Do you think it’s safe to deposit $250,000 in a savings account? Here’s why you might not
The advantage of keeping your money in a savings account or certificate of deposit (CD) is that your principal is protected from loss. When you invest money in stocks, there’s always the possibility of losing some, so your initial investment of $10,000 could end up being worth less than $8,000. However, if you invest $10,000 in an FDIC-insured bank, you are guaranteed not to lose a penny of that $10,000 if the bank fails.
However, FDIC insurance is not unlimited. Rather, you can be protected up to $250,000 per person per bank. And it doesn’t matter how many accounts you have at one bank. gun The amount of protection per institution is $250,000. By having a joint account holder, you may be able to double your FDIC insurance coverage at certain banks.
Considering these rules, you can assume it’s safe to deposit $250,000 in a savings account at a single bank. But that’s actually a bad idea.
If you do not want to exceed your FDIC insurance limits
If you have $250,000, you might think it’s okay to put it all in one savings account. And if you’re thinking, “Who the hell has $250,000 in cash these days?” Many people consider saving up for a down payment on a home until they are ready to buy. Considering home prices today, it’s not inconceivable to come up with $250,000 for a home when purchasing real estate in an expensive part of the country.
The reason you shouldn’t have $250,000 in a single savings account is simple. Once you start earning interest on that money, it will exceed $250,000. And there you go, you lose FDIC insurance on some of your money.
So let’s say you deposited $250,000, and after a few months your balance grows to $252,000 because you’re earning a decent amount of interest on it. If your bank goes bankrupt, you risk losing $2,000 in interest. And while you might argue that this isn’t a huge loss for someone with $250,000 in the bank, it is a loss nonetheless. So why take the risk?
Consider spreading your money around
If you have $250,000 or something close to it that you want to keep in cash for the short term, it’s usually best to spread it out across two or more banks for full FDIC protection. If you have exactly $250,000, you might decide to keep $225,000 in one bank and the remaining $25,000 in another bank.
Remember, any FDIC protections you may be eligible for apply on a per-bank basis, not on an individual-by-individual basis. No matter where your money is stored, you’re not just guaranteed a total of $250,000. Rather, you will receive $250,000 worth of protection per bank. So, if you have accounts at four institutions, that’s $1 million in total protection.
Of course, most people don’t have to worry about having a $250,000 excess balance in a single savings account. However, if you’re splashing cash for a short-term goal, keep your limits in mind so you don’t risk potentially losing money.
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