How safe is your cash?
The FDIC Limits
The first place, and perhaps the safest place, people turn to keep their cash is a bank to take advantage of FDIC insurance. The insured limit was raised from $100,000 to $250,000 during the financial crisis of 2008, and the increase was made permanent in 2010 by the Dodd-Frank bill. Additionally, through 2012, all non-interest-bearing accounts have unlimited coverage.
The limits apply to each “ownership category,” which includes single accounts, joint accounts, certain retirement accounts, and trusts, among others. So, you could have a single account in your name that is insured up to $250,000, your spouse could have a separate single account insured up to $250,000, and you both could have a joint account that has an additional $250,000 of coverage, for a total of $750,000 insured deposits (just in case you find a LOT of change in your sofa). Also, you get a whole new set of limits if you go to another bank — but it has to be a completely different bank, not just a different branch of the same bank. Use the Electronic Deposit Insurance Estimator (EDIE) at FDIC.gov to determine how much of your cash is covered.
Deposits at credit unions have nearly identical coverage through the National Credit Union Association. You can use the e-calculator at NCUA.gov to determine how much of your deposits are insured. Both FDIC and NCUA insurance are backed by the full faith and credit of Uncle Sam. That doesn’t feel as safe as it used to, but the reality is that it’s about as safe as you’ll find in this world. Just make sure that your bank or credit union really is insured, which you can confirm at FDIC.gov and NCUA.gov.
The insurance extends to what are generally considered cash equivalents, such as checking accounts, savings accounts, money market deposit accounts, and certificates of deposit. The insurance does not cover investments such as stocks or bonds, nor does it cover money market funds, which are very different from money market accounts. What’s the difference? We’re glad you asked.
What’s in a Money Market Fund?
A money market deposit account is essentially a savings account at a bank or credit union that allows for a limited number of checks to be written to third parties. A money market fund is a mutual fund run by a financial services firm, and it invests in short-term debt (with maturities of a year or less) from governments and corporations. Like every other mutual fund, there is no government guarantee behind a money market fund. However, every fund strives keep its net asset value at $1. There have been only two instances of funds “breaking the buck”: one in 1994 and one in 2008. Investors in these funds lost 2% to 8% of their principal.
Chances are, the cash in your brokerage account or IRA is in a money market fund. To see what’s actually in the fund, you’ll need to visit the website of the company that sponsors the fund. (Fund information providers such as Morningstar typically don’t provide analysis of money market funds.)
A Look Into the Fidelity Government Cash Reserves Fund (FDRXX)
As an example, let’s peer inside a fund from Fidelity, the largest provider of money market funds for retail investors. Almost half of the Fidelity Cash Reserves Fund (FDRXX) is in certificates of deposit, almost 12% in Treasuries or government agency debt, and more than 17% is in short-term debt (known as “commercial paper”) from financial companies. On average, the debt in the fund matures in 56 days.
What many investors might find surprising is that most money market funds have exposure to European debt, though funds have reduced their exposure from 30% at the end of May to 10% by the end of December, according to the Fitch rating service. Meanwhile, they’ve been increasing their holdings of U.S. government debt and repurchase agreements (a.k.a., “repos”), which are a form of secured lending and, thus, theoretically safer bets.
But as the name implies, repos include an agreement by which the seller agrees to buy back the security at a later date, at a certain price. If the seller can’t honor the agreement, the buyer — in this case, the money market fund — is stuck with the debt instrument at whatever the price the market is willing to pay for it. The Fidelity Cash Reserves Fund has almost 20% of its assets in repos. The T. Rowe Price U.S. Treasury Money Fund (PRTXX), which you’d think — given the name — is invested just in U.S. Treasuries, actually has more than a third of its assets in repos. The fund’s fifth-biggest holding is debt from General Electric.
As long as the global economy functions in a somewhat normal (albeit slow) manner, money market funds are very safe. However, if there was another “black swan” event such as we experienced in 2008, it would not be a surprise if a few more money market funds “break the buck.”
Where to Turn
We don’t want to overstate the risks of money market funds; the vast majority will maintain a $1 NAV. However, given their low yields — the Fidelity Cash Reserves Fund yields a whopping 0.02% — there are few compelling reasons to say with a money market fund, especially if you don’t need the money in the near term. Financial planner and columnist Allan Roth has written about choosing higher-yielding, longer-term CDs. Even if you have to pay a penalty for getting your money back early, it’s worth getting the extra yield, as long as you can leave the money alone for approximately two years (depending on the yield and early withdrawal penalty). To find the best rates, check out the GRS CD rate finder, which monitors more than 200 banks and displays the 50 highest rates. There’s no reason to get virtually no yield from a money market fund, when you can get 1% to 2% or higher from a CD that enjoys FDIC or NCUA insurance. That’s the kind of risk-reward proposition we like most.
Where do you keep your cash? Know of any banks or credit unions offering particularly good rates? Let us know in the comments.
Become A Money Boss And Join 15,000 Others
Subscribe to the GRS Insider (FREE) and we’ll give you a copy of the Money Boss Manifesto (also FREE)
There are 51 comments to "How safe is your cash?".
Well, I don’t have nearly enough money for a CD (gah), but I will say that I have an excellent rate for my savings account at Wells Fargo (3%). I realize it doesn’t work the same way as a CD, but I’m pretty pleased with the interest.
How did you swing a 3% interest rate at Wells Fargo?
FYI, I don’t see wells fargo rates coming anywhere close to 3%.
Lauren are you sure its 3%? No matter how hard I try, cant find anywhere its more than 1.5% for saving rate, excluding local credit unions, not on internet. Would you tell me please, will immediately transfer all my money there.
I’m sure! I kind of stumbled upon it one day when I went into a branch to sort something out and it was a special they ran for people with my type of checking. I have to transfer money every month to get the interest rate. Also, it’s 3% now, and when it began, but the interest varies between 1.25% and 3% depending (usually hovers around 2ish).
3% is amazing! This must be directly related to the, geez I dunno, 17% they were charging me on a loan way back when… 🙂
For people who don’t trust the government to “bail out” your bank or credit union (as you alluded to), it’s typically not the government itself that pays up, all credit unions pay into an insurance fund (CUNA) that pays out when a credit union goes down. Probably works the same for banks. If the insurance fund was bankrupted, I suppose that’s when the government would have to step in.
My wife and I bring in a signifant income, but we don’t keep a whole lot in cash..just enough for an emergency.
That said, we don’t have more than $250k sitting in cash. But what we do have in cash sits in Discover Bank currently yielding 0.90%…not much, but its something.
On what planet is a quarter of a million dollars not “a whole lot” in cash?? I don’t see how this response is anything but trolling or an excuse to brag. “Just enough for an emergency.” Give me–give us all–a break from repeatedly coming here to show off. Please.
If you had read the article, you would know that any one account is only insured up to 250K. The comment said they don’t have that, so it’s not really a problem. Perhaps you should reread things before flipping out on someone for no reason.
My wife and leave our main savings in online savings accounts. However, I recently saw a reference to a website called Lendingclub.com. The premise of the site is there are borrowers and lenders. The lenders can pick and choose which borrowers they want to loan money too and as the borrowers pay the money back the lenders get their principal and interest back. They state the key to making money is diversifying your loans. They also boast some pretty significant returns on your money. I’m skeptical because it’s essentially unsecured loans so there is no real recourse to recoup your money. Has anyone used this website with success?
I have been using Lending Club for ~ 3 years now. I have about $2500 “invested,” and have had two loans default (for a total of $150), and my net interest is just under 6%. That 6% includes all the lost principle from the two defaulted loans. I’ve now learned my lesson and invest no more than $25 (the minimum) in each loan, since I had $125 invested in one of the two that defaulted. I’m okay with these results (though not happy to have people default on loans I’ve provided money for), as only 2 of my 100 loans I’m invested in have defaulted. Lending Club has an aggressive collection service when borrowers are late on payment. There is even a section that shows each attempt to contact a borrower who is over 30 days late on payment.
I really enjoy using Lending Club (I have more confidence in it that the market, even when the market was okay). I put some of my allowance money towards because it’s fun for me – I never treat it as an emergency fund or as money I can count on (similar to investing in the market).
I think we’re on the upswing so far as bank failures. Even so, I wouldn’t ever store more than $250,000 in a single account.
Also, thanks for covering money market accounts in a way that most haven’t. Despite the public outcry over money market exposure to Europe, the situation is hardly as bad as it was several months ago.
With so many countries nearing default, I don’t feel like my money is safe anywhere. At one point, tech stocks were safe. Then mortgage-backed securities were safe. Could it be now that US debt is safe? (It’s not).
This article is great. Thanks for explaining money market funds and accounts. It’s always good to know where your money is and how it’s being handled. What I got from the article is that no money is “safe.” Do your own research by finding the time to do it. It’s worth it.
I have a pretty large stash of cash sitting with ING. I’ve been meaning to break it into smaller chunks and do a CD ladder. Should make me about half a percent more in interest.
As of yesterday though, Im intrigued with the idea of Treasury I Bonds. If I’m going to lock the money in for a few years anyway, I might as well at least beat inflation.
I used to keep the majority of my cash in ING, but given the lower rates they have now (and they have been regularly decreasing those rates every month or so the past fall). I have moved all my cash to a local credit union – it has comparable low rates. Given the current unstable state of the economy and the world, this would allow me quick access to it. With ING, there is that three-day transfer wait, which might be just too late, if something bad should occur with the economy.
I’ve used ING for years, current APY is .80, I’ve seen some teaser rates but nothing to make me switch. Now that Capital One has bought ING I’ll keep a close eye on any changes they make.
Capital One High Yield Checking is at 1%. They promise 5x the national average for a year. At least in NJ.
I made more $$ in the last month in interest than YEARS at Chase and Valley.
Min is $5k avg but it’s a regular checking account. It’s great to finally break the .01% barrier!
Interest rates in many of these accounts are lower than inflation. Fun to see your money basically losing value as it’s sitting there…
So here’s what I don’t get:
1. Inflation is caused by the Fed increasing the quantity of money (direct purchases of bonds with “created” money, or quantitative easing).
2. You pay taxes on capital gains in your investments – even though much of the gain is due to inflation.
3. So the Government (please don’t start in about the Fed not being Government) causes inflation, and then taxes you on the gains they caused by inflating the dollar?
4. And the Fed artificially keeps interest rates low to try and force savers into higher-risk investments – but when those higher-risk investments tank the Fed has no responsibility?
Why do Americans allow the Fed to stay in business?
And why don’t more people own gold (or other inflation protections)?
That’s what we need. A post on how to protect ourselves from the coming inflation.
If you are worried about inflation then go buy into real estate, commodities, or stocks. All of those increase with inflation, but obviously they have their own risks.
Gold is already inflated, so I wouldn’t go there, pick some other commodity that isn’t swanmped with panicky buyers.
Paul, that’s a great comment. Very well put, in fact that’s the best comment I’ve seen regarding the fed, anywhere. Quite simply, the Fed shouldn’t exist. The market should dictate the price of money. What’s more of a fair price for money than that which someone is willing to pay?
Mark, real estate is also artificially propped up by the government/Fed. Not allowing foreclosures, first-time home buyer incentives, etc. create artificial demand. I like commodities though, especially gold, as it will be the new medium of exchange for the fruits of production soon enough
Local credit unions… reward checking yielding 2.5 to 3%you spy. Only emergency cash though – extra cash is invested in a variety of things (have to beat inflation).
2.5% looked pretty attractive to me too, but then I saw that I make about $250/yr from credit card rewards (Chase’s 1.1% cash back plus 10 points per transaction). That’s about how much the credit union would give me with the max balance of $10,000. So for my situation, it comes out about the same, but the credit card rewards is more flexible.
I am 24. I typically hold no cash reserves – just enough in my checking account to get me through the month. All non-401k savings go directly into index funds in my trading account. Many people may balk at this, but I can liquidate index/ETFS in a few days in the event of an emergency. That’s right, my trading account also functions as my emergency fund.
The only negative scenario I can see is when I must sell stock due to a cash flow emergency AND the market is significantly down. But that’s a risk I’m willing to take; I am very happy with my relatively simple financial setup.
yes, because that never happens…
What’s the big deal. THe Dow Jones is up 6% from last year. Say you sell at a loss, take 1% to sell quickly, you still up 5%, minus fees and taxes and all that you’re still higher than 1%.
Great insight into the money market accounts. Highlighting the European connection is quite important.
I would be very interested in hearing from the GRS subscribers if they know of any safe alternatives to keeping your cash inside the “system” with the usual suspects like, banks, credit unions, and brokers?
The MF Global debacle, where 1.2 billion in customer money went missing (was stolen and not returned to customers) from supposedly legally protected segregated brokerage accounts, is proof positive that our money is not safe with the brokers. The agency tasked with protecting customers funds (SPIC) did not fulfill it’s obligation to protect those customer funds.
MF Global is the proverbial canary in the coal mine and exposes the corruption in the shadow banking system.
If you pay attention to the talking heads on the 24/7 cable channels they’d have you believe the MF Global situation is a one-off event and well contained, but the fact is …. when you discover one cockroach in the kitchen you can be sure there are other cockroaches you cannot see.
Do you think FDIC (just like the SPIC) would function differently in a crisis? Are we are relying on our government to keep their promise (laughing) in the event our Ponzi economy collapses or the banking system seizes up and fails?
If you think you can believe anything that comes from the government, well, history is replete with examples that you cannot. Think about Mexico in 1994….if you remember the crisis, the day before the government devalued the currency 60% they said they wouldn’t devalue.
The government will never tell you what they are about to do, and if they determine it’s politically expedient or important to “save the system” we can be certain they will ignore their obligations… including guarantees promised by the FDIC.
So, any ideas? Where can we keep our cash safe?
Get a home safe – a very large one. Many people rely on these. What with interest rates so low, it is no big deal to keep a stock of cash on hand and many do. As stated above, a quick lock down on the system would make it impossible to get hands on your cash. Additionally, look to foreign countries where they are limiting the maximum amount of transactions to keep tabs on what people do. Cash and barter – leave as little trail of yourself as possible.
Canned tuna, bullets, olive oil is how I will survive the zombie apocalypse. And a vegetable garden if I can swing it. 😀
Have you played Plants vs. Zombies? Those plants are ruthless!
If my grandfather bought gold instead of investments, he would have retired a millionaire. If my father bought gold instead of investments, he too would have retired a millionaire. …I must be stupid not to own the shiny stuff. 🙁
A nice risk/reward post. I’m with you: right now the ends don’t justify the means.
I have some of my cash in two rewards checking accounts, both started out at about 4% interest but over time dropped to 2%. I get the high rate up to $25,000 deposited per account. One account is at First Bank and Trust in Sioux Falls, SD. At the time I was able to get a checking account there even thought I did not live in the state. I think they changed that now. The other account is with NARFE Premier Federal Credit Union in Annandale, VA. NARFE is National Active and Retired Federal Employees Association. For these checking rewards accounts, you have to make about 10-12 debits per month and have one direct deposit, electronic statements etc.
But I am moving some of my cash money to Treasury I-bonds. I bought $5K electronic and $5k paper last year, and bought $10K electronic this year. What I like about the I-bonds is that I can defer the taxes on the interest earned. Money is locked up for 1 year, and you lose 90 days interest if you redeem in less than 5 years.
I also am a lender in Lending Club. Started several years ago with a couple of hundred dollars invested to test/learn the system and now have expanded to about $8K earning about 10% annual return. I pick each loan individually rather than use an automated tool, although this is more time consuming. I am reinvesting the repaid principal and earned interest, but if I wanted to I could transfer the money out of the account. Lending Club also is linked to a secondary market where lenders can sell their loans to others, although you may have to discount the price some to do that. Another way of cashing in if I can’t wait for all the money to be paid back.
However, the money you lend is in unsecured loans (no collateral) and people can and do default on their loans, causing a loss to the lenders. Lending Club screens out the worst types of borrowers and you have the ability to screen further based on criteria you select. Losses can be deducted from your income for tax reporting. The interest rates are relatively high (5-25% depending on borrower credit rating)to offset some of the default losses. But you need to have a lot of loans in your pool and make each loan as smaller as possible ($25) to keep the risk down. There is also the risk of the company failing. Lending Club is increasing their business every month and year but they still don’t make a profit. They have brought in some larger institutional groups to lend money to their borrowers- I see that as a good sign.
I dropped out of Prosper Lending a few years ago (except for a few remaining loans) when they had to stop making loans for a while due to SEC registration problems and I read some blogs about how some thought the company might not make it financially. So the peer-to-peer lending in not really “safe”. But I figured I have many more dollars at risk in the stock market and thought it might be a good idea to put some money into a different kind of financial investment to diversify my money. But don’t put your rent money into Peer-to-Peer Lending. It is at some risk and the loans are for 3 or 5 years, although you get paid back monthly.
I am also looking at some of the Vanguard bond market funds, like the tax exempt CA municipal bond fund, which has selected higher rated municipal bonds.
Great post! It makes so much more sense to put your money in a CD!
I just keep my cash at my credit union. Nothing too fancy there.
What do you think about putting some money into a microloan program such as Kiva where you earn better interest rates and they reclaim a repayment rate of 98.91%?
Cash is 100% liquid, but I’d guess Kiva isn’t, is it? “Scuse me Mr. Goat Shepherd, I have an emergency and I need to collect on that loan today,” says you.”But I haven’t taken my goats to market yet,” says he, “I need another three months.” “Dang! That ransom isn’t going to pay itself!” says Napoleon Dynamite.
Foiled again. I started to read the article but got sidetracked by the horrific interest rates. I think I’d rather have a the goat herder making use of the cash than it sitting there collecting dust 🙂
So, Robert, my summary of your article is that long-term CDs are safer than other kinds of cash while offering some protection against inflation, yes? (Unless we’re having deflation at the moment– I doubt it, judging by the price of food).
How do you know this is a good place to park your money without taking into account inflation in the next 2 years? I guess my question is– why would somebody who is trying to get “rich” slowly want to have 1/4 million dollars in savings, right now? Wouldn’t my 1/4 million dollar be working harder with little difference in liquidity elsewhere? The Dow Jones maybe?
A joint account would have $500k of FDIC insurance, not the $250k stated in the article. The total coverage under the scenario would be $1M, not $750k.
In Canada, the CDIC (equivalent of American FDIC) only offers $100,000 coverage on each registered account. Probably because each of our “Big 6 Banks” is “too big to fail”. The collapse of just one of those banks would bankrupt the CDIC. What a terribly ineffective socialist program.
We keep our money spread amongst various institutions that are FDIC insured. AMEX Savings, Sallie Mae, ING, HSBC and Fidelity. Out of all them, Fidelity is the only one that has money which is not FDIC insured, but SIPC insured.
In short, kept max of $250K per bank account (if single name) or $500K if joint name since the insurance is per SSN.
Even then, spread it out. MF Global is a different issue and a non-FDIC insurance problem.
Banks that were offering special high (unusual) rates have all gone bankrupt, and more to come.
The rate of bankruptcies have gone down, but that does not mean it will not happen, or accelerate again.
USD should start a decline, and therefore moving money into C$ or Aust$ or SwissFrancs makes a lot of sense. One can do that if sophisticated, and venture-some. But, do it officially.
Finally, never move money into an unusally high yield stock, ETF, REIT, Trusts or Annunities, since that is usually temporary, and it will cost you MORE in the end.
Good luck y’all.
Kenny
We’ve got our cash in 3 separate bank account… at 3 separate banks. His, mine and ours. That being said – the vast majority of it is invested in stocks, mutual funds, bonds and real estate. We’re quite young and willing to take a bit of a risk, but as we grow older we’ll start buying more safe investments.
So many options! aaahhh!
The money in Europe scares me a tad. However, money in a money market fund is extremely safe I believe
I leave my cash in a FDIC-insured, high-yield checking account, which offers 4% APY so long as I make the required number of debits per month with my check card. There are a number of banks (mostly small credit unions) around the country offering similar rates or higher. Some are available only to local residents, or require a branch visit to open an account, but others are available nationwide and can be opened online or over the phone.
To find one in your area, check out depositaccounts.com, and look under checking accounts > reward checking. That site does an excellent job of not only listing current offerings, but also providing background info for each institution so you know who you’re dealing with before you open an account.
I love reading the distrust issues and people who think we are on the precipice of the apocalypse. If you are over the age of 25 or just, you know, read history, we have teterred numerous times and always come through. Oh, and let’s not wallow/brag about the “Great Recession” and even TRY to compare it to the GREAT DEPRESSION. Love them or hate them, our current system used tremendous measures we’ve built up over the years to slow and stop the recession.
Which is now over, by the way, if you read economics.
That said, I have no problem with any of the banks that survived. I have a local, a credit union, and a “big” online bank. You have to diversify to alleviate risk. Period. Even with cash. I keep a small handout amount at home for things like a fast emergency repair (you’d be amazed the discounts you can negotiate with a plumber at 3AM if you’re paying in cash) as well as laddered CDs, non interest checking, interest bearing accounts, etc.
Some people like to poop on those of us who have some cash spread around because we have “more” money. That’s part of the long term issue each person can fix. I went out to the movies last week and I’m declining an invitation this weekend to keep my budget in check. It takes time. I am by no means a top wage earner, but continuing to read these articles is motivating.
Someone said “don’t resent, replicate”. I’ll never be a Warren Buffet, but I’ll still keep my eyes on long term wealth and value when making any money decisions, and I’m far better off now than I was 5, 10, 15 years ago…
Jackowick – your comments show you have an excellent grasp on the last 30yrs of US history, but no recollection whatsoever of economic or historical events beyond that.
Call it “distrust issues” if you will, but a 15.5 trillion dollar national debt and 80 trillion in unfunded liabilities could lead us to an ugly 1-in-50 or 1-in-100-year economic event. It’s painfully naive and frankly, shows a shocking level of hubris to dismiss out of hand the possibility of deflationary depression similar to what Japan has been mired in for the last 20yrs, or the US experienced in the 1930s. In the last 20yrs, Japan has seen their stock market drop 80% and their housing market drop 70%.
People can’t seem to envision the consequences of a default or imagine a decades-long depressionary funk. Most people suffer from a “normalcy bias” (wherein participants assess the probability of an event based on whether relevant examples are cognitively “available”), the Pavlovian cyclically of thought, or the extraordinary delusions of group-think.
Perhaps the biggest problem we have today is peoples lifetime experience is no longer a reliable guide to the future. This is a moment in history when the things that have been true for our entire lifetimes may have ceased to be true.
I do NOT believe we are headed for a biblical-style apocalyptic event, nor do I have a stock pile of weapons, wear a tin hat, or can my own fruits/vegi’s, but I do believe our 30-50 year virtuous cycle of credit expansion which has produced outsize paranormal returns for financial assets — bonds, stocks, real estate and commodities alike is coming to an end. I think risk assets are going to begin to delever because of excessive “risk” and the “price” of money at the zero-bound.
In my opinion, we will soon witnessing the death of abundance and the borning of austerity. Our economy is in transition from a levering, asset-inflating secular economy to a post bubble delevering era.
Our credit-based financial system has become egregiously overlevered and has assumed far too much risk long, so an economic meltdown is highly likely and probably something we need to go through. It’s atonement. It’s atonement for the sins and the excesses of the past.
Jackowick, this may be just as difficult for you (and others) to imagine as your departure into the hereafter, but just because you’ve never experienced something before doesn’t mean it isn’t possible and can’t happen.
Back to the topic “How safe is our cash” … going forward, a return of capital is much more important in the next few years than return on capital.
– Contrarian
My grandfather always used several banks to ensure all his money was FDIC insured. I do the same thing just to make sure I always have access to some funds no matter what happens with a specific bank.
Daisy
I believe the stock market is becoming one of the only ways to really stay ahead of inflation in this economy. It doesn’t have to be risky or complicated to invest either. If you have a group of solid companies with high dividend yields, you can do quite well with little risk.