Top Tips on How to Bank Safely

What do Banks and Marriages have in common? 

Answer: Once you start losing trust and confidence, the whole thing can collapse like a house of cards. That’s what happened last month to Silicon Valley Bank, kicking off a banking crisis in the US and Europe.

There is one important difference in this analogy though. With money and banks, you have the backing of the US government. In the case of SVB, the FDIC took over the failed bank and promised depositors that they would be made whole. So unlike marriage, you have a guarantee that you won’t be left hanging.

That said, it’s still scary to hear about banks failing. So what practical steps can you take? The FDIC protects deposit accounts up to $250K per person, per account, per account category. So if you have more than $250K at one bank, make sure it’s spread out across different account types. $100K in a CD and $200K in a savings account under your name would not be fully covered. But $100K in a CD under a joint account and $200K in savings under your name would be.

My rule of thumb is to keep relationships with at least two banks. One bank is for day-to-day use where the priority is convenience and low fees. We use Schwab because it offers unlimited ATM fee rebates worldwide, a godsend when you’re traveling as much as we do. As for a second bank, I’ve switched around based on what’s been most important. For example – If you care about impact, you might choose a community development bank or credit union. If you’re taking out a mortgage or a home equity loan, you might shop around and use whoever has the best terms.
I used to move my money around banks in order to get the highest savings rate. But it’s a PITA to open new accounts. I find it far easier to put the cash into my brokerage and have my pick of whichever money market fund or brokered CD is yielding the best rate.
What about the money in your investment accounts, IRAs and 401ks? It’s important to point out that money placed in brokerage accounts is very different from money in banks. When you deposit cash at a bank, they loan it out in order to earn a profit. And if something goes awry with the loans (which is what happened in the 2008 crisis), or if someone famous like Peter Thiel starts spreading concern about the declining value of those loans (which is what happened with SVB), it can lead to bank runs and failures.
When you have money in a brokerage account, the broker is only buying and holding assets for you. Your assets are legally required to be segregated from the broker’s assets. So even if your brokerage (e.g. Schwab, Fidelity) went belly up, you’d still be holding your assets. Furthermore, each account has $500K of SPIC insurance, including $250K on cash.

So in short, to be safe you should not keep more than $250K in any one account type at any one bank. Otherwise, as a long-term investor you needn’t lose any sleep on the SVB fiasco.

Now, if only there was some way to put a guarantee on your marriage…