Recently a company based out of California that promotes buying gold suggested that banks no longer provide FDIC insurance for your savings and deposits. This misinformation has lead to a lot of angst for depositors, so I thought it was a good time to discuss your ‘safe’ money.
For the broad general public, there are three choices:
Cash. Yes, more people than you might think are actually holding cash. Assuming you keep it in a safe place, there is no risk of loss except inflation, which can erode wealth over time.
Bank Certificates Of Deposit (CDs). You will need to confirm with your financial institution, but most banks insure deposits (FDIC) up to $250,000 per account. If you are married, you could have one account in your name, one account in your spouse’s name, and one account that you both own jointly (joint accounts are insured for $500,000) for a total of $1,000,000 of insured deposits.
Money Market Accounts
Money Market Deposit Accounts (MMDAs). When we think of money market accounts, typically held at financial institutions, we trust that the FDIC backs the funds. These accounts are interest-earning savings accounts with a higher yield than a standard savings account and can offer check-writing privileges. Usually, the accounts have transaction restrictions on the number of withdrawals and checks written on the account. They also typically require a minimum deposit to open the account and an ongoing minimum balance to receive the highest interest rate. Money market deposit accounts offer more flexibility than a CD and are considered more valuable as a short-term investment. To learn more, Investopedia has a great guide for these accounts.
Money Market Funds (MMFs). These funds are typically held at brokerage firms, and we believe that our money is 100% safe from losses. Generally, this has been the case for decades as MMFs are considered extremely low-risk on the investment spectrum. Most people do not understand that a money market fund is typically a pool of very short-term, high-quality bonds and commercial paper. The value of the investment pool actually rises and falls based on changes in interest rates…meaning a $1,000 deposit could technically be worth less than $1,000. What happens is the institution holding your money manages this floating value, so your account always shows $1,000. In most cases, this is not a guarantee, and there have been instances where the ‘dollar was broken’…meaning you got back less than $1,000. Generally, this does not concern me, but I am mindful of who I place my money market funds with. Learn more about these funds here.
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Stewart H. Welch, III, CFP®, AEP, is the founder of THE WELCH GROUP, LLC, which specializes in providing fee-only investment management and financial advice to families throughout the United States. He is the author or co-author of six books, including 50 Rules of Success; J.K. Lasser’s New Rules for Estate, Retirement and Tax Planning- 6th Edition (John Wiley & Sons, Inc.); THINK Like a Self-Made Millionaire; and 100 Tips for Creating a Champagne Retirement on a Shoestring Budget. For more information, visit The Welch Group. Consult your financial advisor before acting on comments in this article.
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