We’ve long been told that the safest place to keep your money is in the bank. Though in comparison to keeping stacks of cash under your bed, it’s a safer option, no doubt. Banks, in general, are a safe place to keep your money. If they weren’t, no one would have a savings account. Of course, the word ‘safe’ can hold a different definition to different people and the risks can change throughout time. When we’re young, we don’t think about the safety of our money in banks. Instead, we simply assume that it’s safe and from there, we pay no more attention to it. But, when you step back and think about it, do you actually know how safe your money is in the bank? Probably not and as money depositors, you should know this.
How do banks work?
Before we even cover the topic of the safety of your money, you need to know how banks function. Historically speaking, the US banking system was run by the 3-6-3 rule. This meant, banks profited by borrowing from depositors at low-interest rates, loaning that money at higher interest rates to borrowers, and then profiting from the difference made. This is where the 3-6-3 rule comes into play. Though it was created as a joke, it was basically how banks functioned. They would borrow money at 3%, loan it at 6%, and then be at the golf course by 3 pm. In addition, banks would also charge a monthly service fee to maintain the accounts which would also provide them extra income. However, eventually, through the deregulation of the banking system in the late 70s, they realized that they would be able to lend out larger loans and charge higher service and transaction fees. Currently, banks have three main sources of revenues: interchange, net interest margin, and fees. What people don’t understand is that they usually end up, in some form, paying their banks to hold their money, even though they may be making interest on their accounts.
What banks are the safest?
Now, you may be thinking, “okay, so, then what banks are the best for me to put my money in?” Well, firstly, you have to acknowledge that regardless of where you invest your money, they’re going to profit off of you. In reality, you have to understand that though banks state that your money is protected, the fact is, that they most likely do not have the money to pay everyone as they’ve already lent your money out to other people. Typically, banks lend out at least 90% of the money to borrowers, this is because they profit from the interest. Though this is inevitable, what you can do is make sure that regardless of what happens in the economic system, such as the financial crisis in 2008, you’ll be able to protect your money in the financial institution it’s in. But how can you do that if they’re all lending out money to borrowers? Good question.
Though all the banks do the same things, if you do your research you can find institutions which offer protective services over the money in your account. For example, banks are backed up FDIC insurance which is a government-backed program that insures the deposits in the bank. Though, this doesn’t mean that all your money is protected. In fact, the FDIC only covers up to $250,000 per depositor per institution. Though, not all banks are insured by the FDIC which means you need to double check and verify that they’re covered. In addition, this protection may vary if you have a joint account or retirement account. Credit Unions are provided protection by NCUSIF insurance, however, they’re also given limits as to how much you’re protected and what accounts are covered.
But what if you have more than $250,000 in an account? Is your money safe? If you have more than $250,000 in a banking account, it’s ideal that you spread those funds across various banks which are insured under FDIC or NCUSIF plans. If you’re thinking beyond this, if you’re concerned about bank robberies, it’s important that you speak to your bank and find out if you’re covered for situations such as those. Though the odds are highly unlikely, it’s always best to be prepared just in case something happens.
Though you may not be worried about the money in your bank, thinking, that it’s too big to fail, you should think again. After the 2008 financial crisis, it’s a clear example that no matter how big a financial institution is, they’re susceptible to crashing. In the long run, it’s best to do your research, choose protected banks and spread your money, not keeping all your eggs in one basket.
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