Banking 101: What is a Passbook Account?

Can’t remember a time when you didn’t manage your bank account from a computer or your smartphone? If so, there’s a good chance you’ve never heard of a passbook savings account.

Passbook savings accounts aren’t as popular as they once were, so you’re in good company if you don’t know what they are. Read on to learn how these accounts operate and review some of the advantages and disadvantages of this retro style savings account.

What is a passbook savings account?

Years ago, traditional savings accounts were commonly referred to as a passbook savings account. The name comes from the fact that tellers would record the deposits, withdrawals, and interest earned for account holders in a small booklet called – you guessed it – a passbook.

Today, electronic record keeping has made passbook accounts largely obsolete. Passbook savings accounts still exist, but they are offered by relatively few banks and are rarely promoted even where they remain an option.

Nonetheless, some banks and credit unions still offer passbook accounts as an option to their customers. In general, the accounts are now more commonly associated with savings accounts for children, though they may appeal to other types of customers as well.

Pros vs. cons of passbook accounts

If you’re considering a passbook savings account, it’s probably a good idea to take a look at the advantages and disadvantages associated with these types of accounts.

Advantages of passbook accounts

Fans of passbook savings accounts often enjoy the following features:

• Passbook accounts commonly charge only low fees, or sometimes no fees at all. Not a fan of savings or checking account fees? Here are five common bank fees and tips on how to avoid them.
• People who prefer in-person banking may prefer passbook accounts to traditional savings accounts. Those who are uncomfortable with online banking may see the appeal of passbook accounts as well.
• Passbook savings accounts can be an effective way to teach children about saving and banking in general.

According to Miranda Marquit, an Idaho Falls, Idaho-based money expert and founder of the financial education website Planting Money Seeds, one of the things she likes most about passbook savings accounts is that you bring your child into the bank and they can see how the banking process works.

“They get an entry in the passbook and they can watch the account balance grow,” said Marquit. “Having that connection with money, and requiring them to pay attention, is a major part of helping them get comfortable with it later.”

Disadvantages of passbook accounts include:

Despite the benefits detailed above, passbook accounts are also known for having some notable drawbacks.

• Passbook savings accounts often offer little to no electronic account management options. Want to make a deposit or withdrawal? Need to transfer funds to or from another account? There’s a good chance you’ll have to visit your local branch in person, passbook in hand. This can be inconvenient for anyone who is used to the ease of online banking.
• You’ll often reap lower interest rates on your passbook savings account balance when compared with other types of savings accounts.
• Checking your monthly statements for accuracy and fraud is an important part of managing your money. If you open a passbook account, you might not receive a monthly statement on the account. This can make the process of managing your account more cumbersome.
• Passbook savings accounts can be limiting if you move away and forget to withdraw your funds before you leave town.
• Minors can't withdraw funds without the co-owner of the account until they are 18. As an example, Marquit explained, “my son can't withdraw from his passbook savings at this point until he's 18 because his dad, the co-owner, is on the other side of the country and can't come into the credit union branch with him.”

Of course, every bank or credit union will have its own set of requirements when it comes to passbook accounts. It’s always a good idea to ask about the specific rules at your banking institution before you open a new passbook account.

Using a passbook as a starter account

Although passbook accounts may largely be a relic of the past, that doesn’t mean they are without value. They can be a great starter account to teach children about the value of saving money in a hands-on way.

“I like passbook savings accounts for young kids,” said Marquit. “I like that they can get a ritual going, of saving part of an allowance or other money, and then going to the bank to watch the cumulative effect. I like the interaction with money.”

Yet, as kids get older, Marquit recommends that “graduating” them to other types of joint accounts might be best.

“My son now has a fee-free basic checking account that comes with a debit card,” Marquit explained. She’s a fan of the account because it helps her son “learn how to handle plastic and the more abstract aspects of money.”

Finding tangible ways to teach children about money is an important element of a child’s financial education. Early financial education about savings is especially important in a nation where so many adults report to not having adequate emergency funds. In fact, the Federal Reserve reports that 40 percent of Americans say they can’t afford to cover a $400 emergency expense, at least not without borrowing money or selling something.

If a passbook savings account isn’t your cup of tea, compare other savings account options to find the one which will be the best fit for you or your child. Remember, the decision to save money is never a bad choice, regardless of which type of account you use to store your funds.