Will My Money Be Safe?

I’ve heard from many, many readers over the last week worried about the country’s current financial situation and worrying whether their money is safe. My response is that unless you’re doing something highly risky with your money, it’s probably safe. Let’s walk through some of the information you need to know.

Cash accounts (savings, CDs, etc.)
Virtually every savings account in the United States is insured by the Federal Deposit Insurance Corporation (FDIC) for up to $100,000. In short, the first $100,000 of your savings account balance is guaranteed by the federal government. FDIC insurance covers checking accounts, savings accounts, trusts, and certificates of deposit.

If your bank collapses and your account has less than $100,000 in it, you’ll transparently have your account moved to another bank with the same balance. There may be a hiccup in your interest earnings, but that’s all. If you have over $100,000, your first $100,000 will be moved transparently as described above, while the rest has at least some chance of being recovered, as depositors get first crack at the assets of a failed bank. Here’s detailed information on how the FDIC handled the failure of Silver State Bank in Henderson, Nevada.

If you are concerned about your bank’s liquidity, I’d take the advice of CNBC’s Carmen Wong Ulrich and immediately get a paper copy of your most recent statement. You can use this as at least some form of paper trail if, for example, you’re hit with identity theft right as your bank fails. I’d do this fairly regularly, especially if I were a customer of a bank that has grave concerns.

Money market accounts
Some people have expressed particular concern about money market deposit accounts, especially after the Primary Fund actually lost value a few days ago, the second time any money market fund has ever lost money.

First, there’s a difference between a money market deposit account and a money market fund. The former, a deposit account, acts much like a savings account for most people with a varying interest rate. These are FDIC insured. If you have a money market account down at your local bank, it’s insured just like your savings account is.

A money market fund is an investment vehicle that is meant to be a very safe place for people to park cash in large investment accounts. They generally have a very low rate of return, but they’re usually incredibly safe in that low return. The Primary Fund lost some value recently, meaning that the fund had a negative rate of return for a short period because the fund owned some assets controlled by Lehman Brothers. When Lehman Brothers went poof, The Primary Fund realized they weren’t going to get their money back, so they wrote it off as a loss, and that loss made the entire fund lose enough value that it was suddenly worth less than what had been deposited.

In short, if you have less than $100,000 in your money market deposit account, you really don’t have much to worry about.

Investment accounts
What about other investment accounts? First of all, no investment account is insured against market risk. If you own a stock and the value drops, it’s not insured – you’ve lost that money. Insurance only matters if the company managing your investment account fails.

IRAs are actually guaranteed by the FDIC up to $250,000, as described in their FAQ. If the company managing your IRA fails, the FDIC will step in and take care of it up to the first $250,000, moving it to a new manager.

And other investments? Most other investments are insured by the SIPC – the Securities Investor Protection Corporation – for some amount, usually $500,000. You’ll want to check with the specifics of your account to make sure that it’s insured – dig into the fine print.

The procedures for failure of an SIPC account are much the same as an FDIC account failure – it’ll be gradually transferred to a new brokerage. And, as with FDIC accounts, if you’re worried, make a paper trail. Print off all the information you can and have it on hand.

Are all these programs stable?
Obviously, the advice I’ve given above is predicated on the stability of those government programs. Are they stable? To put it simply, if they’re not stable, the United States itself isn’t stable and we’ve got much bigger problems than such insurance programs. Given the amount of money flowing into the federal government in terms of tax dollars, I would tend to believe that the FDIC and SIPC will never fail unless the country is failing, in which case $100,000 will have roughly as much value as Monopoly money.

In short, I wouldn’t worry about it unless you’re actually under the belief that the United States is about to fail.

What should I do?
The first thing I would do if you’re worried about these issues is make sure your accounts are all FDIC and SIDC insured and have a master information document so you have your key account information at your fingertips.

I would also print out copies of online statements from my banks and brokerages and keep any mailed statements, just as a matter of course.

One final step: get informed about politics. Surely, you now realize that this financial situation is serious. The root cause of it can be found in Washington. Do the research and find out where each candidate stands on the issue of the day. How will they handle the economy? What do their histories say about their ability to handle economic situations – did they handle them well in the past? What about their key economic advisors? Are the candidates prepared to lead? Are their running mates similarly prepared? Get independent facts – that means not relying on Fox News if you’re leaning conservative and not relying on MSNBC if you’re leaning liberal. Read the candidates’ Wikipedia entries. Read where they actually stand on the issues. Most important of all, decide, in your heart of hearts, what issues really matter to you – don’t let personalities and a desire to “break barriers” or trivial issues like marriage rights swing your vote at all. The real issues this time are too important.

(Kindly do not clog the comments with political commentary – any mention of any candidates will be deleted. The topics here are more serious than that – let people do their own research and make up their own minds.)