Savings accounts are an excellent vehicle for depositing short term funds that you may need instant access to. Provided that they are secure and free of fees, your money will grow a little while in the bank’s custody until such time as you need it. However, there may be a few things you did not know about savings accounts:-
1. First Savings Accounts
The first savings accounts were established by the Philadelphia Saving Fund Society (PSFS) in 1816. A $5.00 deposit by a Mr. Roberts started what was to become one of the most successful banking institutions in America, until financial mismanagement and a run on its deposits in 1992 forced the Federal Deposit Insurance Corporation to step in and liquidate its remaining assets.
2. The FDIC
The Federal Deposit Insurance Corporation (FDIC) was established in 1933 by President Franklin D. Roosevelt to in response to the thousands of bank closures that occurred in the 1920s and 1930s. The FDIC currently insures all deposits in FDIC protected savings accounts up to $250,000 – but only until December 31, 2013, when the protection decreases to ”just” $100,000.
3. Regulation D
The Federal Reserve Board was responsible for introducing Regulation D in 1978, to control the supply of money in America. By introducing a 6 withdrawals/month limit it is supposed to prevent runs on deposits (obviously not in the case of PSFS above), but thanks to internet banking and ATMs there is effectively no limit to what you can withdraw and when.
4. Excess Withdrawal Fee
Not all banks conform to Regulation D (think of interest bearing checking accounts – illegal!) and some will charge you even if you make fewer than the “permitted” number. The Bank of America for example charges a $3.00 “Excess Withdrawal Fee” if you make more than three withdrawals in a month – that’s a year’s interest on a $600.00 deposit!
5. Monthly Maintenance Fees
Monthly maintenance fees are another way in which bank charges can eat not only into the interest you receive on your savings, but the savings themselves! Citibank are not alone in insisting that you maintain a minimum balance in your account (they want at least $500.00 on some savings accounts) and they will charge you $5.00/month if you fail to do so.
6. Inactive Accounts
Even more charges exist if your account is regarded as “inactive”. KeyBank would encourage you to put a lump sum away for a rainy day, but if it fails to rain for 13 months and your balance is under $5.000, they will charge you $5.00/month for keeping your account open and reduce your interest rate to 0.05% – a tenth of their regular saving account interest rates!
7. Compound Interest
Not all banks calculate your savings account interest using the same formula. Some banks calculate the interest on your savings every day and pay you compound interest (paying you interest on your interest) monthly, quarterly or annually. However, other banks will pay only “simple” interest on your savings account deposits only – and these banks should be avoided.
8. Negotiating Terms
In these times of increased competition from online savings banks, it may pay to ask your local brick-and-mortar bank to match offers which are available elsewhere or waive their charges. Rather than spend a day weighing up the relative merits of each savings account, why not pop down to your local bank and see what they can do for you – the worst that will happen is that they say “no”.
9. Opening Offers
If you find a bank offering savings account deals which include a bonus just for opening an account – take it! At 0.50% interest, any bank offering a cash bonus of $50.00 for you to open an account with them is giving away the equivalent of ten years interest on $1.000.00!
10. Teaser Rates
However, beware of “Teaser Rates” – these are inflated rates of interest to encourage savers to deposit their money on the promise of higher rates of interest. Although great to start off with, if the bank reduces its interest rates to lower than you could get elsewhere, or you fall below a certain balance (as with Capital One InterestPlus) you could end up losing money.
The bottom line when selecting a savings account is to read the small print carefully and if an offer looks too good to be true, it usually is!
Photo Credits: PSFS Building / Wikipedia Bank of America / Flickr Compound Coins / Flickr Capital One / Flickr
