Savers who have built up a large cash balance may be hesitant to invest all of it in the stock market, as doing so may come with risks.
But these savings may face another type of risk, especially if they have more than $250,000 saved through a single institution.
How the $250,000 insurance limit works
Federal Deposit Insurance Corporation (FDIC) insurance protects up to $250,000 per depositor, per insured bank for each category of account ownership. If you bank with an insured bank, your first $250,000 is protected in case the institution goes under. The National Credit Union Administration (NCUA) offers similar insurance to credit unions. However, if your balance exceeds $250,000, it is no longer fully protected.
A saver with a $100,000 checking account and a $200,000 savings account at the same bank may have $50,000 uninsured. It’s fine if the bank stays in business, but that unsecured money can disappear if the bank goes out of business. Having multiple checking, savings, certificates of deposit (CD), and money market accounts at the same insured bank will not solve the problem since they are often pooled together for FDIC insurance purposes.
The FDIC only covers deposit products. Any stocks, bonds, cryptocurrencies or annuities will not be covered by FDIC or NCUA insurance.
Why uninsured deposits can be a problem
Bank failures are rare, with only two bank failures reported last year, according to the FDIC. However, bank failures can increase during economic depression, as 2009 and 2010 both saw more than 100 bank failures.
Even if bank failures are statistically rare, why take that kind of gamble on a problem that is so easy to fix? If you have more than $250,000 in the same bank, you can open an account with a different financial institution and transfer more money.
Ways to protect your extra money
Spreading money across FDIC-insured banks or NCUA-insured credit unions is an easy way to protect your money, while having separate account ownership categories can also help. Joint accounts, trust accounts and certain retirement accounts are also viable options if they make sense for your financial and legal situation.
Some banks make it easy by offering money-sweeping programs that spread deposits between partner banks. (Though it’s never a bad idea to contact an institution and make sure all your money is protected.)
Saving a lot of money
Having more than $250,000 in your bank account may also not make sense in terms of long-term savings. Investing in the stock market offers much higher returns than keeping your money in a savings or checking account, or similar alternatives such as CDs.
Financial advisors often recommend keeping at least enough money in a liquid account to cover three to six months of living expenses. While you may want to keep more on hand depending on your goals, risk tolerance and time horizon, you may want to consider investing some of your money.
