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Is your money safe at your local Bank? Is it safe at your community bank? With the subprime bubble hitting the floor resulting in the down turn of the economy, there are many issues arising in America’s banking industry. One used to think that you could keep hundreds of thousands of dollars in your local or national bank or credit union and all would be fine a dandy. IndymacBank, the nation’s 9th largest home mortgage lender, just last week was taken over by the government because of its gone bad home mortgage portfolio. Over 10,000 depositors waited in line to withdrawal all their funds to only find out they were going to lose half of their liquid worth. Now, there are 8,500 banks in the United States and only 5 have gone down this year. However, it makes you wonder if a coffee can berried in the back yard is safer then today’s American Banks and Credit Unions.How Do Banks Work?
As a small business owner, there are a few things that need to be known in order to wisely store cash in a certified charted bank or credit union. First, it is important to understand how Banks and Credit Unions make money. Each bank or credit union will take deposits, which is your money. The bank will then lend out your money to the public in ways such as home mortgage loans, commercial real-estate loans, car loans, personnel loans and any other loan the bank is willing to entertain. The bank or credit union will charge you lets say 7% annually, and you are responsible for paying the entire amount of the loan plus 7% annually, back each month. That is one major way banks and credit unions make their money. Knowing that, MOST banks or credit unions that allow deposits will be federally insured by an organization called the Federal Deposit Insurance Corporation (FDIC). For Credit Unions, the organization is called the National Credit Union Share Insurance Fund. This means that if a bank or credit union is in serous financial trouble (IndymacBank: mortgage loans went bad), and cannot pay you back your current deposits, the federal government will pay you, the depositor, back all your money up to $100,000 dollars. Anything over that, you can say goodbye. So if you have $250,000 in your account then all you get back from your bank is $100,000. Bummer isn’t it? So IndymacBank lent out all these depositors money and lost it due to the barrowers not paying back the loan. That’s how banks can make money and lose it all at the same time.
Don’t Freak Out Just Yet
As a small business owner myself I have learned to ask the right questions to make sure my money is safe so I can make payroll next week. When opening an account at any bank or credit union, first and foremost make sure they are FDIC insured, and for how much. The norm is $100,000. And remember FDIC only insures cash like CD’s, and bank accounts and savings accounts. Treasury Bonds for example are NOT insured. If they are not FDIC insured and the bank goes down, you could lose every penny. That would really through a wrench in your long term goals. Ask the bank or credit union what percentage of their assets is invested in loans. What kinds of loans? You probably want to stay away from home mortgage loans at this current time in the economy. However, keep in mind banks HAVE to lend to stay in business. Remember its how they make most of their money. Another great way to roughly see how a bank or credit union stands is asking them how much they pay out for savings accounts and how much they charge for a 30 year fixed. By comparing these percentages you should be able quickly assess a banks performance. The bank should charge a little more than double for a 30 year fixed then what they pay out on savings accounts. Regarding cash in the bank, if you have over $100,000 and you need an account to store it in, I would recommend multiple accounts with multiple banks. If you have a spouse, you can keep one bank as long as each account only has one persons name to it. Your wife has one account in her name and your husband has one account in his name. O and keeping your money in the coffee can in the back yard isn’t the best idea. Keep in mind that if you're not earning at least some interest, you’re losing money every day. Inflation erodes the purchasing power of cash sitting in that coffee can. With six-month CDs paying about 3 percent these days, and the consumer price index up 5 percent in the past 12 months, you’re already losing 2 percent of your purchasing power. But that’s still better than the 5 percent you’ll lose at the Backyard Coffee Can Bank & Trust. Don’t be afraid to ask your bank or credit union questions. You want to make sure your money is safe.
