Image: IndyMac Bank
David Mcnew  /  Getty Images file
About 10,000 depositors at IndyMac Bank recently learned about the limit the hard way; they’ll lose about half the money in their accounts above that $100,000 limit.
By John W. Schoen Senior producer
updated 7/21/2008 12:36:29 PM ET 2008-07-21T16:36:29

The failure of IndyMac Bank last week — and news that some depositors didn’t get all their money back — has a number of readers wondering: Is my bank account safe? If not, it can be with a few simple steps.

I would like to know a safe place to put my savings money. Do you have an idea? I don't feel banks are safe right now. Or am I wrong?
Brenda, St. Petersburg, Fla.

Well, you’re not wrong to feel nervous. With banks reporting huge losses these days, a lot of people with savings in the bank are wondering the same thing.

But so far, only five banks have closed this year — out of some 8,500 banks in the U.S. And when a bank like IndyMac fails, it doesn’t disappear: it gets taken over by the government, which is then responsible for paying back all deposits that are backed by federal insurance. So you should be able to sleep well at night as long as your money is in an insured account, and you follow a few simple steps.

The most important is to make sure that your account has less than $100,000, the limit for insurance coverage by the Federal Deposit Insurance Corporation. (If you keep your savings in an Individual Retirement Account, the limit is $250,000.) Savings in credit unions are covered for the same limits by the National Credit Union Share Insurance Fund.

About 10,000 depositors at IndyMac Bank recently learned about the limit the hard way; they’ll lose about half the money in their accounts above that $100,000 limit. So keep an eye on any large accounts to make sure they stay under $100,000. If you stash away money and “forget about it,” you may go over the limit.

You also need to make sure the account is FDIC insured. Banks these days are happy to sell you all sorts of other investments through a brokerage account. Some of these are sold with the promise that they’re as “safe as cash.” But deposit insurance only covers savings like cash or certificates of deposit. Treasury bonds, for example, while also very safe, are not insured, so you can lose money if you need to sell them before they reach their maturity date.

If you have more than $100,000 outside of your IRA, you can break up your savings into separate accounts – each of which will be covered as long as the balance is under the $100,000 limit. The easiest way is to do that is to keep accounts in separate banks.

If you want to keep multiple accounts in the same bank, you can break up your savings into multiple accounts. If you’re married, you can set up two accounts in the same bank for each spouse. You can also keep a joint account and an individual account in each spouse’s name — the FDIC insures accounts in separate categories up to the coverage limits. Or you might want to move some savings to an account in your child’s name for college savings. For more on different ways an account can be titled, check the FDIC Web site.

If you do split your savings into multiple accounts, check to make sure that each one is properly titled: a mistake by the bank clerk can be expensive. If you’re unsure, ask a financial advisor or tax preparer.

For those readers who fear the worst — and believe the best place for cash is a coffee can buried in the back yard — 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.

We have about $26,000 in GMAC Demand Notes which are not insured. We are really worried about leaving it in there, but we are making over 4 percent with it and can’t find anyplace else to put it that is paying decent and doesn't tie it up. We are 57 and 53. Should we leave the money in the demand notes? If not, what should we do with it?
— Sue O., Auburndale, Fla.

We don’t give advice on specific investments. (Even if we did, it’s probably not a good idea to get investment advice from some guy on the Internet you’ve never met.)

But in general, higher returns come with higher risk. That's why long-term certificates of deposit or 30-year Treasuries usually pay a little more than a shorter-term equivalent; they come with slightly higher risk. Even if there’s no higher risk of losing your money altogether, locking your money up for a long time carries the risk that interest rates will go up and you’ll miss the chance for higher returns.

So the question you have to ask is whether is extra return you’re getting on your demand notes is high enough to adequately compensate for the added risk over, say, an insured CD. That’s a tough call. But to answer the question, you need to take closer look at what your risks are.

In the case of GMAC demand notes, not only are these not insured, they’re also unsecured. That means there are no assets specifically designated to be used to pay them back if the company ran into trouble. So you’re betting on whether or not General Motors can pull through its current financial trouble by managing costs and shifting its product line to keep up with changes in sales patterns that have resulted from rising gasoline prices. If you’re not familiar enough with the company’s operations to make an educated guess about the outcome, your risk is higher than someone else who’s able to make that judgment.

The worst case for unsecured debt is that the company files for bankruptcy and holders of secured debt are in line ahead of you when the bankruptcy judge decides who gets paid first. With the recent downturn in the economy and the slump in car sales, the prospect of a General Motors bankruptcy has gone from more or less unthinkable to highly unlikely, but still possible, especially if gasoline prices keep climbing and sales of trucks and SUVs keep falling.

You also have to ask yourself how much risk you personally can afford to take. Someone just starting out, with 30 years to build a retirement nest egg, can afford to take on more risk because they’ve got time to rebuild if they lose their money. As you get closer to retirement, your risk is has a bigger impact than it does for a 30-year-old — but you don’t get compensated for that with a higher return.

A lot depends on how much you’re going to rely on these demand notes to pay retirement expenses. Someone with a generous pension or a sizable annuity can afford to take a little more risk with a portion of their nest egg. If this is money you’re going to need to pay bills, that will limit the risk you can afford to take.

Shopping around for the best yield is always a good idea. But if chasing higher yields means taking on more risk, it may not be worth it.

As Will Rogers put it, the return of your money can be more important than return the on your money.

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