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 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 available—some 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.

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 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:

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, whereas 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 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.

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.

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 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 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 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.

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.

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