Personal Blogs

Most home banking systems make it easy to buy stocks, bonds, mutual funds,
CDs, options, and other investments. One advantage in investing through your bank is that all of your holdings are consolidated in one place. That not only makes recordkeeping easier, but many banks will charge lower fees, or even waive them altogether, if you keep all of your assets at the bank. The more money you keep at the bank, the higher the interest the bank pays on deposits and the lower interest it charges on loans. Another advantage is that you are able to comparison-shop online for yields on CDs and other bank products.

Banks will list all of the different maturities of their certificates with the current yields, so you can pick the CD with the highest yield and maturity appropriate for your needs.

Banks will also automatically update the value of your securities portfolio, usually every night after the stock market has closed. In addition, the bank will keep track of reinvesting stock dividends and mutual fund capital gains distributions and will adjust for stock splits and bond redemptions. The bank also should keep track of your cost basis so that you can calculate your capital gains liability when you sell an investment. All of these recordkeeping chores would be a tremendous burden for you to track on your own.

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For decades, the interest that banks and savings and loans could pay on checking and savings accounts was regulated by the federal government. Savings and loans could pay 51⁄2 percent on passbook accounts, while banks could pay a maximum of 51⁄4 percent. The soaring inflation and interest rates of the late 1970s rendered those fixed rates obsolete, ushering in the era of bank deregulation.

Ever since the banking industry was fully deregulated in the early 1980s, banks and savings and loans have been free to pay as much as they choose on checking and savings accounts. A bank that wants to generate a large amount of deposits to make loans will offer higher interest rates than a bank that does not anticipate much loan demand.

Though there are variations from bank to bank, the yields you earn on your cash are affected more by the general movement in interest rates than by individual banks themselves. If inflation is high and rising and the Federal Reserve pushes up interest rates to try to cool off the economy, cash instruments will pay rates from 8 percent to as much as 20 percent, as they did in the early 1980s. Under these circumstances, which persisted in the 1990s and 2000s, yields on cash can fall dramatically to as low as 2 percent.

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