Bank CD

This newsletter will be relatively short. It is my biased view of a Certificate of Deposit at any bank because I do not view a CD as a real investment. To me it is like being held up. At the end are additional tidbits of information.

Once, sometime in the 1980's, I owned a CD from Omaha State bank, it was a 3 year CD that paid me 3 or 4% per year. At the end of this experience, I vowed never to buy one again. So far I have been true to my word. I did like that they did fulfill the contract and paid me interest and my original principle. I did like at the time the idea of FDIC security. That was about all I liked about the experience.

What I did not like about the experience were:

1) My money was locked up for 3 years, kind of like an inverse bank robbery.
2) My rate of return was as good as a money market account so I could have put my money in a money market account, gotten the same return, and had access to it at the same time.
3) What I got paid in interest was only a fraction of what the bank got.
4) A money market fund has the same safety as a CD, since the SEC made whole the only money market fund to ever lose money which did occur last year, the FDIC insurance cost is really a tax eating into my return.

Let's talk about the game the bank is playing. They take the money, loan it out at a much higher rate, and take the difference as gross profit. Wouldn't you be glad to make 6% on the money and only pay out 3% to get it?

A local bank is paying 2% interest on a 24 month CD. The historical average rate of return for a corporate bond or mortgage backed bond is between 5 and 6%. So the bank has a spread of 3 - 4% that they are making on your money. You are a lot better off getting the 5 - 6% interest. An extra 4% interest doubles you money in 18 years. I do not mind someone making money except when they make more money off of me than I make myself, this is just wrong!!!