Safety of cash reserves.
As a financial advisor, one of the most important things that I tell my clients is to keep their money safe. However, sometimes even the safest places to keep your money can fail. In this blog, I will be discussing what a bank failure is and what you can do to protect yourself.
A bank failure occurs when a bank becomes insolvent and is unable to meet its financial obligations. This means that the bank is no longer able to pay its depositors, lenders, or other creditors. When a bank fails, it is usually taken over by a government agency or another bank.
There are several reasons why a bank might fail. One reason is that the bank may have made bad loans or invested in risky assets that have lost value. Another reason is that the bank may have engaged in fraudulent activities or mismanaged its finances. In some cases, a bank failure may be caused by external factors, such as an economic downturn or a natural disaster.
When a bank fails, it can have serious consequences for its depositors. Depositors are people who have placed their money in the bank, either in checking or savings accounts, certificates of deposit (CDs), or other financial products. If the bank fails, depositors may lose some or all of their money.
However, there are ways to protect yourself from a bank failure. The first thing you should do is make sure that your bank is insured by the Federal Deposit Insurance Corporation (FDIC). The FDIC is an independent agency of the federal government that provides insurance for deposits at banks and savings institutions. If your bank is insured by the FDIC, your deposits are protected up to $250,000 per depositor, per account type, per insured bank.
Another way to protect yourself from a bank failure is to spread your money across different banks. This is called diversification. By diversifying your deposits across multiple banks, you can reduce your risk of losing all of your money in the event that one of your banks fails.
Regional vs. National
The main difference between a regional bank and a larger bank is their size and scope of operations. Regional banks are typically smaller financial institutions that operate within a specific geographic region, such as a state or a group of neighboring states. In contrast, larger banks have a national or even international presence and operate across multiple regions.
One of the advantages of regional banks is that they often have a deeper understanding of the local market and the needs of their customers. They may also have more personal relationships with their customers, as they tend to serve a smaller, more localized customer base. This can result in more personalized service and a greater focus on building long-term relationships with customers.
Larger banks, on the other hand, may offer a wider range of products and services and have more resources to invest in technology and infrastructure. They may also have more established brand recognition and a larger marketing budget, which can help them attract a wider customer base.
In terms of risk, larger banks may be more diversified and therefore less vulnerable to economic downturns in any one region or sector. However, they may also be more complex and therefore more susceptible to systemic risks, such as those seen during the 2008 financial crisis.
Ultimately, the choice between a regional bank and a larger bank depends on individual preferences and needs. Some customers may prefer the personal touch and local expertise of a regional bank, while others may prioritize a wider range of products and services offered by larger banks. As a financial advisor, I help my my clients carefully consider their options and do their research before choosing a bank to do business with.
Types of Accounts
Let's dive into some specific financial products that can be used to save and grow money: money market accounts, savings accounts, and certificates of deposit (CDs).
Money market accounts (MMAs) are a type of deposit account that typically offers a higher interest rate than a traditional savings account, but with some limitations. MMAs often require a higher minimum balance and may have restrictions on the number of withdrawals or transfers allowed per month. They are considered to be a low-risk investment option as they are insured by the FDIC up to $250,000 per depositor, per account type, per insured bank. MMAs can be a good option for those who want to earn a higher rate of interest than a traditional savings account but still have easy access to their funds.
Savings accounts are a basic type of deposit account that is designed for storing and earning interest on short-term savings. Savings accounts often have a lower interest rate than MMAs but may have lower minimum balance requirements and fewer restrictions on withdrawals. Like MMAs, savings accounts are also insured by the FDIC up to $250,000 per depositor, per account type, per insured bank. Savings accounts are a good option for people who want to earn some interest on their savings while still having easy access to their money.
Certificates of Deposit (CDs) are a type of time deposit that offers a fixed interest rate for a specified term. CDs usually offer higher interest rates than savings accounts or MMAs, but they require a fixed amount of money to be deposited for a specific length of time. Early withdrawal from a CD may result in a penalty, making it important to choose a CD term that aligns with your financial goals and liquidity needs. CDs are also insured by the FDIC up to $250,000 per depositor, per account type, per insured bank, and are a good option for those who have a specific savings goal in mind and don't need immediate access to their funds.
As a financial advisor, I often recommend that my clients consider a mix of these different savings products based on their financial goals and liquidity needs. MMAs, savings accounts, and CDs all offer different benefits and drawbacks, and choosing the right mix of savings products can help individuals balance their desire for higher returns with their need for liquidity and flexibility. It is always a good idea to shop around and compare the rates and terms offered by different banks before choosing a savings product.