With the news of the Silicon Valley Bank collapse and banking unease in the United States, many Americans are wondering, “is my money safe in the bank?” It’s not surprising that this news has rattled many of us. We’re told that keeping our money in a bank is the most risk-averse, conservative place to store our money rather than in riskier vehicles that are more exposed to the volatility of the stock market.
But the recent banking situation has people wondering if they should reconsider the places they keep the bulk of their money.
Should I pull my money out of the bank?
Now is not the time to panic, say industry experts. Keeping a large sum of money at home in cash is never a good idea, security-wise. As long as you manage your finances effectively with an institution that is FDIC-insured, you can have peace of mind that your money will be safe.
FDIC: the acronym that’s front and center
The FDIC (Federal Deposit Insurance Corporation) is an independent agency of the US, a government body that protects depositors by insuring their money in the instance of an event like a bank collapse. If the institution in which you keep your money is FDIC-insured, rest assured that your money up to $250,000 is safe. The National Credit Union Administration is the equivalent insuring body for credit unions.
If you have more than $250,000 in your account, say if you own a cash-flow heavy business with many deposits coming in, there are several steps you can take to ensure your cash above the FDIC insurance limit is safe:
- Split your money between different banks: Say you have $2 million in one bank. You can consider splitting it into eight different banks with deposits of $250,000 each. Just make sure you’re choosing reputable banks that are FDIC-insured.
- Open joint accounts with your spouse: Since FDIC-insurance works on a per depositor basis, if you have two depositors sharing one account, you can get insurance up to $500,000.
Should I look for alternatives?
If you’re wondering of other places to store your cash apart from traditional checking or savings accounts, consider the alternatives. In the current high interest rate environment, it may benefit you to consider storing money in account where you can take advantage of historically high interest rates, for example, many banks and online providers are currently offering high-yield savings accounts, Certificates of Deposits (CDs) and money market accounts around 4% interest – significantly higher than the traditional savings account average rate.
For more details about the features and benefits of each of these alternatives, read our blog: Discover Safe and Better Alternatives to Savings Accounts.
The great thing about these accounts? If you open them at institutions that are FDIC-insured, chances are, the money in these accounts will be FDIC-insured up to $250,000, just like in a traditional bank account. As opposed to other investment vehicles and funds, which are rarely insured against investment loss.
How to decide where to keep your money
Where you decide to keep your money is a personal decision, that depends on you and your family’s financial situation. Note that if you keep your money in an alternative to a traditional checking account or savings account, there could be limits on withdrawals. So, if you think you’ll need to take out money multiple times per month, a vehicle like a high-yield savings account or a CD with a time limit might not make sense.
But, a money market account typically provides you with a debit card and checking pad linked directly to your account. So, you can withdraw money much more easily.
Considerations for money market accounts
Money market accounts may have minimum balance requirements, transaction limits, and other restrictions that can make them less flexible than traditional savings accounts. Additionally, while money market accounts are generally considered to be low-risk investments, they are not completely risk-free. The value of the securities in which the bank invests the funds can fluctuate based on market conditions, which can affect the interest rate that the account holder earns.
Where does the bank actually put your money when it goes into a money market account?
When you deposit money into a money market account at a bank, the bank typically invests your funds in a variety of short-term, low-risk securities such as government bonds, certificates of deposit (CDs), and commercial paper.
Since money market accounts are considered to be relatively low-risk investments, the securities in which the bank invests the funds are generally short-term and highly liquid. This means that they can be quickly bought and sold without a significant impact on their market value.
Overall, whether placing your savings in a money market account is more or less risky than placing it in a traditional savings account depends on your individual financial goals and needs, as well as the specific terms and conditions of each account. It's always important to carefully read and understand the terms and conditions of any financial account before opening it.