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Savings account alternates
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May 20, 1999: 7:24 a.m. ET
CDs, money market accounts offer higher rates without much added risk
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NEW YORK (CNNfn) - The proliferation of new investment instruments may have made more traditional means of saving less attractive, but many consumers are holding on to these "old-fashioned" accounts nonetheless.
Despite a steady decline in market share to 11 percent in 1996 from 19 percent in 1980, time and savings accounts still account for $2.9 trillion. That compares with $2.2 trillion five years earlier.
The people who have these accounts "run the gamut," said American Bankers Association spokeswoman Janet Eissenstat, with senior citizens and Gen-Xers alike proclaiming their loyalty to passbook and statement savings accounts.
What's the appeal?
The reasons people have these accounts vary.
For some, passbook savings accounts are simply a matter of habit. Popularized in the 1920s, passbook accounts require customers to carry a record book, which is updated at the bank each time a deposit or withdrawal is made. They typically appeal to older customers who have used them throughout their lives.
Statement savings accounts -- in which the institution regularly mails you a printout listing recent transactions -- are much more common today. They are often the first account many people open, says Eissenstat.
These accounts "have remained incredibly popular. They are the old stand-by, the first building block for improving your net worth," she said.
Their simplicity is what makes these old-time accounts the savings instrument of choice for many consumers. They are easy to understand and keep funds readily accessible. And unlike equities, savings accounts are guaranteed by FDIC insurance, making them particularly attractive to the risk-averse.
But security has its drawbacks.
The bottom line
The returns offered by traditional accounts are meager when compared to alternative savings and investment methods.
Interest rates on statement and passbook accounts have fallen from more than 5 percent to less than 2 percent in the past 10 years.
Consequently, you may want to consider more profitable alternatives.
"This is not your father's bank," Eissenstat said. "There is a whole new range of products out there that earns interest and still keeps money safe."
What to consider
Any decision involving your savings should include an assessment of your age, risk tolerance and overall investment portfolio. While accessibility may be a top priority for older account holders, younger customers may want to focus more on growth.
Similarly, if your savings account serves as your sole investment vehicle, exploring higher-yield options may be more important than if your bank account is merely a supplement to a diversified portfolio.
Risk tolerance should also come into play.
"People need to choose the risk and savings instruments that are right for them. If a person is very risk averse, then bank deposits are very attractive." said Keith Leggett, the ABA's senior economist.
Where the interest is
If you are willing to give up some flexibility, certificates of deposit or money market deposit accounts offer better returns without major risk.
MMDAs, as they are often referred to, currently offer interest rates between 2.5 or 3 percent. These accounts allow you to write checks and make withdrawals, though you may be limited to a certain number of transactions per month. Check-writing may be limited to set minimums, such as $100 or $500. Balance requirements are not unusual and banks may also impose fees on these transactions.
MMDAs are sometimes offered on a tiered basis, in which yields increase as deposits grow. For instance, an account holder might earn 2 percent interest with a $500 balance, but as much as 5 percent interest or more with a balance of $50,000.
Banks may also offer MMDAs as part of package deal. Under such an arrangement, the money market account is linked to savings, certificates of deposits and other bank investments you may have at the institution. A minimum deposit requirement may be waived and higher yields are likely.
If you are willing to give up some accessibility, time deposits, or certificates of deposits, are the more profitable alternative. CDs offer a guaranteed rate of return for a specified term, which can range from several days to several years. The longer the term, the higher the interest rate.
Currently, a 6-month CD yields about 4.24 percent, while a 5-year CD offers about 4.86 percent.
A CD locks up your money until the term ends. You will face penalties if you make premature withdrawals, though some institutions may allow you to withdraw the interest you earn. Penalties can be as high as three months of interest.
CDs can be rolled over upon the completion of the term. In fact, many institutions will renew the CD automatically if you don't tell them otherwise. They will, however, usually notify you before the maturity date of the CD.
Both CDs and MMDAs are guaranteed by the FDIC.
For risk-takers only
If you're looking for still bigger returns, but aren't ready to delve full-force into the stock market, money market mutual funds may be for you.
These funds invest in any of a wide range of tools, including stocks, corporate bonds and U.S. Treasuries.
Similar to an MMDA, a money market mutual fund allows account holders to write checks and make withdrawals without a penalty.
Returns are realized through income dividends, capital gain distributions or profits from selling shares.
The downside of money market mutual funds is that they are riskier than traditional savings tools. For one, money market mutual funds are not guaranteed by the FDIC. Instead they are regulated by the Securities and Exchange Commission, which limits the types of securities in which fund managers can invest.
In addition, tax considerations may make money market funds less attractive. Investors may be liable for taxes on dividends, capital gains distributions and capital gains realized upon the sale of shares.
As with any decision involving money, educating yourself is key.
"Financial instruments need to reflect the risk tolerance and life cycle people are in," said Leggett. "Shop around before deciding where to place your savings." 
-- by staff writer Nicole Jacoby
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