"What are the Disadvantages of Passbook Savings Accounts"

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Passbook savings accounts have Two Big Disadvantages

1. Low interest.

Because they're so safe, that is, invested in loans so likely to be paid off, and also because they're liquid (unlike certificates of deposits), they pay very low rates of interest. In other words, you pay a very high price for their "advantages."

The interest paid on these accounts is lower than the rate of inflation. For example, as I write, the current yield is 0.79%. Since that's a compounded yield, it means the actual rate paid is even lower.

People look for online savings accounts or high interest savings accounts, and you can find some that pay more, but none pay very much. And if savings account rates at a financial institution are too much higher, it could indicate they're not safe.

The interest paid on bank savings accounts does fluctuate with interest rates. Therefore, these accounts are not exactly "fixed" -- they can and will go up if interest rates throughout the economy rise.

However, they do not go up enough to make up for the loss of purchasing power from inflation.

2. The safety of being insured by the FDIC is only up to $100,000. ($250,000 for retirement accounts)

This is a significant amount of money of course, but not enough to generate enough income for investors to live on. You should want to save up more -- but if you do, no more government insurance.

Interest Rates Now are Low

As I write, you might get 3% interest on a high yield savings account. If you have $100,000 that's $3000 for the year

You could open up regular savings accounts at every bank close to you. They'd each be insured by the FDIC for $100,000, but it'd take 10 different banks just to pay you $30,000 a year -- if you happen to have $1 million to split up into 10 accounts at $100,000 each.

If your area even has 10 different banks in it -- consolidation has drastically reduced the number of banks. I think my local area, St Louis, does still have over 10 banks, but a smaller area probably does not.

Next: uses of passbook savings accounts

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