Should You Open a Passbook Savings Account?

19Dec/10Off

Should You Open a Passbook Savings Account?

Before certificates of deposit and money markets savings accounts emerged in the world of modern online banking, people relied on passbook savings accounts for making their money grow. The passbook savings account used to be the most popular and important way to save for practically everything, be it college education, retirement fund, or down payment on a new house or car. Every transaction was written on a passport-like booklet, which makes it fitting to be called a traditional method of investing money.

Creating a passbook savings account is very simple and easy. The concerns merely involve the terms and conditions as well as the monthly service fees of the bank. A person who wants to have a passbook account has to check only the difference of interest rates between banks. To open a passbook account, one just needs to visit the bank of his choice, and a customer service representative will process the application for a passbook account. Once the account is opened, the account holder can make his or her initial deposit.

Are consumers going to expect the demise of the old-school passbook anytime soon? Even if online banking, phone banking, and ATMs have become common modern banking terms, there are still a good number of consumers who prefer the traditional way of saving up. And some banks still issue passbooks to their customers. This is despite the effort of some banks to gradually replace their passbook accounts with modern savings mechanisms.

Passbook savings accounts offer two benefits: safety and liquidity. Money deposited in passbook accounts is always in safe hands. Banks lend the money to businesses and to make mortgage or car loans, and they do them with great caution. When it comes to liquidity, passbook accounts enable withdrawal of money anytime, anywhere from automated teller machines or ATMs.

However, just because passbook savings accounts are safe financial tools does not mean they are free from financial drawbacks. The main disadvantage is inflation. Because passbook accounts yield low interest rates, the interest earned cannot keep up with inflation. In addition, putting money into a passbook savings account yields so little income compared to other investment types. In the United States, the average yield for a passbook account is not more than 0.05 percent. That's the price passbook account owners pay for the guaranteed safety of their savings accounts. And then there are others that provide more income also at low risk, an example of which is the Treasury bond.

Passbook accounts enjoy insurance of up to $100,000 from the Federal Deposit Insurance Corporation (FDIC). So in the event of closure of the bank, one can still recover his savings because it will be reimbursed by the FDIC. However, the FDIC insurance is not sufficient to create enough income for investors. Of course, they would need to save more money, but they would not get insurance if they do that. Whether the passbook account would stay for long or not, only time could tell. But definitely the passbook will etch an indelible mark in the history of banking.

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