Bank Products

Bank products are an important part of any complete financial portfolio. Banks and credit unions provide safe and convenient options for accumulating savings and having ready access to your funds. And some banks offer services that can help you manage your money.

Deposits at banks and most credit unions are federally insured up to a limit set by Congress. And transaction (or checking) accounts and deposit accounts offer liquidity, making it easy for you to get to your funds for any reason—from day-to-day expenses to a down payment or money for unexpected emergencies.

But remember, the interest you earn from bank products—including CDs—tends to be lower than potential returns from other investments.

Savings Accounts

Savings accounts at a bank or credit union have traditionally been one of the simplest and most convenient ways to save. These accounts typically have the lowest minimum deposit requirements and the fewest withdrawal restrictions. But they often pay the lowest interest rates of any savings alternatives. Because they tend to have lower overhead, online banks may offer higher interest rates than more traditional brick-and-mortar banks.

Most savings accounts pay compound interest, which means that your earnings are added to the balance to create a larger base on which future interest is paid. The more frequently it compounds, the faster your earnings will accumulate—though with small balances, the increases won't be very dramatic. You generally begin to earn interest as soon as the money goes into your account, and that interest continues to accrue until you withdraw.

The bank or credit union will tell you the basic interest rate and the annual percentage yield (APY). The APY is larger than the basic, or nominal, rate since it takes into account the impact of compounding. Financial institutions often advertise the APY since it more accurately reflects the amount of interest the account will actually accrue.

Savings accounts are subject to the provisions of the Federal Reserve System’s Regulation D, which includes guidance regarding frequency of transfers and withdrawals. With a basic savings account, you can make as many deposits as you like, whenever you like. However, requirements regarding withdrawals and transfers may vary, with some banks now allowing unlimited withdrawals and transfers and others setting monthly limits of as few as six withdrawals per month and sometimes charging fees for transactions that exceed these limits.

Additionally, minimum opening balances may apply to savings accounts, and some banks charge fees if your balance falls below that minimum.

Some banks offer low-cost savings accounts or more flexible alternatives for children, college students, seniors and others whose income falls below certain limits. The way these accounts work varies from bank to bank.

Money Market Deposit Accounts

Money market deposit accounts are similar to savings accounts but might pay higher interest rates. They tend to have higher initial deposit and balance requirements than savings accounts, and different interest rates may apply to different account balances.

Money market deposit accounts let you write a limited number of checks each month, in essence combining features of savings and checking accounts. You can also make additional withdrawals by visiting a bank branch office in person or, when the money market account is linked to a debit card, through an ATM, and you can deposit that money into your checking account without penalty.

Be aware that money market deposit accounts differ from money market mutual funds—even though their names sound alike. A money market mutual fund is a type of security (rather than a bank product) that is not federally insured. Learn more about mutual funds.

Certificates of Deposit (CDs)

CDs are financial products that hold your deposit for a fixed term—usually a preset period from six months to five years—and pay you interest until maturity. At the end of the term, you can cash in your CD for the principal plus the interest you've earned or roll your account balance over to a new CD.

CDs are less liquid than savings accounts. You can't add to or withdraw from them during the term. If you cash in your CD before it matures, you'll usually pay a penalty, typically forfeiting some of the interest you've earned.

You can buy fixed-rate CDs or variable rate CDs, sometimes known as market rate CDs, which have interest rates that may rise and fall with changing market rates or be readjusted on a specific schedule.

A common CD investment strategy involves creating a CD ladder in which you divide the total sum of money you’re okay with locking away in CDs equally across multiple CDs with varying maturity dates, which can provide you with additional flexibility.

Other offerings include long-term CDs, which pay high interest rates but may be callable, meaning the bank can redeem them early (say should interest rates fall), and brokered CDs, which are more complex and carry more risk. Although most brokered CDs are bank products, some may be securities, which won't be federally insured.

While bank products are generally low risk, no investment is risk-free. Understanding the risks associated with bank products can help you plan how best to meet your financial goals.

Inflation Risk

This is the risk that the yield on your bank products will not keep pace with inflation. If the interest rate for your money market account is lower than the inflation rate, for example, your money might not be worth as much as you anticipated and could actually lose value over time.

Liquidity Risk (or Withdrawal Risk)

This is the risk that you won’t have easy access to funds when you need it. This risk applies to money invested in CDs. If you purchase a five-year CD and find that you unexpectedly need the money in year three, for example, you may face a significant penalty for withdrawing prior to the maturity date. Penalty rates vary. Purchasing CDs with shorter terms or lower early withdrawal penalties can minimize this risk.

Interest Rates and Fees

Because interest rates fluctuate, the impact of investments in these products can vary as well. You could end up locked into a rate for a CD that will you pay you less than current market rates at the time of maturity. Or, on the flip side, you could see your money market account’s initially low interest rate increase if a bank decides to raise interest rates in response to a rising market overall.

Fees can also affect the net yield of bank products. In addition to early withdrawal penalties associated with CDs, excess withdrawal fees, maintenance fees and other charges can quickly eat away at your savings. Know the costs associated with savings and money market accounts and CDS before you invest in order to avoid unexpected deductions.

For additional information about bank products, please see the following resources:

• FINRA Investor Insights:
  • In the Market for Money
  • High-Yield CD Offers Can Be Bait for High-Commission Investments
• SEC:
  •  Investor Publications: High-Yield CDs: Protect Your Money by Checking the Fine Print
  • Certificates of Deposit (CDs)
• Consumer Financial Protection Bureau: Bank Accounts and Services