Buildings and loan associations insured by the government pay up to 4.6 percent return, sometimes more if the savings are left in the association for a period of time. This rate is about .6 of 1 per cent higher than that of the highest rate savings banks in the country, and the building and loan associations provide comparable safety and liquidity.
About 25 million Americans deposit in insured building and loan associations, and the total assets of these associations amounted in 1959 to $63,472,000,000. This total represents a rise from $5,733,000,000 in 1940 and $16,893,000,000 in 1950.
The savings capital of all of these associations combined amounted to $2,243 per investor. The building and loan association is the chief outlet for the funds of the small investor and the medium and small income earner. On interest day there are tremendous lines of investors in many building and loan associations anxious to have the interest added and to see how much they have up to the present accumulated.
The growth in a fund deposited in an insured building and loan association over a period of years is surprising. As an example, let's look at loans that have been prepared at various rates of interest obtainable in the year 1962, and interest has been compounded semiannually. Compounding simply means adding.
If $10,000 is deposited at 4 percent and interest is compounded semiannually, at the end of the first six months, 2 percent has been earned, and the total is now $10,200. At the end of the next six-month period the 2 percent is based on $10,200, and $204 is added, whereas only $200 was added at the end of the first six months. This compounding has a cumulative effect. Every time interest is added it is added to a larger amount.
At the rate of 3 percent your money doubles in 20 years (of course taxes have to be paid as the interest accumulates each year and this tax lowers your net return, depending on what tax bracket you are in).
Over a period of time the difference between 3.5 percent and 4 percent is great. Over a 20 year period, at 4 percent, $10,000 has become $22,080, while at 3.5 percent it has become $20,016-$2,064 less. This difference amounts to over 20 percent of your original investment of $10,000.
Because a slightly higher rate means so much over a period of years, it is best to seek out the highest paying insured building and loan associations. They should be all insured by the Federal Savings and Loan Insurance Corporation (FSLIC), and if they are, there is not the vital necessity to invest only in the largest and soundest associations. There have been only 39 building and loan association failures since 1934 on which the FSLIC has had to pay off. Most of these failures were caused by embezzlement.
Where the investment has to be watched, in conditional sales contracts, for instance, the investment should be nearby; but where the investment is insured by the government it does not make a great deal of difference where it is, and many of the highest rate associations are in California.