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Deposit accounts: Advantages & disadvantages

Although many deposit accounts pay relatively low returns, they still hold a number of attractions for investors.

The first and foremost is their high liquidity. Your money in a deposit account is always available, never farther away than your checkbook or the nearest ATM machine.

Even accounts that require higher minimum balances generally charge only small monthly fees if your account balance dips below the minimum; and if you need to, you can close the account at any time. Usually there are no "penalties for early withdrawal" to worry about here.

Security

Second, deposit accounts offer a high degree of security.

The Federal Deposit Insurance Corporation (FDIC) insures each deposit account of its member banks up to $250,000 ($250,000 for retirement plan accounts).

Similarly, the National Credit Union Administration (NCUA) insures credit union deposits for the same amounts through its National Credit Union Share Insurance Fund (NCUSIF). Even in the unlikely event that your bank, credit union, or savings and loan association fails, most depositors will receive the full value of their accounts. Most financial institutions belong to the FDIC or NCUA, but some that are state-chartered rely upon whatever backing their states provide.

Even deposit accounts that are not backed and that rely solely on the managers of the portfolio that the deposits are invested in (money market accounts) offer security because they usually are invested in some of the most reliable debt securities available.

While you may not make huge returns on your deposit account, at least you have little fear of losing your money.

ASHLAND, OREGON - JUNE 17, 2019: A banking customer uses an ATM machine in Ashland, Oregon. (Photo by Robert Alexander/Getty Images)
A banking customer uses an ATM machine in Ashland, Oregon. (Photo: Robert Alexander/Getty Images)

Widespread availability

Finally, deposit accounts are available to anyone with even a small amount of money.

You can save nearly any amount of money in a passbook account, for example. There is no need to meet minimum investment requirements that can run into thousands of dollars with other kinds of investments.

The main disadvantage

Of course, as with any investment, there is a tradeoff between safety and returns.

Even the best deposit accounts usually pay lower rates than "risk-free" investments such as Treasury bonds. And it is not unusual for passbook accounts to pay interest or dividend rates lower than the inflation rate.

As a result, there is little opportunity for your capital to appreciate in real value (over inflation) or beat the kinds of returns possible with other kinds of investment opportunities.

Dive deeper: Deposit accounts: Everything you need to know

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

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