Passbook Savings Definition

Passbook accounts are a traditional way of saving.

Passbook savings and statement savings accounts are the two basic savings accounts offered by most banks. With the former, deposits, withdrawals, interest and balances are recorded in a small booklet the saver keeps. Transactions with statement savings accounts are recorded at the bank and mailed to savers on a regular basis.

A Bygone Era

Like the Model T Ford, the passbook account is a reminder of the past.

The prognosis for the passbook savings account is not good. Computerization of the banking industry in conjunction with online banking with its boundless possibilities has made the passbook savings account a relic. It provides few benefits relative to the costs incurred to provide the service. Banks are concerned because passbook accounts are labor intensive, requiring bank tellers to provide a function done better, faster and cheaper by computers. Most customers prefer more convenient banking requiring less face-time at the bank. Consequently, larger banks have, for the most part, moved to statements due to high service costs and diminishing demand for passbook accounts.

Passbook Account Features

Passbook accounts require diligence from the saver to make sure every transaction is recorded. When discrepancies occur between bank numbers and passbook numbers, bank numbers prevail. Complete passbook accuracy necessitates regular visits to the bank for updating. Passbook accounts provide limited access to the funds. They do not have a check-writing feature. Many do not have ATM access, debit cards or online features. Some banks require prior notice before making a withdrawal, a minimum account balance, and often restrict the number of "free" withdrawals. Given the limitations, passbook accounts are most appropriate for people who make infrequent transactions.

Interest Rate Malfunction

Inflation can erode the puchasing power of savings in passbook accounts.

Most financial advisers counsel that keeping large sums of money in passbook or statement accounts is a bad idea. Savings account interest rates compare poorly with the inflation rate. The risk is that savers may actually withdraw less purchasing power than was initially deposited. Thus, when the annual passbook interest rate is 1.5 percent and the inflation rate is 2.5 percent (not unusual in both instances), the deposit will be worth a point less in value a year later. Savers should strive diligently to keep their nest eggs safe from the eroding effects of inflation.

Alternative Saving Products

Most financial institutions offer more convenient, more flexible and better-paying saving options. Chief among the options are money market accounts. They pay a slightly better interest rate and come with check writing, ATM, debit card and online banking features. Money market accounts have a minimum balance requirement, which could be good value given the benefits relative to passbook accounts.

For slightly less liquidity and still better interest rates, certificates of deposit (CDs) may have appeal. These "time deposits" require leaving funds on deposit for a period of time to avoid early withdrawal penalties such as forfeiture of accrued interest. However, if the saver intends to leave the funds untouched for a length of time, CDs make good sense. Like savings accounts, both money market and CD accounts are FDIC insured.

Saving for Emergencies

Establishing a savings routine is a daunting challenge for most families even during the best of times, and wishful thinking during the worst of times. But the only certainty about the future is uncertainty. The general rule of thumb is that an emergency fund should always be available to last through three to six months of unemployment. A money market account is a good place to start building that emergency fund for easy access and convenience.

References

• BNet:: "Business Definition for: Passbook"
• Passbook Savings Account: "Disadvantages to Having a Passbook Account" (article focuses on the inconveniece of pb accounts)
• BankRate: "Building Liquid Savings" (also describes PB accts and is source in sect. 5 about 3 - 6 mos svings in last paragraph)
• BankRate: "Passbook and Statement Savings Rates" (avg int. rts for pb accts)
• BankRate: "Passbook and statement savings accounts barely pay" (source for comments in sect 3 about inflation)