Credit Loan > CD Rates > CDs: A Brief History of the FDIC

One Reason Why CDs Are A Good Investment

CDs (certificates of deposit) are a “must-include” for any investment portfolio. They can be bought for a month or five years, depending on need, with a locked-in interest rate for that term (meaning the CD rate you have when you buy the certificate will not go down even if overall interest rates do). Best of all, as long as your investment institution is an FDIC member, the money you have invested will not be lost, even if the bank fails. While CDs do not have the potential for rapid or high return that stocks and bonds do, they do have this added security, which is a prime reason for making them part of your portfolio. Diversification is always advised for investment plans and this is why. A high return is always good, but the knowledge that a portion of your retirement is safe regardless is crucial.

In the midst of the Great Depression, banks were failing left, right and center due to having nothing to back up their customers’ deposits, which had generally been invested somewhere else because this is how banks make money. When those deposits fell through due to the stock market crash, it essentially became a cascade failure with the banks having no money to pay their depositors and those depositors in a frenzy, trying to withdraw money that essentially no longer existed. This didn’t work out for anyone.

In order to prevent further cascade failures of banks and in hopes of mitigating some of the impact of the stock market crash, let alone prevent the Great Depression from getting worse, President Franklin Delano Roosevelt (FDR) authorized the creation of the Federal Deposit Insurance Corporation, to insure banks and their depositors against future catastrophes.

The FDIC works the same way as any other insurance; only the federal government backs it up. Member banks pay a fee that in turn guarantees their deposits (generally up to $100,000, though this can vary with specialized accounts), regardless of what happens to the bank. This is why, despite the current economic situation, the problems the banking industry has had, have not hurt the public the way they once did.

So, with higher interest rates (up to 3% or better), accrued and compounded interest, and government backing, CDs should be part of every investor’s portfolio. It doesn’t hurt either, that with the money held for a certain term with interest penalties for early withdrawal, that the temptation to use it for anything other than absolute necessity is withdrawn.