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Types of Accounts |Plusses and Minuses of Savings Accounts Interest on Savings Accounts |Interest on Money Market Accounts
Putting money away for a rainy day is the basic idea behind savings accounts. Money you put in a bank savings account earns interest, and your account is insured up to $100,000. And you can deposit or withdraw money when you like. However, the appeal of traditional savings accounts has eroded because there are so many other options that let you earn more.
Most banks offer several different ways to save.
Statement accounts are the standard savings account. Your deposits and withdrawals, plus the interest you earn, are reported either monthly or quarterly. If you have more than one account with the bank, they may be reported on the same statement.
Money Market accounts are savings accounts that let you write a limited number of checks each month. They pay more interest than regular savings accounts, as long as you maintain the required minimum balance in your account.
Passbook accounts are the traditional savings accounts. You get a booklet when you open your account showing the amount of your deposit. Each time you deposit or withdraw, the teller records the amount, adds the interest you've earned, and figures the new balance. Your booklet is your record. If you lose it, you'll probably be charged a fee.
Holiday savings clubs require a weekly deposit of a fixed amount of money so you'll accumulate a specific amount in time for holiday spending. You can make the deposit yourself or have the amount transferred from another account. Some holiday clubs pay the same rate as a regular savings account, but others pay little or no interest.
pluses and minuses of savings accounts
It's always good to save, but the shortcomings of savings accounts may outweigh their advantages.
pluses of savings accounts
- You can get your money any time.
- Money in a savings account can reduce -- or eliminate -- charges on your checking account. You may save more on fees than you lose because of low interest.
- Bank savings are FDIC insured for up to $100,000 per depositor.
minuses of savings accounts
- Other kinds of accounts, such as CDs and Money Markets, pay more -- sometimes much more -- interest.
- Most banks discourage small savings accounts by not paying interest below a minimum balance and/or by charging service fees that can erode the interest you earn.
- Interest earnings rarely beat the rate of inflation.
- Interest on savings accounts is fully taxable.
Your earnings on savings depend on the interest rate and the way interest is figured.
Banks use one of three methods to determine the interest they pay. In this example, assume a 4.5% interest rate:
April 1:
Begin with:April 29:
Withdraw:April 30:
End with:Day-of-deposit to day-of-withdrawal is the best method. All the money in your account earns interest every day it's there. $2,000 $1,000 $1,000 + $9.00 interest Average daily balance method pays interest only on the average balance for the period. $2,000 $1,000 $1,000 + $9.00 interest The lowest balance method pays interest only on the smallest balance during the period. $2,000 $1,000 $1,000 + $4.50 interest
interest on money market accounts
Figuring the interest you'll earn on your account can be a complicated process.
Specialty accounts that combine savings and checking and have required minimum balances (i.e. NOWs and money markets) often pay different rates of interest based on your total balance. If the rate is tiered, you earn the highest rate on your entire account as long as you have at least the required minimum. If the rate is blended, you earn different rates on different segments of the total amount in the account.
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