With all of the volatility and chaos that has occurred over the last week in the banking sector, many people are suddenly wondering if the money they have saved at their own bank is as secure as they once thought. So, how do you know where to safely park your cash? A large part of the answer revolves around FDIC Insurance.
What is FDIC insurance?
As a part of the Federal Banking Act of 1933, President Roosevelt signed a law creating the Federal Deposit Insurance Corporation (FDIC). The purpose was to prevent the type of run on the banks that we saw at the beginning of the Great Depression, as well as to restore trust in the US banking system. The goal was to have the Federal Government insure smaller deposits at member banks so that, if the bank “goes under,” those who had deposits at the banks would get up to (at the time) $2,500 of their money back. Member banks fund this insurance, as well as follow increased regulations. In 2010, when the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted, the insured amount was raised to $250,000 per person, per bank.
This means that if you have $250,000 or less deposited at your bank, whether in cash, CDs, or another insured vehicle, you will not lose a single cent of your money in the event of that bank’s collapse. Furthermore, this amount is per person so, if you and your spouse have a joint account with up to $500,000 in it, that will also be fully insured. Conversely, if a person had $300,000 in an account or a couple had $550,000 in a joint account, $50,000 could be exposed upon a bank failure.
What if I have more in my bank than the covered amount?
If you have more than the covered $250,000 sitting in cash in your bank account, the first thing to do is evaluate your liquidity needs. The usual “cash” recommendation for individuals is to keep three to nine months’ worth of expenses liquid/easily accessible. If you have additional cash, now is a great time to consider investing the extra funds in a brokerage account or in an annuity. If there is a true need for extra cash on hand due to a large upcoming expense, there are also some additional options to consider.
First, you can consider splitting the money between different banks. FDIC insurance is per person, per bank. So, if you have $250,000 in one bank and $150,000 in a second bank, you would still be fully insured. Another option is to consider shifting additional funds into a brokerage account and investing in short-term CDs with different banks, usually in increments of $200,000, in order to accomplish the same goal without needing to open several different accounts. The downside to that option is it may “lock” your money up temporarily, due to the terms of each CD.
Above all else, it is imperative to remember that times of chaos also represent times of opportunity for those who don’t panic. Take a step back and evaluate your risks before making any financial decisions. As always, our team stands ready to assist with alternative recommendations and any questions that arise.
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