Three Tips to Protect Yourself from Bank Failure

by Kevin on April 5, 2010

In my last post I showed you how to check your bank’s health with two different rating systems.

Hopefully your bank is in great shape and has a high rating.

But what do you do if it is rated poorly?

How to Protect Yourself from Bank Failure

If your bank doesn’t have the best rating you need to take steps to protect your assets. Here are three steps you can take to help protect your finances from potential bank failures.

Never Exceed FDIC Maximum Coverage

The FDIC currently provides $250,000 of maximum deposit insurance per person per bank. The coverage was temporarily bumped up from $100,000 to $250,000 during the recent financial crisis. The maximum insurance will drop back to its normal level of $100,000 on January 1, 2014.

The easiest way to protect yourself from bank failure is to make sure that if your bank fails you don’t lose any money. And the easiest way to make sure you don’t lose any money is to make sure you are under the maximum FDIC coverage. If you’ve got $99,999 in your checking account and your bank fails overnight you will get every last penny back.

Never go over the FDIC maximum coverage. Ever.

(Also, note that the coverage is for all of your assets at one bank. So if you have a checking account with $50,000 in it and a savings account with $55,000… you would be over the normal $100,000 limit.)

Never Let One Bank Control All of Your Money

On top of staying under the FDIC maximum coverage, I highly encourage you to spread your money around to multiple institutions.

Of course there is a trade-off here. You don’t need 10 bank accounts. That gets confusing and hard to manage.

But I definitely think having at least two accounts is a good idea.

Why?

Even if you stay under the FDIC coverage limit, if your bank fails it can be months before you actually get the money back. Yes, you will get it back.

But what if you had all of your money in your account? You’ve got bills to pay and a budget to stick to. Suddenly not having any money on hand becomes a major problem. (Imagine looking at your budget planner one day and where there should be your monthly budget instead there were zeros!)

Splitting up your money between two banks guarantees you that you will have immediate access to some money if one of the banks fail. I think that is great self-insurance and a step worth taking.

Get to Know Your Banker

I cautiously put this as the third tip to protect yourself from bank failure.

Don’t get me wrong, I think knowing who you are banking with is key. Since most of the good rewards checking accounts I see out there are at smaller local community banks, you need to know who you are dealing with. Sitting down over coffee and discussing the bank’s situation is beneficial.

At the same time, your banker needs you. He’s a salesman for his firm just like you are for your firm. So take his words with a grain of salt.

If All Else Fails Find a New Bank

If your bank is in bad shape and you just don’t think it is worth sticking around to see how it turns out… by all means find a new bank. Much better to deal with the hassle of having to change direct deposits and order new checks than to lose access to your funds for a long period of time!

Your thoughts? How else can you protect yourself from bank failure?

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brooklynchick April 6, 2010 at 7:36 am

I don’t know if this is rational, but I do all my daily (checking account) banking with a local credit union. I think that a smaller local bank is probably more risk-averse and thus safer. Who knows if that’s true!

And, as said above, I split my $ – retirement at Vanguard, shorter term savings at ING.

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Budgeting in the Fun Stuff April 6, 2010 at 3:06 pm

Good points! We’re spread mainly between ING Direct and Smarty Pig with a small amount in Chase as well. We also could cash out some Scottrade money if the need arose.

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