The recent defaults of SVB and First Republic have left many depositors wondering: is my money safe in the bank? As I mentioned in Understanding Cash Allocation 101, the FDIC insures all deposits up to $250,000 per depositor, per insured bank, for each ownership category in the event of failure. But what happens when you have more than $250,000 in the bank? In this blog I will discuss some of the ways that you can protect your money and make sure that all your cash is protected.
This is a simple way to make sure all your cash is insured but requires you to be attentive to your accounts. Regular check-ins are necessary to make sure everything is under the $250,000 limit. Spreading your funds over multiple branches of the same bank does not increase your insurance limit.
Diversifying your account ownership categories allows you to have over $250,000 insured without having to use other banks. An ownership category refers to the owner of the account itself. Here are the two ownership categories that allow you to hold over $250,000:
A deposit account owned by two or more people. All co-owners must be living people and must have equal rights to withdraw money from the account. Each co-owner is insured up to $250,000, meaning that you could have well over the limit and still be covered.
A deposit account owned by one or more people that identify one or more beneficiaries who will receive the money in that account in the event of the death of the owner(s). The owner of the account is insured up to $250,000 per beneficiary. Beneficiaries include living people, charities and non-profit organizations.
A sweep account is a bank account that is connected to an investment account. At the end of each business day, the account automatically transfers all of your money in a certain account over a set limit into a high-interest investment such as a money market fund. While the money that is transferred out of the bank account is not FDIC insured, it is typically transferred into stable investments with low levels of risk. Sweep accounts pose the opportunity to earn higher interest than a checking account but they typically come with broker fees which can offset the extra money you make.
Credit unions are non-profit financial institutions that offer the same services as a traditional bank. Similar to banks, credit unions that are members of the National Credit Union Association (NCUA) are insured by National Credit Union Insurance Fund (NCUSIF). Individual depositors of credit unions are insured up to $250,000 as well as certain retirement and trust funds. While credit unions generally have better rates and fees than traditional banks they usually offer fewer products and services such as credit cards and have less physical locations.
When choosing where and how to allocate you cash, security is a top priority. Diversifying your allocation both externally through the use of different financial institutions and services and internally through different account types can help you protect your money in times of uncertainty.
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