Is it reasonable to split my money across two banks for security?

Question

I am working to build an emergency fund, so I have money available in case I need it. I have read advice about keeping money split across multiple banks, for security. The idea is: if one of my banks gets hacked or I lose access to the funds, I still have part of my money at the other bank.

How wise is this to split money across multiple institutions? Is this normal practice for mitigating financial risk? Overkill?

I like the idea of splitting my assets across banks with different risk profiles. e.g. a large national bank and a local credit union. Some banks talk about money being insured so it can be replaced if lost. But what if this takes a long time? I don't want to wait weeks or months for paperwork when I have lost access to my money.

Is there a better strategy?

Answer 1

In 2008, about 25 banks failed and nearly 150 more failed in 2009. The FDIC was quite adept at making a seamless transition of ownership without the need to close the banks. The odds of a bank closure are slim because the 'suits' are involved before the failing bank fails.

Though not asked, it's a good idea to have a second brokerage account. When a broker fails, it isn't necessarily an overnight seamless transition. While SIPC guarantees custodial ownership of your stocks, you are at risk during the transition period (loss of share value).

Answer 2

It depends what kind of risk you are afraid from, I can think of cases where splitting the money can prevent you from accessing it.

In some countries execution office can "lock" funds in your bank account, but up to the due amount, since the bank don't know that your money is locked in the other one too - you can be ended up with double the amount locked - in the two banks.

For myself - I own two bank accounts, this saved me once when while traveling a credit card was locked (having another credit card could get the same effect in this case).

Answer 3

From an information security point of view, this would provide a little bit of security as long as you used different usernames and passwords for each account. Each account requires a separate hack to compromise as long as:

1) you use different usernames/passwords

2) the accounts cannot transfer funds between each other (this makes it a pain to set up, but if a hacker can transfer funds from your other accounts to a compromised one it basically ruins the entire purpose.)

3) you don't store the account information in an easily accessible location (use a password safe at least).

Now, in terms of financial security: the FDIC insures each deposit account you hold with an approved bank. The catch being, only one account per institution is insured (or a combination of your deposit accounts up to $250,000). Also, you're only protected from the bank failing. If someone hacks your account there's no FDIC insurance that kicks in and your bank is not legally required to refund your money.

This question also reminds me of something my grandfather always said: "Use multiple banks in multiple states." He was referring to protecting your assets from divorce settlements. We all have heard that 50% of marriages end in divorce and you lose 50% of your money. The reality is a little more detailed, 5 states (including California) don't report their divorce statistics, and you lose half of what was gained during the marriage (as long as you can document what you had before the marriage and your ex-spouse can provide reliable documentation of your current finances) and potentially any money you consistently provided to your ex-spouse.

Do you see where I'm going with this? During a divorce, the court can order your bank to reveal how much you have deposited, but they have to know where you have your accounts and out of state banks don't have to comply with a different state's court orders. When you set up a bank account, you have to provide your address, but you don't need to update it when you move and it's now easier than ever to manage accounts through electronic statements. As you go through life and move around, open new accounts (local banks/credit unions are best) and have electronic statements go to a private email account. Any money you keep in a shared account will be split and any money you consistently provide to your spouse/partner (watch out for states that recognize Common Law Marriages) will be considered when determining alimony payments.

Answer 4

FWIW in US (which you didn't say or tag), about 30 years ago my daily commute took me walking past the headquarters of the bank I used then. After working late one Friday I was coming home about 9pm and I saw a large group of people in suits leaving from (and locking) the back door of the bank offices, which I thought was unusual. On Monday morning by the time I went past, there was a large sign in the front window that the old bank had been closed by state regulators, reopened under new ownership, and all accounts immediately accessible up to the FDIC insurance limit. (And at that time in my life my total assets, much less my bank cash, were way under the FDIC limit.)