FDIC Insured.....

[nokia1566]

I was reading something on ING where it says that my money is FDIC insured up to $100,000. I am pretty much clueless as to what this means so if someone could elaborate it would be helpful... I guess what I am wondering is, what am I risking by having $200,000 in the account? What are possible threats to my money? What could cause my money to basically be lost and then only get $100,000 back (from the FDIC)?

Thanks

[FishHooks]

FDIC was a program which FDR started, because of the depression and many people losing their life savings because of the banks going under. It basically protects your money if your bank goes down the tubes and becomes bankrupt. The government will reimburse up to $100,000. If you have over that set up another account.

[laserboy]

When you deposit money in a bank, the bank doesn't actually keep that money on hold for you. They turn around and lend it out to someone else, that is how they make their profits.

Traditionally under the fractional reserve system, banks were required to keep about 10% of their deposits in reserve allowing them to lend out about 90%(in actuality most banks now keep much less than that). If for some reason a large number of these loans ever went bad (for example if banks were for some reason loaning hundreds of thousands of dollars in real estate loans to poor people that they couldn't realistically pay back) it is possible that your bank would become insolvent and unable to pay back its depositors. The bank would eventually go under and many people would be screwed out of their money.

The FDIC is a government agency that "insures" your deposits up to $100,000. In such a crisis they would essentially "borrow" money from other banks to pay back the creditors.

The risk of this happening is not large, but it does exist and is something you should be aware of.

[nokia1566]

So basically if I had 200,000 in my ING account and ING somehow went bankrupt (this is the only case right?) or something then I'd only be paid back 100,000? Is it generally recommended to not have more then 100,000 with each institution or do most people just take the risk (since its apparently small)? Are there any other sites like ING where I could spread my money around and put no more then 100,000 in each (i'm insured for 100k for each individual site/account right?)?

Thanks again...

[laserboy]

It depends on how likely you think it is for your bank to go under and whether you think that risk is worth 3% interest. There was a banking crisis not too long ago during th S&L Loan crisis, so there is a real possibility of it happening.

There is also the possibility, that in an extreme enough banking crisis, that the FDIC will not be able to make good on their insurance.

These are the risks you take for your 3% interest. I personally don't think it is worth keeping $200,000 in the bank, particularly when there are so many more attractive investments available. I would keep enough liquid to handle my day-to-day expenses, and put the rest in safer or more aggressive investments.

As was mentioned in another thread, T-Bills have a pretty much 0% risk of default.

[nokia1566]

Well I am planning on buying a house in 3 or 4 years and after some research I was basically told that if my time horizon for investments is only 3 to 4 years I shouldn't be investing in the stock market or other such aggressive investments. I was told to make safer investments for a shorter time horizon such as creating an account on ING and/or CDs. I've never heard of T-Bills and don't really know how to get one. Does pretty much every bank offer CDs (and do they offer different rates)? If I kept 100k on ING, then where would the safest (where I would be guaranteed to get my money back with some % ontop) place to put the rest (over 100k more) be? Can I put more then 100k into T-Bills and not have to worry about problems like I do with ING? What about CDs? Or would I have to go to different institutions and put 100k into each one to guarantee that I will be insured on my investment?

Thanks for the responses in advance.

[laserboy]

CDs would be subject to similar risks as money market accounts. To answer your question, yes you would be FDIC insured for 100K at each different institution.

Treasury bills are just short term government bonds. Since they are backed up by the US government, the risk of default is nil (the government can just print money to pay them off). You would also be earning better interest rates than the ING account.

The drawbacks are that they are less liquid, you would need to hold them for a specified period of time or sell them through a broker. You also run the risk of being outpaced by inflation and of the US dollar falling relative to other assets. This can be mitigated somewhat by purchasing inflation indexed securities, whose interest rate is linked to the CPI.

Check out: Treasury Direct (http://www.treasurydirect.gov/indiv/indiv.htm)

Take a look at the I Bonds or EE bonds. The I Bonds currently offer 4.80%, that should be good for a few extra grand a year on 200K (I expect a commission for the advice /images/graemlins/grin.gif).

[squiffy]

Why take a chance when it's trivial to open a new account at another bank.

Though I suppose if you are married, that you can open a second account in your wife's name and it will be separately insured.

But I guess if you are doing joint accounts, then the insurance limit is probably per account. So you will only get $100K coverage on one account, if you both jointly own both accounts, but you might get $200 K coverage if you have one account only in your name and one account only in your wife's name.

Many reasons a bank could go under. Accounting fraud, embezzlement, loans to third world countries that are not paid back, etc. Very very unlikely, but always possible.

It is possible that many banks could go broke in a huge loan scandal, but at least you reduce your risk somewhat by opening a new account at a new bank. There is always a chance that one will fail and the other will survive and that FDIC will be able to insure your money and will not fail.

It would take you 5-10 minutes to open the new account and increase your safety a bit. Why not?

Though it would be interesting to see what the statistics are on individual bank failures over the past 10 years. Possibly your chances of having Nicole Kidman ask you out on a date are higher than the chances of your bank going under.

In which case you are just wasting 5-10 minutes of your time by opening a second account at a new bank.

You may find it interesting to do a general search on bank failures. Maybe there is an FDIC info site, which gives some statistics.

Basically, the fact that we have bank insurance means that banks can and do fail.

Companies go bankrupt. Banks go under. Car crash. So we have insurance. Health, auto, life, disability, and FDIC.

Why not use the insurance if it is cheap?

[colgin]

[ QUOTE ]
Well I am planning on buying a house in 3 or 4 years and after some research I was basically told that if my time horizon for investments is only 3 to 4 years I shouldn't be investing in the stock market or other such aggressive investments.

[/ QUOTE ]

I am in a similar boat as you. My wife and I will be buying proerty within the next 2 years. While I believe that there is a massive housing bubble and that prices will be coming down, regardless of whether I am right or wrong we will need to buy a house within a ccouple of years. So, I have been selling off my equity investments when the market has rallied and am looking to put them into safer short-term investments. Since interest rates appear to be headed up, albeit slowly, I am looking to put money into shorter term interest bearing instruments and then roll them over into similar ones when they mature (hopefully at higher interest rates). I still have stock exposure but may reduce that further. FWIW, I am very bearish on the stock market and econmy in the near term.

[nokia1566]

Have you guys looked into the Vanguard Treasury Money Markey fund by any chance? I am assuming that this fund doesn't have any of the risks that putting my money in a bank does (am I right to assume there are no risks even with an account balance of over $100,000? If there are any risks to my money, what are they?) and they invest 100% in nothing but T-Bills. So it is also 100% free from any state or local income tax as it invests only in US treasuries. After a year or so, I would also be able to get bumped up to Admiral which gives a better rate then the normal fund (need to have atleast $100,000 in the account to get it). Would this be a good place to dump my money for the next 4-6 years? Is there something else like this where I could just deposit all my money into for the next 4-6 years without having to worry about it (as I do with banks)?

[Sniper]

A strategy of going to all cash for 4-6 years is generally a bad one. This would depend also on how old you guys are and whether you have a continuing income stream from which you continue to be able to save additional $$.

[midas]

Why are you worried about banks? It is highly unlikely that a bank will fail. You might want to match your investment life better with your investment choice. See if Vanguard has an intermediate 3-5 year bond fund. You'll get better returns with limited interest rate risk.

[James Boston]

Just to clarify...

If you have money in an interest bearing account, and the bank does go under, the FDIC will not reimburse the interest earned.

[Jeffage]

Also, one other clarification...there is currently pending legislation to raise FDIC insurance to cover up to 130k. Just an FYI...

Jeff

[laserboy]

There is some interest rate risk involved in buying long term bonds funds. If long term rates for current bonds were to go up, the present value of the already issued long term bonds would go down (and vice versa). That is why the value of the long bond fund fluctuates. FWIW I think the long bond fund it is a very sound investment as far as US dollar denominated assets are concerned.

I think Colgin advice is very good as well.