(soft music)
- Oh, I feel like I slept on a pile of bricks.
- Well, I slept like a baby,
knowing that all our cash is safe
and sound right in our mattress.
- No wonder my back hurts.
Why'd you do that?
- Well with all these banks closing,
I just figured it was the safest place
to put our money right now.
- You know the banks are insured, right?
- Well, yeah, but what if the insurance
companies go under too?
- I think that's a lot less likely
than someone coming into our house and stealing it.
- How would anyone ever find out
we keep all our savings in our mattress?
Maybe I'll put it back in the bank.
(upbeat music)
- Most people know that the image
of all your hard-earned paper dollars
sitting in some dusty vault isn't actually how it works.
Though the first banks were likely ancient temples
that guarded wealthy people's currency,
the Renaissance brought a major financial innovation
called Fractional Reserve Banking,
which allowed banks to lend out
the majority of their deposits at interest of course,
and only keep a fraction of them on hand.
- See, this is exactly why I'm so freaked out.
What happens if everyone wants
to withdraw their money at once a la Mary Poppins?
We'd be out in the cold.
I want my tuppence with me.
Thank you very much.
- Well, it's true.
Bank runs and failures were a common consequence
of fractional reserve banking in the past.
In the mid 1800s,
rampant railroad speculation led to big losses for banks
and hundreds failed in an awful domino effect.
After the Great Depression of 1929,
FDR stepped in to stabilize things
with the Banking Act of 1933
which created the Federal Deposit Insurance Corporation.
The FDIC is a government corporation
that provides insurance for depositors.
If a banking institution covered by the FDIC fails,
account owners are made whole up to $250,000.
- Now, this insurance is something you'll never
have to pay for, at least not directly.
The FDIC is not publicly funded.
They get their money by charging the banks
for their membership based on the bank's level of risk.
This ranges from well-capitalized, which means a 10%
or higher reserves to debt ratio all the way
to less than 2% known as critically undercapitalized.
The lower the reserves, the higher the banks dues.
- The FDIC also plays an oversight role.
When an insured bank drops to around the 6% reserves mark,
it can force the bank to take corrective action
like change management or sell off assets.
It can also take over failed banks
and manage the sale of remaining assets and debts
like it did for Silicon Valley Bank in March of 2023.
In that particular case, since so many
of the depositors had more than $250,000,
the government made an exception and reimbursed everyone
in order to shore up confidence
in the system and prevent a contagion of collapse.
- So it sounds like I can take a breath.
It also makes me feel better knowing that since 1933,
not a single depositor has lost a penny
of an FDIC insured deposit
and the government seems more committed
than ever in making sure the banking system is stable.
So I think our checking
and savings accounts are as safe as I could hope for.
But what about our retirement funds, our investments?
And now that I think about it, we're not even at a bank.
We're with a credit union.
- Don't worry, Henny Penny.
There's another acronym that's got us covered.
The NCUSIF is basically the same thing,
but for credit unions.
And as for our IRAs
and investment accounts, well that's where
the Securities Investor Protection Corporation comes in.
The SIPC is actually a non-profit governmental
organization that insures the investment accounts
and member institutions, again, up to $250,000 per member.
- But keep in mind, these forms
of insurance only apply if the institution goes under.
It doesn't mean we're protected
against our investments losing value.
Commodities, fixed annuities, hedge funds, crypto,
money you park in these kinds
of financial instruments is uninsured.
That's a big reason why the crypto crash
was so hard on people.
- Overall, the government
and financial institutions have done a lot
of work making the banking system pretty safe
for your average person, which means the 48%
of Americans who report feeling moderately to very concerned
about the safety of their money can relax a bit,
even though times seem especially turbulent post COVID.
- But in reality, there's no such thing
as a perfect store of value.
Whether it's stuffed in a savings account or a mattress,
cash is always susceptible to inflation.
Certificates of deposit
and treasury bills might have really long
and steady track records, but they're not
gonna return enough to help you retire on time.
And as we've talked about in other episodes, stocks,
mutual funds and even real estate naturally gain
and lose value in cycles over time.
There's nothing out there that's perfectly
impervious to loss.
- But when you find yourself getting especially nervous,
try asking yourself the question,
what are you wanting to keep your money safe from?
- If you're nervous about inflation eating
away the purchasing power of the cash you have,
then you could move some into an investment.
If it's about your company's stocks losing value,
you might wanna mitigate that
by moving it into a broadly invested mutual fund.
- But if you're worried that you might wake up
and see the name of your bank on the news,
making sure your accounts are with insured institutions
and under $250,000 per bank should do the trick.
- [Both Presenters] And that's our Two Cents
- [Speaker] Thanks to our patrons
for keeping 2 cents financially healthy.
Click the link
in the description to become a Two Cents patron.
(upbeat music)
- If you still think there's a way to perfectly
protect your cash from loss,
you might wanna check out our episode,
Should I Invest in Gold?
(upbeat music)