The Bank

Safe As Money In the – Savings Accounts A savings account is a bank instrument that ideally credits more interest than any possible account maintenance fees charged. It usually features low yields that are fully taxable, but money is extremely liquid and FDIC insured. A savings account is either a Passbook Account in which records of deposits, withdrawals and interest are stamped and recorded in a booklet, or Statement Savings whereby the consumer receives a quarterly or monthly statement showing deposits, withdrawals and interest activity.

We used to say savings accounts were suitable as a learning tool to teach children about banks and saving, but grownups were too big for this ride. However, linked savings accounts are a different story. Linked Savings Accounts are linked to a personal checking account, and money to or from the saving account is electronically transferred at customer request. These often pay much high interest than old style account  

 Passbook Replacement – Money Market Accounts
A bank money market account protects principal, is very liquid, and earns taxable interest. Money market accounts may often be opened for as little as $100 (although some banks require $500 or $1000). Yields are typically higher than those paid on bank savings accounts and lower than rates realized on certificates of deposit, but at times, money market rates have been higher than short-term CD rates.

They are extremely liquid; you can make up to six withdrawals and write up to three checks a months (a penalty is usually charged when you write too many checks). Bank money market accounts are FDIC insured and subject to their limits.

 

This discussion is limited to bank money market accounts. Mutual funds also offer money market accounts called money market funds and they have an excellent record of safety, but this site does not discuss the merits of securities, which would include mutual fund money markets.

Mom, Apple Pie & Certificates of Deposit
A CD is a bank savings instrument with a specified maturity. Maturities can be for any term length, but most range from three months to five years. Interest may be credited daily, weekly, monthly, quarterly or yearly, and compounds and accrues until the CD is cashed in or matures.

Over the last twenty years the average interest paid on certificates of deposit has ranged from around 1% to almost 18%, and these yields may swing violently between one period and the next. As an example, if a retiree was living off CD interest in the fall of 1991, they saw their income plummet 44% by the fall of 1992.Even more dramatic was the 69% drop in CD rates from the fall of 2000 to the fall of 2001. CD rate increases tend to be slower - a typical 1-year CD yielded 1% at the end of 2003 and didn't reach 4% until the end of 2006. 

Certificate of deposit yields are usually higher than money market accounts and, based on our research, yields earned on 5-year CDs might well exceed average rates earned on Series EE Savings Bonds. Interest is fully taxable, even when money is compounding inside the CD. Over the past thirty years, taking into account the rate of inflation and assuming the effects of a top marginal income tax rate, real CD returns after taxes and inflation have been negative half of the time.

The typical CD penalty for early withdrawal is usually six month’s interest, but could be one year's interest if the CD term is two years or longer; the penalty for maturities of less than a year is often only the loss of one month’s interest. Certificates of deposit are FDIC insured and subject to FDIC limits.

You can buy CDs where the interest rate paid may increase or decrease over time based on a set schedule, or where the interest you earned is linked to the performance of an equity index, or even where it is denominated in a foreign currency.

Your CD may be “callable” whereby the bank can pay you off prior to maturity at their whim (usually when new CD rates are lower than your current rate). However, “callable” is a one way street, a depositor cannot “call” the bank (if rates go up) and tell them to send you your money without penalty.

You can redeem a traditional CD by going to the bank, surrendering the CD and paying the penalty, but some of these newer CDs cannot be cashed in before the end of the term. It is possible you may be able to sell the CD – like you would a stock – but as with a stock the price may be more or less than you originally paid.

And you may not hear what you thought you heard. If someone told you about a “penalty free, five year non-callable CD” you might think you heard about a CD with a five year maturity having no penalties for early withdrawal. However, the reality could be a CD that does not mature for 10 years, but that the bank cannot take it away for at least 5 five years, and the reason there are no penalties for early withdrawal is because the CD cannot be withdrawn until the end of the term.

Market-Linked, Indexed, Structured CDs
Although they use different names they all refer to a certificate of deposit where the interest earned is based on the movement of an external index, that could be the S&P 500 or foreign currencies or inflation or almost anything else. These CDs are typically FDIC insured and may even guarantee a minimum return or place a cap on the amount of interest you can own. The ones I have seen usually do not lock in the interest until the end of the 3-5 year term, so if the index was up for 4 years and then plunged in the last year you could wind up earning zero interest (this is different from almost all of the index annuities on the market because they usually credit any index-linked interest earned annually, but there are a few index annuities that do not lock in interest annually and wait until the end of the term). However, even in the worst case the CD still gives you your principal back at the end of the term.

Who Is In Charge?

If you would like to learn more about the regulatory world surrounding your bank visit the following web sites: 

Federal Reserve Board  http://www.federalreserve.gov/
FDIC  www.fdic.gov
OCC (National Banks)  http://www.occ.treas.gov/index.htm
OTS (savings Banks)  http://www.ots.treas.gov/

Credit Unions
Although they might object to be included in the bank section, credit unions offer the same safe money places as banks and the covered account values are also federally insured. Credit Unions are owned by their members - the people in the community that use their services. They are non-profit entities (a tax status that banks do not have) with a history dating back almost a hundred years.

The National Credit Union Association (NCUA) charters and supervises federal chartered credit unions, and savers in all federal and most state chartered credit unions are insured by National Credit Union Share Insurance Fund (NCUSIF), a federal fund backed by the full faith and credit of the United States government. Credit Unions are a safe money place.

If you would like to learn more about credit unions visit the following web sites:
America's Credit Unions http://www.creditunion.coop
Credit Union National Association http://www.cuna.org
National Credit Union Administration http://www.ncua.gov/