Keep Your Money Safe from Bank Failures
Guidelines for investing in uncertain financial times and how to keep your nest egg safe from bank failures.
Laura Adams, MBA
Listen
Keep Your Money Safe from Bank Failures
Today’s episode is about how to keep your money safe in uncertain financial times.
When times are tough in the financial markets, investors need to adopt a survival mindset. Sometimes the best we can hope for is not a return on our investments, but simply the return OF our investments!
Don’t Assume Your Money is Protected
You should always question how safe your money really is. Never assume your money is protected just because it’s in a bank CD or money market fund that has traditionally been safe. The rules of the investment game are changing and every investor needs to become more aware of this.
The “credit-crunch” we’re experiencing from the distressed housing market is taking it’s toll on financial institutions that were once considered too big and powerful to fail. As of the date of this podcast, the Federal Deposit Insurance Corporation (FDIC) lists 8 banks that have failed since the beginning of 2008. My guess is that there will probably be many more to come. Here’s a link to the FDIC failed bank list.
Guidelines To Keep Your Money Safe
To help to keep your money safe in today’s financial environment, consider the following three guidelines:
1. Don’t chase unrealistically high return investments. Extraordinary returns may be a sign that an institution is desperate for your deposits and could actually be in trouble. If you do find an irresistable offer, make sure you’re ok with higher levels of risk or that the full amount of your money will be FDIC insured.
2. Know which investments are insured by the FDIC. Make sure your deposits are held at banks with FDIC insurance. The FDIC only covers deposits in checking and savings accounts, money market deposit accounts, and time deposits such as CDs. The FDIC does not insure money invested in mutual funds, stocks, bonds, annuities, life insurance policies, or any type of security–even if they were bought from an insured bank.
3. Know how much the FDIC insures. The FDIC covers the balance of each depositor’s account, dollar-for-dollar, up to the insurance limit. This includes principal and any accrued interest through the date of the insured bank’s closing. More about the specific insurance limits in a moment…
The Role of the FDIC
The FDIC is an independent agency of the federal government that was created in 1933 due to the thousands of banks that collapsed in the 1920s and early 30s. The agency proudly states that since the start of FDIC insurance on January 1, 1934, no depositor has lost a single cent of insured funds as a result of a bank failure.
However, FDIC data shows that as much as $2.6 trillion in deposits are uninsured nationwide! If your money is part of this staggering number, you should seriously consider restructuring your deposits right away.
FDIC Insurance Limits
There are two kinds of FDIC coverage. One is for basic accounts and the other is for retirement accounts. Any person or legal entity can have FDIC insurance on a deposit. Even those who are not U.S. citizens or residents are covered.
The basic insurance is $100,000 per depositor, per insured bank. For joint accounts, owned by 2 or more people, each co-owner is insured for their share, up to $100,000.
A listener named Dave writes,
“I am assuming that if you had an insured savings account at a bank that went belly up that you would still only be covered up to $100,000.00 which may not include any accrued interest on the savings?”
Thanks for the question Dave, and you’re right. It’s important to understand that the combination of all your insured accounts must not exceed $100,000 to be fully insured.
The FDIC insurance limit for retirement accounts is raised to $250,000 for certain types of accounts including:
- Traditional IRAs
- Roth IRAs
- SEP IRAs
- SIMPLE IRAs
- self-directed 401k plans
- self-directed Keogh plans
Strategy to Increase Your FDIC Insurance
Deposits with each FDIC insured bank are insured separately from deposits at other insured banks. Deposits in different branches of the same insured bank are not separately insured. So “brick and mortar” branches as well as on-line divisions of the same bank are considered one insured bank.
If two banks are affiliated, such as having a common holding company, but are separately chartered, they are considered separate institutions. You can confirm that banks are separately chartered if they have different FDIC certificate numbers. I’ll put a link in the show notes to the FDIC Bank Find page where you can find and verify bank certificate numbers.
So, the best way to increase your level of FDIC insurance, is to open up new accounts in a different bank once you’ve reached the $100,000 basic limit or $250,000 retirement account limit. In the event that your different banks merge, you still continue to have separate insurance for a grace period of 6 months.
If you purchase a CD from a broker, it’s very important to know which bank issued that CD. Find out exactly where the broker will deposit your money, so you can take your FDIC insurance limit into consideration.
I’ll put a link in the show notes to the FDIC Guide, which gives complete information on FDIC insurance.
U.S. Treasury Securities
As wonderful as the FDIC insurance is for protecting consumers, it isn’t perfect because the protection has limits. One secure investment that has no dollar limit on protection is U.S. Treasury securities. U.S. Treasury bills, bonds, and notes, are backed by the U.S. government, which ultimately backs the FDIC. There has never been a default on U.S. Treasury securities, even when government operations have temporarily shut down due to budget disputes.
When financial times are tough, watch your nest egg carefully and consider taking lower but safer returns on high-quality investments.
Administrative
And if you’re not subscribed to Money Girl through a podcast aggregator such as iTunes or Zune, consider doing so. Subscriptions are free and the easiest way to get each new show as soon as they’re published. I’ll include a link to my iTunes podcast page where subscribing is as easy as clicking a button.
And while you’re in iTunes, be sure to subscribe to The Public Speaker, a new podcast in the QD Now network of shows created to help you improve your communication skills. The newest release is about what not to say at work!
I’m glad you’re listening. Chi-Ching, that’s all for now, courtesy of Money Girl, your guide to a richer life.
Bank image courtesy of Shutterstock
About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.