Advantages and Disadvantages of the Different Types of Investment Essay

Published: 2020-04-22 15:24:05
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Checking Account

Basic In this type of account, one is presented less services and low cost. The disadvantage of this type of account is that banks usually do not pay interests. Moreover, if used excessively, the owner of the basic checking account may pay additional charges (Types of Accounts Typically Offered by Banks, 2008).

Interest Bearing compared to the basic checking account, the interest bearing account is broader in terms of services and cost. Interest bearing accounts offer unlimited number of checks. Negotiable Order of Withdrawal (NOW), a type of interest bearing account, offers interest depending on how large the money a person has deposited in the bank  (Types of Accounts Typically Offered by Banks, 2008).

Money Market Account

The money market account is a savings account that is protected by the federal government. This is the most liquid and safe account, but it offers low interests. In this type of account, a persons money is invested in a short-term debt. Examples of short-term debts are commercial paper and treasury bills. Commercial papers are unsecured commitment that is given by banks to back up their needs such as accounts receivable and inventory.  Money market accounts also give higher interests than interest bearing checking accounts (Types of Accounts Typically Offered by Banks, 2008).

This type of account is given a number of checks. If an account of this type fails to maintain a minimum balance the bank will enforce a service charge (Types of Accounts Typically Offered by Banks, 2008).

Savings Account

The savings account is the most basic type of investment. In this type of investment, one is eligible to withdraw and deposit money in the bank but one cannot use checks to transact with the bank. Banks usually give higher interests in this type of account than checking account, but it is much lower than certificate of deposit and money market accounts. The bank also charges the depositor a certain amount if the balance falls from its required minimum. This type of investment usually uses passbooks to record each and every transaction (Types of Accounts Typically Offered by Banks, 2008).

Certificate of Deposit

Also known as Time deposit, the owner of a certificate of deposit agrees with the bank to hold his or her money for specified amount of time. The longer the duration specified in this type of account, the bigger the interest it will get. However, the owner of this type of account cannot withdraw the money until the end of the specified duration. Once he or she withdraws the money when the duration is still not finished, the bank will penalize him or her. If one cannot live without his or her money then it is best not to enter this type of account (Types of Accounts Typically Offered by Banks, 2008).

Analysis of the Advantages and Disadvantages of the Various Types of Accounts

In checking account, one disadvantage is that the interest given is very little compared to other accounts. Nevertheless, the advantage of this is that one can use check whenever he or she needs money.

One disadvantage of a savings account is that one cannot use the money in his or her account whenever he or she needs money by accident. However, the advantage of this account is that the owners can monitor their money through their passbook.

The advantage of the money market account is that it gives a higher rate of interest compared to checking account. However, the disadvantage of this is that it requires a high minimum balance.

In the case of the certificate of deposit, its advantage is that it gives a higher interest rate compared to the three other types of account. However, the downside of this account is that one cannot withdraw his or her money until the specified time agreed by him or her and the bank.

Considering the advantages and drawbacks of the aforementioned accounts, I can say that the certificate of deposit, otherwise known as the time deposit, is the best investment to choose. We invest our money to get big money. Hence, we should aim for the highest interest as it means higher profit for us.

Given the formula for compounded interest, we can actually estimate the money that will be accumulated when we invest $1,000 dollars in a certificate of deposit:

A = P(1 + r/m)mt

Where A = accumulated amount at the end of conversion period, P is the principal amount, r is the normal interest rate per year, m number of conversion period per year, and t is the term or the number of years (Exponents, Logarithms, and Applications to Compound Interest, n.d.). Whatever the number of conversions per year, if the rate and the number of terms are increasing, then the accumulated amount will always be higher in certificate of deposit (CD). As we are only given a certain amount of money, the only thing that we have is the time. As long as the money stays in the bank and is accumulating interest, then it will still profit. That is why the CD is the best account to invest your money with.

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