Most people believe that the money saved in your bank accounts are 100% safe. It's not necessarily true for everyone. Based on the data from the Federal Deposit Insurance Corporation (FDIC), more than 500 banks in the U.S. failed from 2001 to 2017. You may not get all your money back when your bank fails. This week I will talk about how safe your money is at the bank and how to make it safer if necessary.
First and foremost, let's introduce the concept of the deposit insurance provided by the Federal Deposit Insurance Corporation (FDIC). It is the actual program that protects your money at the bank. Many of you probably have heard of it or have seen it on the materials from your bank. Here is what it does for you.
FDIC insurance covers all your deposit accounts including checking, savings, money market deposit, and time deposit like certificates of deposits(CDs) at any FDIC-insured banks, dollar-for-dollar, including principal and any accrued interest through the date of the of the insured bank's closing, up to the insurance limit.
The standard insurance limit is $250,000 per depositor, per insured bank, for each account ownership category. For example, let's say you have one individual checking account, one individual savings account and one joint checking account at FDIC-insured bank A, and another savings account at FDIC-insured bank B. Your individual checking and savings accounts at bank A are insured up to $250,000 while your shares of the joint checking account at bank A are insured up to another $250,000. Your savings account at bank B is insured separately up to $250,000. You could learn more about the limit on different specific types of accounts here.
Three things are worth mentioning here. Firstly, most big banks have FDIC insurance, but not all banks do. You could check with your bank directly or search it here. Secondly, credit unions are not covered by FDIC insurance. However, federally insured credit unions have similar insurance coverage provided by the National Credit Union Administration(NCUA) which you could learn more about it here. Thirdly, a money market deposit account at a bank is different than a money market fund you have in your brokerage account. The latter is a type of mutual fund which is not a deposit account and not covered by FDIC insurance. The Securities Investor Protection Corporation(SIPC) insures securities like stocks, bonds, mutual funds, and cash held at any SIPC-member brokerage firms. The standard insurance amount is $500,000 per account type, per insured firm (including a $250,000 limit for cash only). It only provides coverage when the brokerage firm fails and your assets are missing. It does not protect against the decline in the value of your securities. You could learn more about the SIPC insurance here.
Now you should have a basic understanding of how FDIC insurance works. The next step is to figure out whether your money saved in all banks are fully covered. Some banks may give you excess coverage in addition to the standard one. FDIC provides an online tool here to help you figure out your coverage at each bank based on your specific situation. For people who are not fully covered by FDIC insurance currently, you could consider getting more coverage by taking advantage of different types of account ownership and/or transferring the excess money to different banks.
Last but not least, in my opinion, besides emergency funds and savings for short-term goals, the rest of your money should not stay in a bank's deposit accounts as it will very likely lose value due to inflation in the long run. You could learn more about "The Impact of Inflation" here.