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Making Sense of Savings
What Do You Do With Your Money?
You have many choices concerning what you do with your moneyspend 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 pamphlet 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 availablesome plain, some fancy, and some less and 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 you.
Do You Need a Bank Account?
There are many reasons for opening a bank account. First, an account may help you save moneysince it is often easier not to touch your savings if you keep them in a bank or other institution. Second, an account may bee less expensive way to manage your than are 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.
What types of deposit accounts are available?
Depository institutions may offer a great variety of accounts, but they generally fall within one of these four types:
1. Checking Accounts
With a checking account you use checks to withdraw money from the account that you have deposited in it. Thus you have quick, convenientand, 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 accountfrequently called a demand deposit accountdoes not pay interest, whereas a negotiable order of withdrawal (NOW) accountdoes.
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 any day during the month or if the average balance for the month drops below the specified 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.
2. Money 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 does. MMDAs often require a higher minimum balance to start earning interest, but they frequently pay higher rates for higher balances. 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.
3. Savings Account
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 accountfor example, passbook savings and statement savings. With a passbook savings account you receive a record book in which your deposits and withdrawals are entered to keep track of transactions on your account; this record book 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 Union Accounts
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.
Time Deposits (Certificates of Deposit)
Time deposits are often called certificates of deposits, or CDs. 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 the 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 your 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 take out your money, the CD will roll over, or continue, for another term.
Basic or No Frill Bank 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 checks you can write and 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: balance requirements.
What type 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 reach 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.
Account Features To Compare
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
The Annual Percentage Yield (APY) The APY is a rate that reflects the amount of interest you will earn on a deposit.
When You Start Earning Interest
Different Rates For Different Balances
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 on the balance you keep in each level. Of course, getting paid the stated interest rate on the entire balance is a better deal.
Information Required From Institutions
The Truth in Savings Act, a federal law, requires depository institutions to provide you withor disclose to youthe important terms of their consumer deposit accounts. Institutions must tell you:
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 f or 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.
Annual Percentage 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 Money - an institution pays you for its use of your funds.
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.
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