Getty Images
Getty Images

Getting to Know the FDIC

Getty Images
Getty Images

You may have heard that the banking industry isn't looking so hot right now. If your bank goes under, just how much do you stand to lose personally, though? You probably know that the Federal Deposit Insurance Corporation protects your money, but how much and through what avenues? Let's take a look at the FDIC:

Don't panic. While we may sneer at the major missteps our contemporary bankers have been making, things were much, much worse in the 19th century. The whole notion of banking as we know it is based upon what's known as a fractional reserve system. This means that when you deposit your cash at a bank, the bank doesn't simply stick it in a safe until you come back to ask for it. Instead, they take some of your dough and buy securities and make loans. The bank holds only a fraction of its deposits in reserve, and the economy grows because banks can effectively use the unreserved fraction to "create" new money. It's a supremely effective system. That is, unless everyone tries to get their cash out at once, in which case the bank wouldn't have enough money to pay all of its depositors.

These scenarios popped up from time to time throughout the 19th century. Depositors would start to worry that their bank might become insolvent, so they'd go pull out their money. As more and more people did this, the bank actually got closer and closer to insolvency, so there was an ever-stronger incentive for all depositors to get their cash back, which would effectively crash the bank.

Problems like these persisted into the 20th century, and like a lot of financial woes, peaked in 1933 when over 4,000 banks collapsed. With such systemic bank failure, people didn't want to put their money in banks, and the government needed to intervene somehow to restore faith. Congress did so by passing the Glass-Steagall Act of 1933, which created the FDIC to insure individual deposits up to $10,000. The FDIC would fund such guarantees by collecting premiums from banks. Although bankers weren't too hot on the idea of bailing each other out of hot water, the FDIC soon counted most of the country's banks among its members.

So what's the limit now? The FDIC's ceiling for insuring accounts at member institutions has gradually grown from the original $10,000. As of 1980, each account was taken care of up to $100,000, and following our latest rocky economic times the limit's been temporarily bumped up to $250,000 per account.

What exactly is insured? As of right now, you're covered for up to $250,000 on your deposit accounts at member banks. This means that your checking account, savings account, money market deposit accounts, and certificates of deposit are all safe up to $250,000 total. You should know that it's cumulative, though, not per account; if you've got $200,000 in a checking account and $100,000 in a savings account, only $250,000 of your cash is totally insured. If you've got accounts at separate banks, each one is insured for up to $250,000; if you've got $250,000 in a checking account at Chase and $250,000 in a checking account at Citi, both are completely covered. (You might want to spend some of that dough to hire someone who can help you manage your money a little better, though; that's a lot of cash to have in checking accounts.)

On top of that, if you have deposits in various categories of accounts, they can be insured separately, so things like your IRAs are also taken care of up to $250,000.

So what isn't insured? Everything else. Your stocks, bonds, mutual funds, annuities, Treasury securities, and life insurance policies aren't covered, even if you bought them from an FDIC-insured bank.

Also, the stuff in your safe deposit box isn't covered since it's not a "deposit" in the standard sense of the word. Usually when a bank goes under another swoops in to take it over, though, and then the acquiring bank will hang onto your stuff for you. In the event that another bank doesn't take acquired the failed bank, the FDIC will send you instructions for how to clean out your box. The federal government really has little interest in absconding with the passport you left there for safekeeping.

Can I outsmart the FDIC's limits? At a single bank? No. You can't circumvent the caps by including your middle initial in your banking records or changing the "and" to an "or" in the joint account you share with your spouse. If you need coverage above and beyond the current $250,000 cap in any category of account, you'll have to open up an account at a separate bank.

What happens to whatever deposits I had over the cap? Don't worry; you probably won't lose all of it. The FDIC continues to insure beyond the caps; it's just not 100% dollar-for-dollar coverage. For instance, when IndyMac Bank failed earlier this summer, roughly 5% of its $19 billion in deposits was over the limit. The FDIC paid depositors for 50% of their uninsured funds.

However, the FDIC doesn't work just like a regular insurance company; it actively tries to get another bank to take over failed institutions. In these cases, the purchasing institution takes over the failed banks' liabilities (like your deposits) and also gets some of the bank's assets (like outstanding loans). In this case, the depositors can end up getting more of their uninsured cash back. A story that ran in the San Francisco Chronicle last weekend said that in recent years depositors in failed banks have gotten around 72% of their uninsured funds back. Sure, losing that 28% hurts, but as anyone who had money in a failed pre-FDIC bank could have told you, it's a lot better than taking a 100% hit.

nextArticle.image_alt|e
iStock
The Average Age When People Become Millionaires
iStock
iStock

If you start investing in a retirement plan early in your career, you don’t have to bring home an insanely high salary to become a millionaire—eventually. (Thank you, compound interest.) The average age when bank accounts reach the seven-figure mark is in a person’s late 50s, according to Business Insider and The New York Times.

The average age when women become millionaires is slightly lower than the average age for men, despite the persistent wage gap in the workforce. For women, the average age is 58.5 years old, while for men, the age is 59.3. Or at least that’s the case for people with Fidelity 401(k) retirement plans, according to the investment firm’s research. That means that millionaires are reaching that milestone several years before the usual retirement age of 66 to 67 years old.

Nevertheless, how much money you need to retire comfortably varies based on your current salary, your expenses, and the number of years you’ll be living off your nest egg. Many financial advisers say you should aim for $1 million or more, which will hopefully last you through a 30-year retirement.

Reaching that million-dollar mark may seem like a long shot, but Fidelity has found that more and more of its savings plan customers have become millionaires in recent years. One of the firm’s recent analyses found that 133,000 of its customers had $1 million or more in their accounts in 2017, compared to 89,000 in 2016. (The company oversees 401(k) accounts for around 15 million people, so that’s not exactly a huge portion of its customers, though.) Between 2005 and 2017, the number of women who had $1 million in their retirement accounts doubled.

Fidelity attributes this increase to people putting more money away for retirement than in past decades. On average, the firm’s customers making less than $150,000 a year become millionaires by saving around 22 to 25 percent of their salaries in retirement funds, including employer matches. That may seem like a lot if you aren’t making a six-figure salary, but keep in mind that the earlier you start saving, the more your money grows. Investing just a little money in your 20s is a more effective way to save for retirement than investing a lot of money in your 30s and 40s. So if you want to become a millionaire (and who doesn’t?), now would be a good time to start investing in that 401(k).

[h/t Time]

nextArticle.image_alt|e
iStock
How Rich the U.S. Is Compared to the Rest of the World, Visualized
iStock
iStock

The U.S. is often called the richest country in the world. But how rich is it, really? A new infographic from How Much, spotted by Digg, explores the average household income across the 36 countries in the Organization for Economic Co-operation and Development (OECD). As you can see in the graphic below, the U.S. is, on average, quite rich compared to most other countries.

The infographic explores finances on two different levels. The size of each bubble corresponds to household wealth: in other words, assets minus debts. That means it takes into account savings, stocks, and other financial assets as well as loans. (It doesn't include property holdings due to a lack of data, so it doesn't encompass the big boost of wealth that comes from say, owning a penthouse overlooking Central Park in New York City.) As you can see, the U.S.'s bubble is a pretty big outlier. On average, U.S. families have a net worth of $176,100, compared to just $128,400 in the second-wealthiest country on the map, Switzerland.

Colored bubbles represent household income and wealth across the OCED
How Much

The colors of the bubbles correspond to "household net adjusted disposable income," as the OECD refers to it, which has to do with the money you bring in each year rather than what you own. That takes into account salary, income from things like stock dividends and rental properties, and government benefits (like Social Security, unemployment, food stamps, or housing subsidies). It also takes into account what each household pays in taxes, providing a snapshot of the take-home pay people actually have available to spend, rather than their pre-tax salary.

The U.S. has relatively high salaries, at $44,000 a year (the top of the scale) in disposable income. Only Switzerland, Luxembourg, and Norway have disposable income levels greater than $35,000. Mexico falls at the bottom of the scale, with average adjusted disposable incomes of less than $15,000. Most of Western Europe falls within the $25,100 to $30,000 range, while income in Eastern Europe, Israel, South Korea, and New Zealand is a little lower.

There could be a lot going on behind this data, though. The U.S. has an increasingly stratified economic system, so while the averages seem fairly high, that's probably because the few billionaires among us are skewing the numbers. The U.S. also doesn't have the social safety net offered by governments in much of the rest of the world, meaning that while we have relatively high salaries and pay lower taxes in some cases, we have to pay for things like healthcare and retirement on our own.

Read more about the OECD numbers here.

[h/t Digg]

SECTIONS

arrow
LIVE SMARTER
More from mental floss studios