Invest wisely
Breaking the Bank: How Safe Are Your Savings?
CBN.com
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In almost any good-sized city, many of the largest buildings are likely to be bank buildings. An impressive edifice sends an important message to customers: "Our bank is solid and successful. We're here to last."
Bankers know that customer confidence is one of the keys to a bank's health. If confidence were to waver, a bank could go into a financial tailspin.
With the collapse of more than 40 banks over the past year (most overwhelmed by problem loans), the banking industry is on edge.
To shore up customer confidence the American Bankers Association--the banking industry's trade group--issued a list of "talking points" to member banks, emphasizing that banks are "well-positioned to handle economic downturns" and that "customers' deposits are protected."
So, if bankers are feeling nervous, should you be, too? The answer is both yes and no. A systemic banking crisis, if it comes, won't be pretty (remember the S&L meltdown?). Still, it is unlikely, even if your bank were to fail, that you would lose a penny--unless you have a great deal of money in that one bank.
Through the end of this year, the level of insurance for most bank deposits has been raised to $250,000 per depositor by the Federal Deposit Insurance Corporation (FDIC), a federal agency. (The level is set to revert to $100,000 on Jan. 1, 2010.) Joint accounts are covered up to $500,000. In some states, deposits may have additional state coverage.
Today, when a bank fails, it usually reopens--with new owners and under the close supervision of federal banking officials--within just a few days. Behind-the-scenes arrangements between the purchasing bank and the FDIC allow the "new" bank to have ample cash on hand for frightened customers who may want to move their money elsewhere.
But even with the relatively smooth business transition that occurs after present-day bank failures, it's simply not wise, given deposit insurance limits, to have more than $250,000 in any single bank.
To spread your risk, you can simply move a portion of your savings (anything over the insurance limit) to another insured bank. The accounts will be insured separately, so even in the unlikely event that both banks were to fail, you wouldn't lose any funds.
For CD accounts, you can get additional protection by signing up for the Certificate of Deposit Account Registry Service (CDARS), which makes it possible to have your CDs insured up to a limit of $50 million! Here's how: Banks in the CDARS network split large CD deposits into smaller chunks, which are then spread among other member banks, so that the amount in any given bank is below the FDIC limit.
Some online brokers are now adapting the CDARS model to cash accounts, giving customers a way to "spread the risk" without having to open multiple accounts. A client's cash deposits with a broker are split into smaller amounts and simply re-deposited in multiple banks, thus raising the effective limit of FDIC insurance. One such broker, FOLIOfn, promises "extended FDIC coverage" of $6.5 million.
Of course, you may not need millions in coverage. But given the current struggles in the banking industry, it's worth adding up how much you actually do have in any single bank, and, if necessary, taking steps to protect it.
A little attention now can ensure that you'll never have to stand outside that impressive bank building in a long line of worried depositors, wondering if all your funds were insured.
In short, then, stop procrastinating, get in the game, stay in the game, keep things simple, and think long-term.
Sound Mind Investing exists to help individuals understand and apply biblically-based principles for making spending and investing decisions in order that their future financial security would be strengthened, and their giving to worldwide missionary efforts for the cause of Christ would accelerate. In other words, we want to help you have more so that you can give more.
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