Finding a bank or financial institution that you feel comfortable trusting your money to can often be a challenging task. Many people will consider a lot of different factors before they decide on the institution that they’d like to do business with.
The potential for analysis paralysis doesn’t end there, though. Banks offer multiple products and it often ends up being a chore deciding which product to opt for. Depending on the bank, these products may include savings and checking accounts, credit and loan products, business banking products, etc.
It’s incredible to see that, despite the wealth of information that’s available online these days, a lot of people still end up making bad financial decisions. One simple example of that is being unaware of the difference between a transaction account vs a savings account.
What is a transaction account?
A basic bank account in which paychecks and other payments are deposited and thereafter the funds used for daily expenses is what’s called a transaction account. These accounts enable the account holder to make payments through cheques, online, and wire transfers.
The transaction account is primarily meant for meeting daily expense requirements that can include paying bills, transferring funds, shopping online as well as making in-store purchases using the debit card.
There’s always the guarantee of ready and full liquidity with a transaction account. The funds are available for immediate access as there are no limits or conditions for withdrawal.
Is a transaction account the same thing as a checking account?
A transaction account is just another name for a checking account. The underlying features are the same, the only difference is that in some countries these accounts are referred to as the former. In the United States, they’re commonly referred to as checking accounts.
All banks and credit unions in the United States offer checking accounts. Customers can easily deposit and withdraw money for their daily needs. In most cases, customers are allowed unlimited deposits and withdrawals so they don’t incur any fees but that may vary by bank.
The main purpose behind a transaction or a checking account is to securely store your money for a short period. The customer benefits from these liquid bank accounts because they know exactly how much cash they will be able to access at a moment’s notice.
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Both transaction and checking accounts suffer from the same limitation. They don’t earn interest. That’s why parking your money in a checking account for a long time is a bad idea. The money would only be sitting in there without earning any interest, thereby actually costing you money in the long run when accounting for inflation.
Are transaction accounts technically savings accounts?
Transaction accounts can’t be classified as savings accounts primarily because they don’t earn any interest. A savings account is meant to be a place to park your funds in for a while.
Put any money you don’t immediately need to use in a savings account. It’s also a great way to build out an emergency fund that will continue to grow over time as the interest accumulates.
Most conventional savings accounts don’t place any limitations on account holders’ access to funds. So if they find themselves in a situation where they need to dip into their savings for an expense, they can quickly just transfer the money from their savings to their checking accounts.
However, some savings accounts and other fixed-income products do charge penalties for early withdrawal. In that case, it’s always best to let the clock run out to not be hit by the penalty.
What can you do with a transaction account?
A transaction account provides access to a variety of basic banking services. For example, a debit card will be provided with an account that can be used to make online and in-store purchases as well as cash withdrawal via ATM.
Paycheck deposits can be configured so that account holders’ wagers are directly sent to their transaction account. Other payments, such as online transfers from friends or cash deposits, can also be made into these accounts.
Most banks offer a variety of online features these days. Customers can access the online banking portals or the mobile app to pay bills, transfer funds, check balances, and more.
It’s pertinent to note, though, that many banks do charge a service fee on checking accounts, particularly if the balance falls below a certain threshold.
As long as customers maintain a minimum balance in their account per month, they won’t have to pay the fees. Exactly how much fees they will be charged for failing to meet the minimum balance requirement will vary by bank.
Is it better to have a transaction account or a non-transaction account?
It’s generally considered good financial planning to have separate transaction and non-transaction or savings accounts. The simple reason being that funds inside a transaction account don’t earn interest so there’s no possibility of growing the proverbial pot.
Recordkeeping becomes easier as well when transaction and savings accounts are kept separately. You can diligently keep an eye on spending patterns and adjust savings goals to meet future needs — this may include putting a down payment on a house or taking that dream vacation that you’ve always wanted.
That’s precisely why a lot of people subscribe to the 50/30/20 rule. The rule is that you should divide your after-tax income and straightaway separate 20% for savings.
This amount should ideally be deposited in a separate savings account where interest will accumulate on the funds. The remaining 50% and 30% can be spent on needs and wants respectively.
It’s a great way to teach yourself financial discipline. Once 20% is taken out from the paycheck the moment it comes in, you adapt your spending habits to make the remaining 80% of the paycheck last you the entire month.
Can you use transaction accounts in an eco-friendly way?
It depends largely on the values of the institution that you choose to do business with. There’s only so much that a customer can do individually to adopt an eco-friendly way of life.
For example, you can choose to only support businesses that actively play their part in making the world a better place. You can be mindful about where you spend your money and try not to give your business to companies that don’t care about the impact that their activities have on the planet.
You can adopt an eco-friendly lifestyle overall. This would require making more sustainable choices in every aspect of life, be it the food that you eat or the mode of transportation that you prefer.
What if you do all of the right things to minimize your carbon footprint and not cause any intentional damage to the planet’s climate, but your bank is actively pouring billions of dollars into fossil fuel projects?
Almost all major conventional banks lend out billions of dollars that they receive in deposits from customers to fund massive fossil fuel projects. The top three lenders in fossil fuel financing doled out more than $500 billion in 2020 alone.
Thus your efforts to reduce the carbon footprint will pale in comparison to the damage that these fossil fuel projects will cost to our planet.
How to find the best transaction account for your money — and your values
The smarter way to go about this is to bank with an institution that won’t fund any fossil fuel projects. Aspiration has made a 100% commitment to clean money. It guarantees that no customer deposits will ever be used to fund fossil fuel projects like oil rigs, coal mines, power plants, and more.
Aspiration is a neobank and it provides cash management accounts. These accounts offer the flexibility of a transaction account with the interest-earning potential of a savings account.
The APY offered on Aspiration’s account is higher than what most conventional banks provide. That’s because it operates on an online-only model and doesn’t have any physical branches. These savings in overheads are passed on to customers in the form of lower service charges and higher interest rates.
Aligning itself with customers’ eco-friendly values, Aspiration also offers mutual funds that only invest in companies that have the good of the planet at the core of what they do.
Account-holders are even given the option of planting a tree with every purchase by rounding up to the nearest dollar, thereby ensuring that they are actively making contributions that help reduce their carbon footprint.