Traditional Banking Model - Checking & Savings

Most people that have ever paid a bill or set money aside for future use are familiar with the traditional banking model. This model is conceptually very simple:

• Wages are deposited into the checking account
• Spending money (cash) is withdrawn from the checking account
• Bills are paid from the checking account using variety of techniques
• Checks
• Debit Card Transactions
• Electronic Bill Payments, sometimes referred to as ACH (Automated Clearing House)
• Extra money might be left in the checking account to pay future bills, or transferred to a savings account for future "rainy days" or major purchases

Basically, in this model, the checking account is intended for everyday spending, and the savings account is intended to squirrel money away for the future.  In fact, this intended behavior drives the way the bank treats the accounts.  Because, after all, the bank is in the business of making money using your money.

Checking Account

The bank assumes the balance of a checking is always in flux.  Paychecks come in a couple of times a month, and bills are constantly being paid out.  Because of this, the bank does not assume that it can use the money in your checking account for very long.  As a result, a checking account typically pays little or no interest, and sometimes even charges a monthly maintenance fee (which often can be waved if you deposit enough money or maintain some minimum balance).

Savings Account

The bank assumes the balance of a savings account is relatively stable, if not growing over an extended period of time.  The bank knows you will eventually use the money, but it will likely not be very soon.  As such, the bank assumes it can use the money in a savings account for a long time.  Thus, a savings account generally earns interest, and may even offer a better interest rate as the balance increases.  There might even be limits on the maximum number or amount of withdraws of various types within one month or statement period.  Sometimes the bank will charge maintenance fees if you do not maintain a certain balance.  Basically, the bank is trying to incentivize you to keep the money in the savings account for a long time so that it can use that money to issue mortgages, loans, and do various types of long term investments.

Covid-19

What most people do not realize is that, due to changes in technology and Regulation D during the Covid-19 pandemic, the traditional banking model used by your parents and grandparents is not necessarily the best banking model for you.  That will be the topic of my next article.  In the mean time, you may want to explore one of the modern banking platform such as SoFi Checking and Savings.  Heck, if the offer is still valid when you click on it, you might even earn $325 for signing up via that link.