"What are Passbook Savings Accounts"

Decades ago, long before the prevalence of money market accounts and certificates of deposit, ordinary people earned interest by putting their money into passbook savings accounts at their local bank, savings and loan or credit union.

Things were much simpler then. Money you needed to pay current bills with, went into a checking account so you could write checks to pay your bills. Except for a brief period of time in the late 1970s and early 1980s, (because interest rates were so high, banks could afford to compete for money by paying a small amount of interest even on checking accounts) checking accounts have not paid interest.

But for money you wanted to save up for a new car, a down payment on your house, college education for your children and even your retirement, you put that into a passbook savings account at your local bank or savings and loan or credit union.

The financial institution loaned the money out for a higher rate of interest than it paid to you, usually to businesses and for home mortgages, but did pay a reasonable amount to you once a quarter

They're called passbook savings accounts because when you opened up one of these bank accounts they gave you a small booklet that did look a lot like a passport. But instead of lots of blank pages to stamp visas on, you had blank pages on which the bank stamped all your transactions.

Today, most savings accounts send out monthly statements the same as checking accounts do.

Some financial institutions still issue the old-fashioned passbooks, but I am writing about all savings accounts interchangeably, since the difference between using a passbook only and getting monthly statements in the mail is not significant.

Money in savings accounts are available upon going to the bank or ATM machine and presenting a passbook or ATM card

However, you cannot write checks on that money or spend it with a debit card, so these accounts are different from current checking or demand accounts.

I can remember going with my mother to make deposits into an account for myself and my sister at Germania Federal Savings and Loan. Every time she made a deposit, the teller would put it into a machine that updated the transactions (including any interest posted to the account since our last visit) and balances.

For many years, passbook savings accounts paid 5 1/4% or 5 1/2% interest

This was a reasonable rate of interest in the 1950s and 1960s, prior to the surge of inflation that began in the late 1960s.

So passbook savings accounts were an important financial tool for ordinary people back then. Many people did not put their money into stocks. Even if they did have brokerage accounts and bought and sold stock, they still kept a supply of money available in their savings account at the bank.

I'm sure that many ordinary people simply lived on less than they earned, deposited the difference into an ordinary savings account, let it compound over the years and retired with a big chunk of money.

Either money market accounts didn't exist, or nobody really knew about them

I'm sure that more people than I'm aware of did invest in bonds if they had enough money, but for ordinary people for ordinary savings who wanted income and security, passbook accounts were much more important than they are now.

And of course the old-fashioned savings and loans such as The Bailey Brothers Savings and Loan in IT'S A WONDERFUL LIFE have not survived the consolidation of financial institutions in the past 30 years (neither did Germania Federal Savings and Loan) or the savings and loan scandal and bailout of the 1980s.

The minimum deposit amount required to open up a passbook savings account ranges from $10 to $1000, but it usually at the very low end. You should look for institutions that compound the yield they pass on a daily basis. The average yield right now in the US is 0.79% -- historically very low.

Also, most institutions do not limit the amount of transactions you can make or charge any fees. They may require a minimum account balance (such as $25) before they pay any interest. With interest rates so low, the interest earned by any amount under $25 is not even worth talking about.

Next: What are the benefits of passbook savings accounts

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