Consumption Diversity - Essay Example

Some common variants of traditional savings accounts are; passport savings, money market accounts. Although passbook savings is one of the most widely used since it stipulates few restrictions and withdrawals are usually not limited; consequently they are typically low yielding alternatives to other types of accounts. Interest can be compounded daily, weekly or monthly so it pays to calculate the actual yield based on terms and all transactions are recorded. Money market accounts provide a more attractive alternative to passbook accounts, since they are usually higher-yielding, provide the ability to write checks, and are subject to certain restrictions.

Some disadvantages are that they are typically subject to fairly high minimum balance requirements in order to avoid fees and usually restricted to six withdrawal transactions, three must be done by check. Certificate of deposit provides the most attractive alternative as an investment instrument. Certificates of Deposit provide the highest interest return and are virtually risk-free due to the fact that they are insured by the FDIC. The deposits are usually of a fixed term, with maturity ranging often three months, six months or from 1-5 years.

Interest is usually fixed, with longer-term CD’s usually offering a higher yield. The main disadvantage lies in the fact that early withdrawal is heavily penalized, thus the investor must be aware of this fact because the principal is held until maturity.