How can I protect amounts of more than $250,000?
November 27, 2013
Q: What do wealthy people do to protect their money when it far exceeds $250,000?
A: Your question can be answered in two ways: first within the narrow context of Federal Deposit Insurance Corporation limits, and then within the context of a broader discussion of financial risk.
FDIC insurance limits up to $250,000
The $250,000 number you refer to is part of FDIC insurance limits. This insurance is funded by levies on participating banks, and backed by the federal government. Those banks are charged with keeping deposits safe, but should any of those institutions fail -- as happens occasionally -- the FDIC will make sure that depositors will receive the full amount they put into the bank, up to the $250,000 limit.
FDIC insurance coverage: How deposits are protected
The key thing about that limit is that it is applied per depositor at each institution.
FDIC insures up to $250,000 per depositor, per bank
So, an individual who simply splits a larger amount of money into $250,000 increments at the same bank would not receive additional insurance. However, if you split your deposit among multiple banks in increments of $250,000 or less, you would be fully insured because you are entitled to that amount of insurance at each bank.
Spread out deposits among FDIC-insured institutions
Given that there are currently nearly 7,000 FDIC-insured institutions, it would be theoretically possible to get well over a billion dollars insured if you spread it among all these banks. Of course, that would create something of a bookkeeping headache, though with that amount of money you could well afford to have someone take care of that for you.
Why diversify savings accounts, investments
One of the ways to protect your investments, whether savings accounts or other vehicles, is to diversify through:
Treasury bills, notes or bonds
As a practical matter though, a simpler way to have your money backed by the full faith and credit of the U.S. government is to invest in Treasury bills, notes or bonds. Though these may fluctuate in price prior to maturity, they do offer interest and principal payments guaranteed by the U.S. government.
Of course, wealthy investors don't generally limit themselves to savings accounts and bonds. They also diversify into growth investments such as stocks. While this carries the risk of losing money, growth investments help protect against other forms of risk.
For example, the precipitous decline in savings account rates and other deposits since the 2008 financial crisis can be seen as a form of risk. While depositors did not lose any principal, they saw the income production of their savings slashed.
The bigger picture of financial risk management
In addition to that type of interest rate risk, there is also the risk of inflation steadily eroding the purchasing power of your money. This is another risk that growth investments can help combat.
So, while it is theoretically possible to protect very large amounts of money by spreading your deposits across many banks, some sensible diversification into other types of investments would allow you a more well-rounded risk management approach.
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