Making Sense of Savings*
What do you
do with your money?
You have many choices concerning
what you do with your money--spend it, invest it, or hide it under your
mattress. If you invest or save your money, you have many alternatives.
For example, you can buy U.S. savings bonds or Treasury bills; purchase
stocks or bonds; invest in a mutual fund; or open a savings or other deposit
account with a bank, savings and loan association, savings bank, or credit
union. This document will help you understand your choices if you decide
to put money in an account at a depository institution such as a bank
or savings and loan association.
Opening an account is like
buying a car. Many products are available--some more expensive than others.
Because features of accounts and costs can vary greatly, it is important
to shop around to make sure the account you choose is the best one for
Do you need
a bank account?
There are many reasons for
opening a bank account. First, an account may help you save money --since
it is often easier not to touch your savings if you keep them in a bank
or other institution. Second, an account may be a less expensive way to
manage your money than are other alternatives. Buying money orders to
pay your bills or paying a business to cash your paycheck may end up costing
you a lot more than keeping an account would. Third, having your money
in an account is safer than holding cash. Finally, keeping track of your
money and how you spend it may be easier.
of deposit accounts are available?
Depository institutions may
offer a great variety of accounts, but they generally fall within one
of these four types:
With a checking account you
use checks to withdraw money from the account that you have deposited
in it. Thus you have quick, convenient--and, if needed, frequent--access
to your money. Typically, you can make deposits into the account as often
as you choose. Many institutions will enable you to withdraw or deposit
funds at an automated teller machine (ATM) or to pay for purchases at
stores with your ATM card.
Some checking accounts pay
interest; others do not. A regular checking account (frequently called
a demand deposit account) does not pay interest; a negotiable
order of withdrawal (NOW) account does.
Institutions may impose fees
on checking accounts, besides a charge for the checks you order. Fees
vary among institutions. Some institutions charge a maintenance or flat
monthly fee regardless of the balance in your account. Other institutions
charge a monthly fee if the minimum balance in your account drops below
a certain amount. Some charge a fee for every transaction, such as for
each check you write or for each withdrawal you make at an ATM. Many institutions
impose a combination of these fees.
Although a checking account
that pays interest may appear more attractive than one that does not,
it is important to look at fees for both types of accounts. Often checking
accounts that pay interest charge higher fees than do regular checking
accounts, so you could end up paying more in fees than you earn in interest.
Market Deposit Accounts
Most institutions offer an
interest-bearing account that allows you to write checks, called a money
market deposit account (MMDA). This type of account usually pays a higher
rate of interest than a checking or savings account. MMDAs often require
a minimum balance but they frequently pay higher rates. Withdrawing funds
from an MMDA may not be as convenient as doing so from a checking account.
Each month, you are limited to six transfers to another account or to
other people, and only three of these transfers can be by check. As they
do with checking accounts, most institutions impose fees on MMDAs.
With savings accounts you can
make withdrawals, but you do not have the flexibility of using checks
to do so. As with an MMDA, the number of withdrawals or transfers you
can make on the account each month is limited.
Many institutions offer more
than one type of savings account--for example, passbook savings and statement
savings. With a passbook savings account you receive a record book--called
a passbook--in which your deposits and withdrawals are entered to keep
track of transactions on your account; this passbook must be presented
when you make deposits and withdrawals. With a statement savings account,
the institution regularly mails you a statement that shows your withdrawals
and deposits for the account.
As with other accounts, institutions
may assess various fees on savings accounts, such as minimum balance fees.
Credit unions offer accounts
that are similar to accounts at other depository institutions, but have
different names. Credit union members have share draft (rather than checking)
accounts, share (rather than savings) accounts, and share certificate
(rather than certificate of deposit) accounts.
4. Time Deposits
(Certificates of Deposit)
Time deposits are often called
certificates of deposits, or CD's. They usually offer a guaranteed rate
of interest for a specified term, such as one year. Institutions
offer CDs that allow you to choose the length of time, or term,
that your money is on deposit. Terms can range from several days to several
years. Once you have chosen the term you want, the institution will generally
require that you keep your money in the account until the term ends, that
is, until maturity. Some institutions will allow you to withdraw
the interest you earn even though you may not be permitted to take out
any of your initial deposit (the principal). Because you agree
to leave your funds for a specified period, the institution may pay you
a higher rate of interest than it would for a savings or other account.
Typically, the longer term, the higher the annual percentage yield.
Sometimes an institution allows
you to withdraw your principal funds before maturity, but a penalty
is frequently charged. Penalties vary among institutions, and they
can be hefty. The penalty could be greater than the amount of interest
earned, so you could lose some of our principal deposit.
Institutions will notify you
before the maturity date for most CDs. Often CDs renew automatically. Therefore, if you do not notify the institution at maturity that you wish
to withdraw your money, the CD will roll over, or continue, for
No Frill Banking Accounts
Many institutions offer accounts
(often referred to as basic or no frill accounts) that provide you with a limited set of services for a low price.
Basic accounts give you a convenient way to pay bills and cash checks
for less than you might pay without an account. They are usually checking
accounts, but they may limit the number of deposits and withdrawals you
can make. Interest generally is not paid on basic accounts. Compare basic
and regular checking accounts for the best deal in low fees or low minimum
of account is right for you?
What type of account should
you open? The answer depends on how you plan to use the account. If you
want to build up your savings and you think that you will not need your
money soon, a certificate of deposit may be right for you.
If you need to use your money,
however, a savings or checking account may be a better choice. You will
probably find that a checking account is best for you if you plan to write
several checks each month (for example, to pay bills). But if you usually
write only two or three checks each month, then an MMDA might be a better
deal. MMDAs usually pay a higher rate of interest than do checking accounts,
but minimum balance requirements are often higher as well.
Remember, account features
and fees vary from one institution to the next. If you have questions,
you should ask a representative of the institution about any account features
and fees BEFORE you open an account.
I EARN INTEREST?
I WRITE CHECKS?
THERE WITHDRAWAL LIMITATIONS?
Market Deposit Account (MMDA)
usually higher than NOW or savings.
only 3 per month.
6 transfers per month.
of Deposit (CD)
usually higher than MMDA
usually no withdrawals or principal until the date of maturity
if you withdraw principal funds before the date of maturity.
Account features to
In shopping for an account,
it is important to look closely and compare features. Here are some of
the most common features to compare:
The Interest Rate
- What is the interest rate?
- Can the institution change
the rate after you open the account?
- Does the institution pay
different levels of interest depending on the amount of your account
balance and, if so, in what way is interest calculated?
- How often is interest compounded?
In other words, when does the institution start paying interest on the
interest you've already earned in the account?
The Annual Percentage
Yield (APY) The APY is a rate that reflects the amount of interest
you will earn on a deposit.
- What is the minimum balance
required before you begin earning interest?
When You Start Earning
- Do you begin earning interest on the day you deposit a check into your account--called earning
on your ledger balance; or
- Do you begin earning interest
later, when the institution receives credit for the check--known
as earning on your collected balance?
Different Rates for
Institutions may pay different tiered rates that are tied to different balance amounts.
For example, an institution
may pay a 5 percent interest rate on balances up to $5,000 and 5.5 percent
on balances above $5,000. If you deposit $8,000, the institution that
pays interest on the entire balance pays you 5.5 percent on the entire$8,000.
Other institutions may pay you 5 percent on the first $5,000 and 5.5 percent only on the remaining $3,000.
To tell which method an institution
uses, check the annual percentage yield (APY) disclosure. If it is a single
figure for a balance level, you will be paid the stated interest rate
for the entire balance. If the APY is stated as a range for each balance
level, your earnings will depend on the balance you keep in each level.
Of course, getting paid the stated interest rate on the entire balance is a better deal.
- Will you pay a flat monthly
- Will you pay a fee if the
balance in your account drops below a specified amount?
- Is there a charge for each
deposit and withdrawal you make?
- If you can use ATMs to make
deposits and withdrawals on your account, is there a charge for this
service? Does it matter whether the transaction takes place at an ATM
owned by the institution?
- If you have a checking account
or an MMDA, how much will ordering checks cost? Will you be charged
for each check you write?
- Are fees reduced if you
have other accounts at the institution?
- Are fees reduced or waived
if you agree to directly deposit your paycheck or government payments,
like a social security check?
- What is the fee if you request
the institution to stop payment on a check you have written?
- Is there a charge for asking
how much money you have in your account (balance inquiry)?
- Does the institution charge
a fee for closing an account soon after it is opened? If it does, when
will the fee be imposed?
- What is the charge for writing
a check that bounces (a check returned for insufficient funds)?
And what happens if you deposit a check written by another person, and
it bounces? Are you charged a fee?
- Does the institution limit
the number or the dollar amount of withdrawals or deposits you make?
- If you close the account
before interest is credited to your account will the institution pay
you the interest that has been earned until that time?
- How soon does the institution
allow you to withdraw funds that you have deposited to your account?
- What is the term of the
account? In other words, when does it mature?
- Will the account roll over
automatically? In other words, does the account renew unless you withdraw your money at maturity or during any grace period provided after maturity? A grace period is the time after maturity when
you can withdraw your money without penalty. If there is a grace period,
how long is it?
- If you are allowed to withdraw
your money before maturity, will the institution impose a penalty? If
so, how much?
- Will the institution regularly
send you the amount of interest you are earning on your account--or
regularly credit it to another account of yours, like a savings account?
The Truth in Savings Act,
a federal law, requires depository institutions to provide you with--or
disclose to you--the important terms of their consumer deposit accounts.
Institutions must tell you:
- The annual percentage yield
and interest rate;
- Cost information, such as
fees that may be charged; and
- Information about other
features such as any minimum balance amount required to earn interest
or to avoid fees.
To help you shop for the best
accounts, an institution must give you information about any consumer
deposit account the institution offers, if you ask for it. You
also will usually get disclosures before you actually open an account.
In addition, the Truth
in Savings Act generally requires that interest and fee information
be provided on any periodic statements sent to you. And if you have a
roll-over CD that is longer than one month, the law requires also that
you get a renewal notice before the CD matures.
Federal Deposit Insurance
Federal deposit insurance sets apart deposit accounts from other savings choices. Only
deposit accounts at federally insured depository institutions are protected
by federal deposit insurance. Generally, the government protects
the money you have on deposit to a limit of $100,000. Accounts for special
relationships, such as trusts or co-owners, may also have some effect
on the amount of insurance coverage you have. Asking how the deposit insurance
rules will apply to your deposit accounts is always a good idea.
Federally insured depository
institutions also offer products that are not protected by insurance.
For example, you may purchase shares in a mutual fund or an annuity. These
investments are not protected by the federal government.
Yield The amount of interest you will earn on a deposit
on a yearly basis expressed as a percentage.
Compounding Interest The frequency that earned interest is added to the principal
so that you begin to earn interest on that amount as well as on the principal.
Often referred to as interest on interest. The more often interest
is compounded, the greater the annual percentage yield.
Crediting Interest When you have access to the interest. Usually, posting the
interest you have earned to your account.
Grace Period The
period after an automatically renewing time deposit, such as a certificate
of deposit, matures. During this time you may withdraw funds without being
charged a penalty.
Interest Rate The
rate of interest, expressed as a percentage, that an account will earn
if funds are kept on deposit for a full year. It does not reflect the
effect of compounding interest.
Tiered Rates An interest rate structure by which the rate paid on an account is tied
to a specified balance level.
Time Deposit An account, such as a certificate of deposit, with a maturity of at least
seven days, from which you are not generally allowed to withdraw funds
unless you pay a penalty.
Source: Board of Governors
of the Federal Reserve System
* Courtesy of The Federal Reserve