Banks still a good place to keep emergency funds

The month of October began with the Federal Deposit Insurance Corporation (FDIC) taking control of the assets of Warren Bank and turning them over to Huntington Bank. On a national level, the FDIC has taken control of nearly 100 banks, year to date.

If the current rate continues, that number will easily exceed 100 by the end of the year. Fortunately, the takeovers are virtually seamless to the depositors, provided that their account balances are under the maximum FDIC limits.

It's important to the nation's stability that we have a dependable and reliable banking system. Just a year ago, many experts thought that the entire banking system was about to collapse. Although several banks continue to have financial problems, it appears that the banking industry has sidestepped a potential freefall.

As a financial advisor, I believe everyone should have adequate liquid cash reserves, and a bank is an appropriate place to keep them. I have recently received a number of faxes and e-mails, all asking the same underlying questions. "Why are the interest rates at the bank so low?" And "Isn't there a better place to put our money?"

Certainly there are investment vehicles with higher interest rates. For example, a little due diligence will uncover a number of equities with yields in the 8 percent to 10 percent range. Depending on your circumstances and risk tolerance, some of your money probably should be in equities.

But let me issue a word of caution. Only bank and credit union deposits have an underlying guarantee beyond the institution itself. Other investments may or may not have better rates, but in all likelihood they are not as secure because they simply lack the extra layer of the FDIC guarantee. There are many reasons why interest rates are so low. One contributing factor is the fee that banks are required to pay for the FDIC protection. Not long ago, a typical bank would contribute 12 to 14 cents into the system for every $100 worth of deposits. Today, that number is closer to 16 cents. Additionally, to shore up the program that's taken over nearly 100 banks this year, the FDIC has come up with a special assessment for banks.

Simply stated, they are asking member banks to prepay three years worth of assessments. I have little doubt that the added expense of the increased fees and the special assessment are significant reasons why bank interest rates are so low.

On top of that, the collapse of the real estate market has left many banks scrambling to stay afloat. As more and more homeowners default on their mortgages, the banks not only stop collecting money, they are suddenly becoming homeowners.

The bottom line is that, even though rates are low, it's important to have emergency funds in the bank. Over the past year, many investors took some serious losses on their investments, even as their housing values plummeted.

Such downturns illustrate why it is so important to have adequate cash reserves. And it's vital that those reserves are in a safe place. You do not want to, nor should you take risks with your safe money. Interest rates may be at historical lows, but it's good to know that if your bank gets into trouble, you won't lose your emergency money.