounts (U.S.) which tend to pay a much better rate than bank savings accounts. If so, open one link the accounts. Just be aware that you are limited to 6 MM transactions per month. – Bob Baerker Aug 22 at 15:34
  • @BobBaerker: There are regulation D money market accounts, which really are savings accounts (although they may have a debit card or check-writing privileges) and insured by the FDIC. And there are brokerage money market accounts, to which I believe the 6 transaction limit does not apply. Your comment about higher interest rates suggests you mean the brokerage MM account... but then you still mentioned a transaction limit? – Ben Voigt Aug 22 at 15:36
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    Which jurisdiction are you asking about? Some savings accounts in Australia only give bonus interest if no withdrawals are made in the month - the monthly withdrawal strategy wouldn’t work with those. On the other hand, some accounts and/or account combinations give you a pretty good mix of interest, access and fees, particularly if you’re a student. – Lawrence Aug 22 at 15:38
  • @Ben Voigt - Reg D allows 6 withdrawals per month including: bank checks, outgoing wire transfers, ACH transfers/withdrawals, Zelle payments, overdraft withdrawal from savings to checking. Some popular high yield savings accounts include Synchrony, Ally, CIT Bank, Capital One, UFB Direct, ad nauseum... – Bob Baerker Aug 22 at 15:54
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    I think you misunderstand the term "financially independent", as it is generally used. It doesn't mean having your own accounts independent of your parents, it means having enough invested that you can live on the income without having to work. And yes, you can - and probably should - keep your money in a savings account (until you have enough to start investing), and make a transfer or two to checking each month. – jamesqf Aug 22 at 16:17
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I noticed that the interest rates on savings accounts are significantly higher than those of checking accounts. Why is this the case?

Balances in savings accounts tend to be maintained for much longer periods of time (both by choice, and by restrictions on transactions), so the bank doesn't need to keep as large a reserve and can loan out more of the money, for example as mortgages.

See https://en.wikipedia.org/wiki/Fractional-reserve_banking

What stops me from keeping all my money in a savings account then transferring a monthly allowance to my checking account after interest is generated at the beginning of every month?

Nothing. Keeping your checking account balance to just a bit more than your planned spending is a good idea for a number of reasons.

And why don't banks allow for debit cards to be connected directly to savings accounts, they seem like basically the same thing from the bank's point of view.

First, that would be pretty useless, since debit card transactions would be restricted under Regulation D (limit of 6 withdrawals from a savings account per statement cycle).

See https://en.wikipedia.org/wiki/Regulation_D_(FRB)

Second, that would put your entire savings account balance at risk to debit card fraud, instead of the (typically much smaller) amount in your checking account.


When you choose a checking and savings account, look for a bank that offers both with no or very low fee for overdraft protection (automatic transfer from savings to checking to prevent the checking account from going negative which is called "overdraft")


It is worthwhile to note that there are some "premium checking" accounts, with velocity requirements (you must make a certain number of transactions per month), that actually pay even more interest than savings accounts. If you can meet the velocity requirement, these are better than savings accounts (higher interest, no limit on number of transactions) except that the exposure to fraud is also higher.

  • You're the perfect person to answer this being our Regulation D expert. ;) – TTT Aug 22 at 15:34
  • I see now that perhaps the regular allowance idea may be a common thing to do (with money set aside for safety). I really appreciate your time to answer this. – D. Price Aug 22 at 15:49
  • Wouldn't the overdraft protection by automatic transfer from savings leave you open to debit card fraud? – jamesqf Aug 22 at 16:19
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    @jamesqf: Not necessarily. A common feature is overdraft protection that transfers to cover checks and pre-authorized transactions (which usually clear through ACH) but declines debit card purchases and ATM withdrawals (since these are authorized in real time). – Ben Voigt Aug 22 at 18:06
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You are typically restricted by the number of withdrawals you can make from a savings account per statement, which is also why you don't have a debit card for it. My bank has this note on my savings account:

Federal law limits certain types of telephone, check and electronic transfers and withdrawals from Money Market and Online Savings accounts to 6 per statement cycle. This includes things like point-of-sale transactions, Online and Mobile Banking transfers, our Overdraft Transfer Service and transfers from your Online Savings and Money Market accounts. If you go over this limit, we charge $10 for each of these transactions after the initial 6. If you see a negative number on your account details page, you've exceeded 6 transactions in this statement cycle. If you exceed this limit on more than an occasional basis, we're required to close your account.

This way, the bank can invest a portion of the money they have received from savings since they know this is where people keep their money long-term and not needing to keep it all readily available, and they can pass some of those earnings as interest for the account.

In a checking account, the money must be more readily available by the bank for it to be spent frequently, which is also more costly for the bank to maintain.

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