What's the difference between checking and savings accounts, and where should you keep your money?

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• Checking accounts are ideal for managing your expenses since you can use checks or a debit card.
• You likely want to use a high-yield savings account for saving money.
• High-yield savings accounts pay out a small amount of interest, which compounds over time.

If you're looking for a place to store your money, you have a couple of options. Two easy choices are checking accounts and savings accounts.

We'll explain the differences between these accounts so you can decide where to keep your money.

Checking vs. savings: At a glance

The purpose of a traditional checking account is to have a place to manage your spending. Maybe you have paychecks direct-deposited there, you write checks from that account, or you use a debit card that withdraws from that account. They tend not to be the best option for saving, though, since they earn little to no interest. The average checking interest rate is only 0.07% APY, which is lower than the national average savings accounts.

Traditional savings accounts don't earn much interest, either — but high-yield savings accounts do. The average savings account interest rate is just over 0.40% APY, but with a high-yield savings account, you can earn over 5% APY on your savings.

That money isn't invested in the stock market so it doesn't have the risk (or potential reward) of investments, but the bank does pay you a small amount to keep your money there.

See Insider's best high-yield savings accounts>>

Checking vs. savings FAQs

Is it better to open a checking or savings account? 

It may be better to open a checking account if you would like to manage your expenses. If your priority is to grow your money and save for a short-term financial goal, a savings account may be more suitable because they usually offer more interest.

Do checking or savings accounts have debit cards?

Most checking accounts have debit cards. However, one exception may be a second chance account because the goal of these accounts is to help you avoid overdraft fees and improve your banking history. Debit cards are usually less common with savings accounts, although there are a select few online and local financial institutions that have savings accounts with debit cards. 

Is money safer in a checking or savings account? 

Both checking and savings accounts are secure for up to $250,000 per depositor, per category by the FDIC or NCUA.

Which bank account earns more interest?

Most checking accounts do not earn a high interest rate. High-yield checking accounts exist, but the best ones tend to be at credit unions, which usually have requirements for earning interest. For example, you might have to compute a certain number of transactions each month or maintain a specific account balance to earn a particular rate. You generally won't see such restrictions with a high-yield savings account at an online or traditional bank. Right now, savers can expect the best high-yield savings account rates to be between 4% and 5% APY. 

Compound interest helps you earn money

Let's say you put $100 each month into a savings account with a 4% APY compounded daily and $100 each month into a no-interest checking account. The difference becomes apparent over time.

After one year, there isn't too much of a difference: The checking account will have the $1,200 principal from the 12 monthly $100 deposits, while the savings account will have a balance of about $1,224.

After five years, the difference becomes noticeable. The checking account will have a balance of $6,000, while the savings account will be around $6,642. Over $640 of interest will have accrued over those five years.

After 10 years, the checking account will be at $12,000 while the savings account will have a balance around $14,754; after 20 years the checking account will have $24,000 and the savings account will have around $36,763.

That's not to say that keeping money in a savings account for 20 years is the most advantageous move. Generally, if you don't need the money for two decades, most experts would recommend investing it in the stock market. In this scenario, we've projected out 20 years just to show how compound interest (even a little) can work in your favor.

The key difference between the two accounts is the compound interest rate for the savings account. Interest accrues both on the principal put into the account — the $100 per month in the above example — and on the interest already earned. That leads to an exponential growth rate for the savings account that, over time, far outstrips the linear growth rate of the non-interest-paying checking account.