When Your Bank Deposits Aren’t FDIC Insured: Why Deposit Insurance Matters

Understanding FDIC limits can keep your cash safe in the bank.

Understanding FDIC limits can keep your cash safe in the bank.

 

When the stock market experiences choppiness and the global economy teeters, investors wonder about the safety of their money in the bank. In the U.S., we’re fortunate that our cash, with certain limitations, is protected by the Federal Deposit Insurance Corporation (FDIC). This means that as long as you keep your deposits within the limits, your cash in the bank is safe, no matter what happens to the bank.

Here are 5 things to know about the FDIC and your money.

 

FDIC insurance limits

During the global financial crisis that began in 2007, the FDIC limit was raised from $100,000 per depositor, per account type, per institution, to $250,000. This means that a couple can keep $1 million in a single bank: $250,000 in the first spouse’s name, $250,000 in the second spouse’s name, and $500,000 — or $250,000 each — in a joint account held in both their names. If you hold more than this amount in cash, you may want to open accounts at multiple banks.

 

Banks involved

Most U.S. banks are part of FDIC. Those that are will display the FDIC logo on their website and in their branches. If you don’t see it, ask, or check the FDIC website.

 

What’s covered

Here’s the list of accounts that the FDIC insures at banks: “checking, NOW (Negotiable Order of Withdrawal) accounts, savings accounts, money market deposit accounts, and certificates of deposit (CDs).” Note that money-market funds are not a bank product and don’t fall under FDIC protection. What’s also not covered are any investments you hold: “stocks, bonds, mutual funds, life insurance policies, annuities, or municipal securities, even if you purchased these products from an insured bank or savings association.”

You can check to what extent your own accounts are covered with the FDIC’s Electronic Deposit Insurance Estimator.  

 

Ways to get more coverage

Some banks hold multiple bank charters and may spread your deposit accounts across these charters. That will increase the amount of FDIC insurance you are entitled to claim. Ask your bank about this.

 

Managing your accounts

If you hold a significant amount of cash, spreading it out among different institutions in FDIC-insured parcels is a smart way to increase your amount of deposit insurance. Be sure to monitor the accounts so that your cash doesn’t exceed the limit at each bank. Max handles this automatically for members. Learn how Max can help you optimize your FDIC-insured cash.

The Role of Cash in Investor Portfolios

There’s global-volatility-roller-coasternothing like a little reprise of global market volatility to remind us that stocks don’t always go up.  That’s no reason to panic, of course, but sometimes it’s good to take a moment to reflect on portfolio theory and appreciate why most advisors don’t advocate a 100% allocation to equities.

Here at Max, we are not financial advisors, nor do we offer financial advice. Our goal is simply to help individual investors earn as much as possible on whatever portion of their portfolio that they — or their advisors — have chosen to hold in cash, while keeping it safe.  Today, our members are earning approximately 1.00% yield on their liquid cash, with FDIC insurance of up to $5 million per couple.  This works out to roughly 10x more interest income than paid in most savings or brokerage accounts and 20x more than most money market funds (which, it’s worth noting, are not insured.)

According to the most recent Capgemini/RBC Wealth Management World Wealth Report, 4.7 million high net worth households in North America — defined as those with more than $1 million of investable assets beyond their primary residence — are holding a collective $3.8 trillion dollars in cash & cash equivalents.  That works out to 23.7% of their portfolios.  Yet most financial advisors think that their clients are holding closer to 10% of their portfolios in cash. What accounts for the difference?  It seems as if Americans are more conservative than their financial advisors would seem to believe or advise.  They must be holding cash in other pockets — bank accounts, CDs, and money market funds outside the view of their advisors.

Why so much cash? There are several reasons. Some have to do with timing differences. A law firm partner might, for instance, receive monthly draws from the partnership, but pay estimated taxes quarterly. This results in a build up of cash that must be set aside to pay taxes. But if that cash is sitting in a regular checking or savings or brokerage account, it is likely dramatically under-earning its potential. Other households may be saving for a major purchase, such as a first or second home, or reserving funds against commitments made to invest in private equity funds. Again, cash set aside earning next to nothing creates a drag on the portfolio and represents a lost opportunity to earn on those funds.

Other investors are more strategic about their cash allocation. For some, it’s a hedge (amidst market volatility, where the values of stocks and bonds gyrate, it’s nice to have the comfort of an asset class that acts as a store of value.) For others, cash is an even more strategic asset – a form of dry powder, ready to be deployed when market opportunities present themselves.

For all the talk of cash being a zero return asset class, excess cash in a portfolio can also facilitate outsized gains. Looking back on the financial crisis of 2008-2009, an investor with cash on the sidelines, who was able to bravely dip a toe into the market while others were fearful, could have tripled her money simply by buying the S&P 500. Had that same investor been fully invested, she would have missed one of the greatest investment opportunities of our lifetimes. This past week’s market volatility again reminds us that having cash at the ready can mean the difference between fretting over falling share prices vs. capitalizing on opportunity.

Financial advisors should pay close attention to these statistics. Astute advisors know that they can deliver better financial advice if they have a truer picture of their clients’ assets, objectives, and risk tolerance. Bringing more of a client’s cash into view can help inform this discussion and lead to better investment outcomes. MaxMyInterest.com is one such tool that can be deployed to generate better returns for clients, both directly by way of higher yield, and indirectly, by assembling a pool of cash that’s ready to be deployed when volatility emerges.

American Express Raises its Online Savings Rate to 0.90%

What would you do with an extra 0.89% of interest each year?

What would you do with an extra 0.89% of interest each year?

Continuing the trend of rising interest rates, this morning American Express increased the rate it offers on its Personal Savings accounts to 0.90%. This represents American Express’ second rate increase in two months.

Online savings rates have been rising rapidly since December, with several banks now offering more than 1.00% in interest on FDIC-insured bank deposits. For investors, this represents a compelling opportunity to finally earn more on the cash portion of their portfolios after five years of near-zero interest rates.

This stands in contrast to the Bankrate.com national savings average, which remains stuck at a paltry 0.09%. Brick and mortar banks have much higher overhead costs than their online peers, which contributes to their lower rates. It’s the same dynamic that makes online shopping compelling: just as a toy might cost less at Amazon.com versus buying that same item at Toys-R-Us, online banks are able to pass on the efficiency of transacting online to their depositors by paying higher rates. Since online bank deposits are FDIC-insured in the same manner as brick-and-mortar bank deposits, depositors can rest easy knowing that their deposits at leading online banks such as GE Capital Bank, Barclays, Ally Bank and American Express are just as safe as deposits at their brick-and-mortar peers, so long as total deposits are held below the FDIC-insurance limits, currently $250,000 per bank, per depositor, per account type (individual and joint accounts count as separate account types.)

With Max, we’ve created a system that helps depositors mange their cash more intelligently. Our members link their existing brick-and-mortar savings accounts to a number of higher-yielding online bank accounts. Max then monitors changes in interest rates, and periodically tells your banks to transfer funds between your own accounts so as to maximize yield, even as interest rates change. By default, Max also helps keep your cash below the FDIC insurance limit at each bank, so that you know that your cash is safe. And with Max, there’s no change to the manner in which you interact with your existing bank – direct deposit, bill pay, and access to tellers and notaries remain unchanged.

With American Express’ latest rate increase, Max members are now earning a weighted average 0.98% on cash – that’s 0.89% more than the national savings average, and 0.97% than the yield on most money market funds. Today, many members are earning as much as 1.05% on their first $250,000 being optimized by Max.  And as rates continue to rise, Max members benefit automatically.

What could you do with an extra 0.89% of ‘found money’ each year? Save it, of course, and let it compound. Or donate it to your favorite charitable organization. Or take your family on a nice vacation. You can try out the Max calculator to see what this might mean for you.

Online Savings Rates Continue to Rise

Max members are continuing to benefit from a rise in rates offered by online banks.

This morning, American Express increased the interest rate paid on its Personal Savings online accounts to 0.85%.  This comes on the heels of GE Capital Bank‘s rate increase on Monday.

For Americans with substantial cash balances, the ability to spread deposits across multiple online banks helps keep larger amounts of cash safe via increased FDIC insurance, while dramatically increasing yield vs. other alternatives, such as brick-and-mortar savings accounts or money market funds.  Max makes it easy to manage a basket of these accounts, monitoring changes in interest rates and automatically reallocating cash among your accounts to seek the best combination of yield and FDIC insurance protection.  Max charges a small fee of 0.02% each quarter for this service.

For months we’ve been predicting a rise in rates, and in turn a widening of the spread between the yield available from the network of online banks supported by Max vs. the national savings average.  Max members are now earning a weighted average 0.93%, as compared to the Bankrate.com national savings average of 0.09% or most money market funds that yield only 0.01%.

More information about Max can be found at MaxMyInterest.com.

Why Cash Is The Overlooked, Underinvested Asset Class

MaxMyInterest founder Gary Zimmerman discusses why investors hold cash with Morningstar's Christine Benz.

MaxMyInterest founder Gary Zimmerman discusses why investors hold cash with Morningstar’s Christine Benz.

Do you hold cash in your portfolio? Of course you do. It’s the universal asset class. Everyone needs some degree of cash to manage their monthly expenses: homes, automobiles, tuition, travel, dining and entertainment. But how much cash is enough cash? Should you hold cash beyond what you need on a monthly basis? And how much are you earning on the cash portion of your portfolio?

For most high net worth investors, the bulk of their portfolios are comprised of domestic and international equities, tax-advantaged fixed income instruments, real estate, commodities and alternative investments like private equity, hedge funds or real assets. Yet today, cash represents a substantial portion of the portfolios of both individual investors and family offices. Most of it is earning next to nothing.

Forbes Magazine contributor Jim Cahn recently cited a study by US Trust that found that “one-fifth of all high net worth individuals (with $3 million or more in investable assets) are holding more than 25% of their portfolio in cash.” This is consistent with our anecdotal conversations with individual investors and family offices. Sure, we occasionally run into investors who hold virtually no cash, choosing to margin securities when they buy a car or pay tuition. But most investors do keep a meaningful cash allocation. One family office we know is 100% in cash – to the tune of $250 million.

For most investors, having a sizable cash cushion helps them manage both personal and portfolio risk. As I discussed in a recent interview with Christine Benz at Morningstar, we all remember the depths of the financial crisis. Most investors prefer to have a cash cushion to withstand economic swings. They also like to have on hand some “dry powder” that can profitably deployed, so that they can, in the words of Warren Buffett, “be greedy when others are fearful.” Cash can serve not only as a hedge, but also as a strategic reserve.

Among the most conservative investors are investment bankers, many of whom hold seven figures in cash. Working in a volatile industry, where layoffs accompany each business cycle, it makes sense to hold a rainy-day fund in cash. Law firm partners are similar. One leading private banker told me his white-shoe law firm clients tend to hold between $1 million and $3 million in cash, with one client holding a staggering $20 million, all earning no more than 0.30%. Whether that reflects inertia or a deliberate allocation doesn’t matter – what matters is how clients invest that cash, to ensure it doesn’t unduly drag down the returns of the entire portfolio.

At Max, we don’t take a view on how much cash investors should hold – each individual is different, and should consult with his or her financial advisor to determine what’s prudent. However, for whatever portion of your portfolio that you’ve chosen to hold in cash, you ought to earn as much as possible on it, while ensuring that it is safe, insured, and accessible when you need it.

MaxMyInterest is a cash management solution that helps investors earn substantially more on their cash, while keeping it safe. Max members are today earning a weighted average 0.89% on their cash, held in their own accounts at leading FDIC-insured online banks such as American Express, Barclays and GE Capital. As interest rates change, Max automatically reallocates cash to help ensure its members benefit from the best rates available. Best of all, Max members need not change the way that they interact with their existing checking account, so direct deposit, bill pay, and access to tellers and notaries remain unchanged.

An incremental 0.80% of return can be meaningful, particularly when compounded over time. Savvy investors know that it’s important to monitor every aspect of portfolio risk and return. With Max, investors can generate incremental return without incremental risk, the holy grail of investing. So, much like you wouldn’t put up with a mutual fund that consistently underperformed the market by 0.80%, no longer should you suffer such a fate from cash.

We’re all busy, and focusing on cash often falls to the bottom of the To Do list. However, Max was designed so that – after a one-time setup – you never have to think about your cash again. You can just sit back, knowing that the cash portion of your portfolio is optimally invested in your own FDIC-insured bank accounts.

5 Things You May Not Have Realized About MaxMyInterest

The MaxMyInterest booth at the Finovate conference in New York on September 23, 2014.

The MaxMyInterest booth at the Finovate conference in New York on September 23, 2014.

Is Max too good to be true? How can I earn more money on my cash without paying expensive fees, being subject to stiff restrictions on transferring my money, or maintaining a high minimum balance?

We heard many versions of these questions last week when we presented Max at Finovate. Banks, brokerages, and RIA platform representatives all came over to meet us, as well as individuals eager to try out Max for themselves.  We were excited to receive some terrific press coverage from journalists who really grapsed what we’re doing.  To address some of the questions we recieved, let’s dispel a few Max myths:

Max is not a bank, and Max never takes custody of your funds. Many customers have asked how they can send us money to optimize. With Max, you don’t send us any money.  Your money remains in your own bank accounts, automatically moving between your own accounts to where you can earn the best yield each month.

There is no minimum balance required to use Max. These are your accounts, so the only minimums are those imposed by the banks. The online banks in our system have account minimums of either zero or $1.00.  They charge no monthly fees.  The only minimums that might apply are those imposed by your own checking account; often banks will require that you keep a minimum of $1,500 to avoid monthly fees.  But Max does not impose any minimum balance requirement.

There are no incremental transfer fees associated with the monthly optimizations. Every three months, Max charges a simple fee of 0.02% on the balance that is being optimized in your linked online savings accounts, for a total of 0.08% per year. This works out to approximately 10% of the gain that most members can expect by using Max, while our members keep the remaining 90% of the gain. We don’t charge a fee on the money that’s in your checking account.

There is no term to the deposits. These are savings accounts, held in your name, to which you have daily access. The rates offered by these online banks are typically better than even a 5-year CD at most brick-and mortar banks.  These rates are so good simply because the online banks don’t have to pay for the costly overhead of branches.  This saves them ~1.50%, and they’re passing on roughly half of these savings to depositors in the form of higher rates That’s why most Max members today are earning approximately 0.90%, which is about 0.80% higher than the national savings average and almost 0.90% higher than the yield on most money market funds.

Max keeps you optimized automatically. Max doesn’t just tell you what you need to do to earn more on your cash; Max does it for you. The Max system is fully automated, so you set it up once and then Max does the rest.  Max monitors interest rates daily, and once a month, instructs your banks to send funds between one another to keep you optimized, maximizing your interest income while staying within the FDIC insurance limits at each bank, and restoring your checking account to your desired balance each month.  You can log into Max at any time and see your balances, view the status of each of these transfers, request intra-month transfers via our Intelligent Funds TransferSM feature, and change settings to customize how Max works for you.  Come tax time, we plan to have in place a feature that delivers all of your 1099s to you via a single PDF, eliminating the hassle of retrieving a separate tax form for each account you hold.

Have more questions? You can reach Max Member Services at member.services@maxmyinterest.com.

Why Cash, Why Now?

FinovateFall2014MaxMyInterest is presenting at the FinovateFall conference this week in New York City. In honor of the conference, which showcases innovative financial-technology solutions, we’re taking a look at the problem that Max solves: people are not earning enough on their cash in the bank, and they’re taking more risk than they’d like by not staying under the FDIC limits on their bank accounts.

Cash makes up a reported 40% of Americans’ holdings — far more than most asset-allocation models would recommend. With the stock market at an all-time high, why are investors holding onto so much cash?

There are several logical reasons why people would choose a more conservative asset allocation, yet in doing so they’ve missed out on a stock market rally which has been going strong for more than three years.

Some investors feel the market is overvalued and are waiting until stock prices fall to buy more.  They remember the tremendous buying opportunities that existed at the depths of the financial crisis. Investors who had “dry powder” — cash on the sidelines available to invest — were able to triple their money simply by buying the S&P 500 Index at the bottom and waiting for the recovery to take hold.

Many savvy investors employ a strategy called dollar-cost averaging, which reduces the risk of market timing by taking a fixed amount of cash and deploying it methodically in equal installments over several days, weeks, or months. This strategy requires holding extra cash, because it takes some time to accumulate the position that the investor ultimately wants to hold.

Investors’ appetite for cash also depends on how old they are. For millennials, who came of age during the 2008 global financial crisis and the recession that followed, the equity markets are viewed to be perilous. Many investors in this age bracket are ultra-conservative in asset allocation and don’t want to own any stocks at all. As a result, they keep a larger proportion of their assets in cash than people their age usually do. According to a recent Forbes article, 40% of millennials favor cash over any other asset class.

Investors approaching retirement tend to hold a larger portion of their portfolios in cash and fixed income instruments — but with interest rates expected to rise, holding long-term bonds could be a losing strategy, so many of these investors have pulled cash from bond funds, hoping to preserve its value better by keeping it in cash.

One investor who’s holding lots of cash is Warren Buffett, whose Berkshire Hathaway has $55 billion in its corporate bank account. Buffett knows that opportunities are out there, and cash gives him the freedom to scoop them up when they become available. As we wrote earlier, Buffett has historically saved up cash when the markets rise, and spent it quickly when the markets fall.  He is perhaps the ultimately market timer.

The trouble with keeping a large percentage of your portfolio in cash is that cash provides little, if any, real yield, often underperforming inflation. Many investors also grapple with the limits of FDIC insurance, which only cover the first $250,000 per depositor, per account type, per bank.  For investors who hold cash in money market funds (as is often the case in brokerage accounts), they are not even covered by FDIC insurance, meaning their cash could be at risk.

For Max members, holding cash on the sidelines becomes less of an issue. Max members are currently earning a weighted-average 0.88% yield on their cash, far more than the national savings average of 0.11% or most money market funds that yield a paltry 0.01% today. Even in this low-interest-rate environment, that means Max members are earning 8 times as much as the average bank customer on cash deposits. While each investor should make his/her own determination as to how much cash to hold, at least via Max, they can rest easy knowing that they’re earning as much as possible on that cash, so that there’s more of it at the ready when the next investment opportunity presents itself.

4 Ways to Keep Your Cash Safe

Watch your cash grow with Max

Sitting on a lot of cash?  Make sure it’s fully insured.

Banks are the safest place to keep your money — until they’re not. It’s a remote risk, but bank failures do occasionally happen.  It’s important to ensure your cash is adequately protected, before it’s too late.

That’s why deposit insurance exists. In the U.S., the government’s FDIC insurance program guarantees the first $250,000 of a depositor’s cash in each insured bank. But many depositors hold much more than the FDIC limit in cash, leaving a portion of their cash at risk in the unlikely event of a bank failure. Investors keep a portion of their financial assets in cash precisely because they don’t want to take risk, so it makes sense to ensure that as much of your cash as possible is protected by FDIC insurance.

Here are 4 ways to keep your cash safe:

1. Open multiple account types

FDIC insurance tops out at $250,000 per depositor, per account type, and per bank. If you set up an account for yourself, one for your spouse, and one held as a joint account in both of your names, together you now have $1 million in FDIC coverage at that bank: $250,000 for each of your individual accounts, plus another $250,000 for each of you for the joint account.

2. Ask if your bank has multiple bank charters

The largest national banks often have more than one bank charter. This means they can offer their account holders the ability to have accounts at what’s technically more than one bank. Because FDIC coverage applies per bank, this can increase the deposit insurance that account holders can receive. If you hold $750,000 at a bank that has three bank charters, you may be insured under FDIC rules for the entire balance. Ask your bank if this applies to your accounts and read the fine print to ensure you are adequately protected.

3. Open accounts at different banks

To make sure your cash in the bank is insured, you can open accounts at a variety of banks. That way, even if one bank fails, you’ll still have access to your accounts at the other banks.  Be sure to keep your accounts below the $250,000 FDIC coverage limit at each bank.

As you spread your accounts among different banks, consider online banks as well as traditional brick-and-mortar banks. Savings accounts at online banks often pay considerably more in interest, because they don’t have to support the same level of expenses for branches or tellers. Just be sure to monitor the rates your banks are paying, so you can make certain you’re getting the most interest you can. Banks change their rates frequently.

4. Use MaxMyInterest.com to manage accounts held at multiple banks to keep you within the FDIC limits while earning more in interest

If you’d like a solution to help you manage your existing brick-and-mortar checking account along with online savings accounts, while optimizing the amount of interest you earn, try our service, called Max, at MaxMyInterest.com. Max uses the links between your brick-and-mortar checking account and your online savings accounts to optimize the amount you earn in interest on your cash in the bank, while respecting FDIC limits. That means that your money automatically moves between your own accounts to stay within the FDIC limits at each bank, while helping you earn as much interest as possible, even as rates change.

As an alternative to bank accounts, many investors choose to keep cash in money market funds.  This is especially prevalent within brokerage accounts.  However, shares of these funds aren’t insured, which means they could potentially lose value. During the global financial crisis, one such fund, the Reserve Primary Fund, dipped below $1 per share in value, sparking an exodus from this class of investments. Since then, Americans’ investments in money market funds have fallen from $4 trillion to $2.7 trillion today.

One downside of money market funds: many of these funds currently yield as little as 0.01% annually. By contrast, bank accounts typically pay 10 times that much in interest and online savings accounts managed through the MaxMyInterest.com system are yielding approximately 80 times more, even after taking fees into account.  Max members are currently earning a weighted average of 0.87%, or 0.79% net of fees, all via FDIC-insured savings accounts at leading online banks including American Express, Barclays, GE Capital, Ally Bank and Capital One 360.

Gary Zimmerman is the Founder of MaxMyInterest.com.