Can You Pay Bills Directly From a Savings Account?
It is possible to pay bills directly from your savings account, but should you?
Most financial institutions pay a higher interest rate on savings accounts than on checking accounts. So why shouldn’t you put all your money into your savings, earn the higher interest, and pay bills from that account?
There are two main reasons not to pay bills routinely from savings:
- It’s more difficult to save money when you co-mingle funds.
- Savings accounts are not designed to process daily transactions. (By law, banks are required to limit certain withdrawal transactions to six per month.)
However, there are some occasions when you might need to use your savings account to pay bills. It’s just not a good thing to do on a regular basis.
Why Paying Bills from Your Savings Account Is Not Wise
The primary purpose of a savings account is to store your money safely and earn interest on it. That makes having one or more savings accounts a good foundation for building your wealth.
But it’s harder to build wealth when the money you’ve set aside for saving constantly fluctuates because it’s available to pay bills. Savings grow fastest when they earn interest and that interest is compounded, but that only happens when the funds are left alone.
So while some banks might allow you to make purchases or pay bills directly from your savings account, and some may even provide a debit card to facilitate that, the fact that something is possible doesn’t make it a good choice. It’s counter-intuitive: Debit cards are for spending money, not saving it.
There’s another reason the strategy of going for the higher interest rate on a savings account and using that for all your day-to-day expenses is impractical. The fees for exceeding the six-withdrawal limit set by Regulation D will wipe out any higher interest you might earn.
Regulation D: Why Savings Accounts Have Withdrawal Limits and Fees
Banks and other financial institutions use the balance on your accounts to lend money to their borrowers. That’s their main source of profit. Left unchecked, banks would lend out all their account holders’ money.
To protect depositors, the Federal Reserve formulated Regulation D, a rule that requires all financial institutions to hold back a portion of monies on deposit in its accounts as a reserve.
Regulation D makes a distinction between transactional accounts (like checking accounts used for making payments on a regular basis) and savings accounts, though.
Transactional account balances fluctuate more and are, therefore, more unpredictable than the balances in savings accounts. Furthermore, the higher volume of transactions increase costs for banks, which they pass on to consumers in the form of fees or lower interest paid on deposits.
Because checking accounts are set up as transactional accounts, a bank or credit union cannot count on all that money being there all the time, so they are required to set aside a higher reserve on checking accounts. Of course, that limits the profits they can earn from checking account deposits.
Savings account balances, on the other hand, tend to remain more stable. Therefore, banks are allowed to hold back a lower percentage of reserves against savings account deposits. That means they can lend out a higher percentage of those deposits and make more money from them. In turn, that allows banks to offer their depositors higher interest rates on savings accounts than on checking accounts.
Regulation D also ensures that savings account deposits remain stable by limiting certain withdrawals to six transactions per month and imposing fees on excessive withdrawals.
Once you exceed that, most banks charge you anywhere from $10 to $15 per transaction over the limit. Some banks’ terms and conditions even allow them to close your savings account or convert it into a checking account.
Exceptions to the Six-Transaction Limit
There are a few exceptions to the six-transaction limit. Withdrawals at an ATM or in person at a branch are not included. Also excluded are check withdrawals if the check is mailed to you as the depositor.
Reg D, and its penalties for excessive withdrawals, are probably the biggest single reason why paying bills or making purchases directly from a savings account is not a practical idea.
How to Pay Bills from Your Savings Account
Given that paying bills or making purchases directly from your savings account on a regular basis is not the best practice, there are times when you might need to do that.
An emergency fund, for example, is money usually set aside in a savings account so it can earn interest and grow until those funds are needed. And even though you work to avoid emergencies, it is better to use your savings to pay bills than to go into debt.
In that type of situation, there are still ways to maximize interest on your money without losing all flexibility in making purchases or paying bills when necessary:
This (literally) involves a little legwork. The Reg D withdrawal limit does not include ATM or branch visit transactions. So you can overcome the limit to some degree by making a trip to a branch or ATM to transfer money to your checking account without that withdrawal counting toward the limit.
To do this, you’ll need to obtain an ATM card for your savings account. An ATM card is different from a normal debit card in that you can’t use it for purchases. you can only use it at your financial institution’s own ATMs to withdraw cash or to make transfers.
Credit Card Usage
A second strategy is using a credit card for as many purchases and payments as possible, then making one single withdrawal to pay off the card purchases every month with a single transaction.
Open a High-Interest Checking Account
An interest checking account pays interest on your cash and without the monthly transaction limit.
Online financial institutions (banks and credit unions, mainly) are often able to offer higher interest rates for all their financial products and services because they don’t have the burden of maintaining brick-and-mortar facilities. By using this site, you can quickly and easily find a checking account paying high interest. It may not be as high as you can earn on a savings account, but it may come close.
Open One or More Money Market Accounts
Money market accounts often pay a higher interest rate than regular savings accounts. However, many have even tighter limits on the number of withdrawals, but most of them offer checks with which to pay a few bills. You can increase the number of withdrawals per month if you have a second money market account, though.
Schedule a Single Withdrawal for All Bills
This alternative may require a little more effort. Schedule all of your monthly payments, such as utilities, rent/mortgage, phone, etc., closely together within the same week if possible. Then make a single withdrawal from your savings account to cover them all, and deposit that into your checking account, from which you then make the payments as usual.
If you budget your other expenses and purchases, you should be able to make one withdrawal every week or two and end the month with fewer than six withdrawals while still earning the highest amount of interest each month.
Aside from Reg D compliance and its over-limit fees, it’s just bad practice to co-mingle money meant for saving and living expenses in one account.
Many personal finance experts have shown over and over that it’s far easier to reach savings goals when your savings are out of sight. It is also why making contributions to your savings and investment accounts the moment you receive your paycheck has repeatedly shown to be one of the most effective strategies to build your personal net worth.
However, it’s nice to know that you can pay bills directly from your savings account if necessary.
What If Your Bank Doesn’t Support Savings Account Direct Deposits?
It may be time to look for another bank or reassess how much your current bank is worth to you.
Savings banks are not meant to be heavily transactions-oriented. Federal Reserve regulations limit them to no more than six withdrawals a month, but the key thing here in your situation is there is no such limitation on the number of deposits. So, there is no regulatory reason to forbid direct deposits into a savings account, even if the nature of your work (e.g. someone with multiple employers) is such that you receive frequent paychecks over the course of a month.
Absent any regulatory issue, one has to assume refusing to accept direct deposits in savings accounts is a matter of your bank’s policy.
Ordinarily, banks would be keen to attract deposits and unlikely to put up barriers to prevent people from sending money their way, but these are not ordinary times.
A combination of low interest rates, a lackluster lending environment, and new accounting regulations have made some banks feel they already have more deposits than they need.
This may explain your bank’s policy, but you do have alternatives.
3 Ways to Get Around Checking-Only Direct Deposits
If you have restrictions on deposits into savings, here are three alternatives:
Transfer Money After Each Payday
One alternative is to get into the habit of transferring money from checking to savings every time you get paid. This would depend on getting yourself on a regular schedule to make these transfers.
However, it might help if your employer gives you a pay stub or other notification of payment to serve as a reminder. It would also help if your bank has online features that would allow you to make these transfers from a computer or mobile device.
Switch to a New Bank
Even if these transfers can be done efficiently, having to make them in the first place does create extra work for you, so you have to decide how much your bank is worth to you in other ways.
For example, since your savings account is causing extra effort, ask yourself whether that savings account compensates you with highly competitive interest rates. These days these would be something in the 0.50% to 0.75% range. If not, it might be worth it to switch to a new bank.
Make Transfers Between Banks
On the checking account side, free checking might be a sufficient incentive to stick with your current bank. Of course, you could still move your savings account to another bank and make transfers between banks unless the savings account balance is helping you to qualify for free checking.
Your bank’s fees and interest rates may well be competitive enough to make it worth your while to make these regular transfers between checking and savings yourself, but you won’t really know how competitive those fees and rates are until you make some comparisons with other banks. In short, it seems likely that this particular policy of your bank will cause you to take a look at what some of their rival banks have to offer.