The three household account types differ on three axes: liquidity, yield, and transaction limits. Choosing among them is a matter of matching the account to the money it holds — spending money in checking, short reserves in high-yield savings, larger idle balances in a money-market fund at a brokerage.
- 01Distinguish checking, savings, and money-market accounts on liquidity, yield, and transaction limits.
- 02Choose the correct account for each tier of household cash.
- 03Explain why the checking-account balance should be smaller than most households keep it.
Checking
Fully liquid, near-zero yield, unlimited transactions. The right home for the current month's spending and one buffer month. More than that is idle money losing purchasing power.
High-yield savings
Fully liquid to the depositor, six-transfer monthly limit removed by regulators in 2020 but still enforced by some banks. Yields track short rates. The right home for the emergency reserve and near-term named savings.
Money-market funds
Not a bank deposit. A brokerage product that invests in short-term Treasuries and commercial paper. Higher yield than most bank savings accounts, subject to market pricing. The right home for larger idle balances the household will not touch in the next thirty days.
- Match the account to the money's job.
- Checking is for spending, savings is for reserves, money-market funds are for idle balances.
- Yield differences of a percentage point on five figures are worth an afternoon of setup.