Are Banks Safe?
The recent bank crisis has led many to question the safety of banks. Increasing and decreasing interest rates are a normal part of the U.S. economy and so is inflation, meaning an illiquid bank isn’t a normal consequence. Generally, banks are a safe place to invest or hold your money, but it’s essential to understand protections and to choose the right accounts.
The following insurance can protect banks:
FDIC: Protects some financial institutions and their investors up to $250,000.
SIPC: Protects brokerage or custodial firm investors up to $500,000.
Private insurance: Some brokerages or custodial accounts have separate private insurance policies that may cover up to $150 million.
Choosing FDIC- or SIPC-insured institutions is crucial to ensure you protect your investments. One of the biggest problems with SVB was that a large percentage of customer accounts exceeded $250,000, meaning the federal government didn’t insure them.
How To Protect Your Money From the Bank Crisis
Investing can be a great way to increase your wealth, but it’s always a good idea to have a strategy in place to protect your money. Inflation and volatile interest rates are a normal part of the economy, so choosing insured banks with a long history is crucial. Here are a few ways to help protect your money from the bank crisis.
Know the Difference Between Banks and Custodians
You have many banking options, and understanding the difference between banks and custodians is a great start. Banks take your and others’ money and invest it into the market, sometimes sharing a small percentage through interest rate returns. Your bank statement shows you how much the bank owes you rather than the amount currently in your account. A custodian works differently, with each account segregated. Custodian accounts store your funds and cannot move your money without permission.
Diversify Your Money
While custodian accounts offer many advantages, they’re not set up for daily transactions, making it important to have multiple account types. Dividing your money into “buckets” can help determine how much to keep in each account type. Keep funds for your daily expenses, including mortgage, gas, grocery, or bills, in a traditional banking account with less than $250,000.
The other bucket includes savings, emergency funds, or money you don’t need to access anytime soon. Move this money to a safer account with a higher yield return, such as a custodian account. Even though custodian accounts aren’t designed for daily transactions, many offer a debit card or checkbook that allows you to access your funds easily.
Diversifying your money also extends your insurance coverage. The FDIC insurance limits are per account per bank, not per person. This means opening multiple accounts or dividing your assets among multiple banking institutions can ensure you’re protected. Diversifying your funds among different bank sizes and types can add another layer of protection.
Research Credentials and Manage Risk
Reviewing a bank’s history before choosing where you’ll invest your funds is also a good idea. Smaller banks may offer slightly higher interest rates to encourage people to transfer funds to them. However, balancing risk with reward is important when choosing the best accounts to hold your funds. Smaller banks are more likely to become illiquid than larger ones with a proven track record. Significantly increasing risk to benefit from a few fractions of an interest rate increase may not be worth it.