What Are the Advantages and Disadvantages of Deposit Accounts?
(3 of 6)
What Are the Advantages and Disadvantages of Deposit Accounts?
Although many deposit accounts pay relatively low returns, they still hold a number of attractions for investors. The first and foremost is their high liquidity. Your money in a deposit account is always available, never farther away than your checkbook or the nearest ATM machine. Even accounts that require higher minimum balances generally charge only small monthly fees if your account balance dips below the minimum; and if you need to, you can close the account at any time. Usually there are no "penalties for early withdrawal" to worry about here.
Things To Know
- Deposit accounts have high liquidity.
- They have low minimum balance requirements.
- Deposit accounts offer low returns, however.
Security
Second, deposit accounts offer a high degree of security. The Federal Deposit Insurance Corporation (FDIC) insures each deposit account of its member banks up to $250,000 ($250,000 for retirement plan accounts). Similarly, the National Credit Union Administration (NCUA) insures credit union deposits for the same amounts through its National Credit Union Share Insurance Fund (NCUSIF). Even in the unlikely event that your bank, credit union, or savings and loan association fails, most depositors will receive the full value of their accounts. Most financial institutions belong to the FDIC or NCUA, but some that are state-chartered rely upon whatever backing their states provide. Even deposit accounts that are not backed and that rely solely on the managers of the portfolio that the deposits are invested in (money market accounts) offer security because they usually are invested in some of the most reliable debt securities available. While you may not make huge returns on your deposit account, at least you have little fear of losing your money.
Widespread availability
Finally, deposit accounts are available to anyone with even a small amount of money. You can save nearly any amount of money in a passbook account, for example. There is no need to meet minimum investment requirements that can run into thousands of dollars with other kinds of investments.
The main disadvantage
Of course, as with any investment, there is a tradeoff between safety and returns. Even the best deposit accounts usually pay lower rates than "risk-free" investments such as Treasury bonds. And it is not unusual for passbook accounts to pay interest or dividend rates lower than the inflation rate. As a result, there is little opportunity for your capital to appreciate in real value (over inflation) or beat the kinds of returns possible with other kinds of investment opportunities.
