"How to Use a Passbook Savings Account"
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One legitimate use for passbook savings accounts is short term -- a surprise windfall of money.
Say you go to work one day and your boss presents you with a huge bonus check. Or you find $100,000 cash in briefcase on the street.
You want to make good use of this money, but because it's unexpected, you're not prepared. So you deposit it into an insured bank account so that it'll draw a little interest for a few weeks or so while you do the research to decide whether you want to put it into a bond fund or a stock fund or a REIT or whatever.
And actually, a money market fund would serve the same purpose and earn you more interest, but in the short term the difference is not really significant and your local bank would be easier. You could not even deposit such money into a money market fund without first depositing it into some kind of bank account, anyway,
One Good Long Term Use for a Passbook Savings Account
Many banks will arrange for you to use the money in your savings account to "back up" your checking.
That is, if you write checks with total amounts higher than you have money on deposit in your checking account, the bank will simply transfer enough money from your savings account to your checking to cover the deficit. This is useful for avoiding annoying overdraft charges to your account for bouncing checks.
Therefore, if you're someone who doesn't pay close attention to your checking account balance, you don't always write down every check or use of your debit card, or you share a joint account with someone else who withdraws money without telling you . . .
In short, if you have sometimes overdrawn your checking account or come close to it, it's a good idea to set up such overdraft protection with your bank.
Overdraft Protection is a Form of Line of Credit
They'll cover the balance you owe, but you owe them that money and they charge you a high rate of interest for this service.
Therefore, this is a service that can wind up costing you money if you use it.
And before the bank will give you this line of credit, they'll check out your credit rating. If you have a bad credit history, you won't qualify. Also, if your credit goes bad, they might withdraw the service.
Use Your Savings Account to Avoid Bank Fees on Checks
Therefore, it just makes more sense to have your checking account covered by a few extra hundred dollars sitting in a savings account
It basically acts as a form of insurance against check overdraft charges. Since the bank will pay you some interest on that money, you'll earn a few dollars. Not enough to make a difference in your lifestyle -- but earning any amount of money is better than paying a high rate of interest on a balance in your credit line of overdraft protection.
Those of you who are well organized and careful don't need to have overdraft protection, but you're most likely to be the ones who have one form or another of it.
You never know when you may face some emergency or critical situation that drains your immediate cash, so I do recommend you have one form or the other of overdraft protection.
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