47

I am curious how a millionaire would guarantee the safety of his money, given that the FDIC only insures up to $250K of an individual's deposits at a bank.

If someone had $3 million that they wanted to put into the bank, would they have to open up 12 different bank accounts and deposit $250K into each one, so that all of his money is insured by the FDIC? Or is there an easier way to guarantee the safety of all his money?

7
  • 8
    Even if all the money was insured, the money would lose value over time due to inflation. To guarantee safety of their 'wealth' (not money), they would spread it over a variety of investments. Value of these investments go up and down,and so does their wealth, that is why one day Bill Gates is richest man, next day it is Carlos Slim or someone else
    – Victor123
    Jan 14, 2014 at 1:21
  • 1
    Ever looked into money market mutual funds? That would be a cash equivalent where some companies will store millions of dollars in commercial paper and other securities that are quite liquid with little price volatility.
    – JB King
    Jan 14, 2014 at 6:11
  • JB King, money market funds are regarded as safe, but probably not quite as safe as something with FDIC insurance, since there have been a few instances when a money market fund "broke the buck".
    – 7529
    Jan 14, 2014 at 17:52
  • 4 week or 13 week T Bills. Dec 22, 2014 at 15:55
  • 3
    @DJClayworth: losing 10% is volatility. "security" to me implies guarding against the possibility of a 100% loss - and I'd say that very rich people care about that much more than poor people, as they have more to lose. Dec 22, 2014 at 16:30

9 Answers 9

38

They might not have to open accounts at 12 bank because the coverage does allow multiple accounts at one institution if the accounts are joint accounts. It also treats retirement accounts a separate account.

The bigger issue is that most millionaires don't have all their money siting in the bank. They invest in stocks, bonds, government bonds, international funds, and their own companies. Most of these carry risk, but they are diversified. They also can afford advisers to help them manage and protect their assets.

14
  • 4
    Agreed! The 'Cash' would likely be in short term treasuries, not in $250K bank accounts. Jan 14, 2014 at 0:50
  • 11
    If they had $3M in a checking account, they need to fire their financial adviser. That's a huge waste of potential earnings.
    – JohnFx
    Jan 14, 2014 at 0:52
  • 16
    @JohnFx - not so fast, John, my friends who are worth over $1B, typically keep a month's expenses in checking. It's not practical to pull $1M out of the ATM every week. Jan 14, 2014 at 0:58
  • 29
    I'll file that under first world problems. :)
    – JohnFx
    Jan 14, 2014 at 1:16
  • 3
    @pacoverflow I might not be a good example, but being nowhere near a millionaire, I have 6 bank accounts (for various different reasons... Some just because I'm too lazy to consolidate). Frankly, not that big a deal to manage.
    – littleadv
    Jan 15, 2014 at 6:06
20

Rich people use "depositor" banks the same way the rest of us use banks; to keep a relatively small store of wealth for monthly expenses and a savings account for a rainy day.

The bulk of a wealthy person's money is in investments. Money sitting in a bank account is not making you more money, and in fact as Kaushik correctly points out, would be losing value to inflation.

Now, all investments have risk; that's why interest exists. If, in some alternate universe, charging interest were illegal across the board, nobody would loan money, because there's nothing to be gained and a lot to lose. You have to make it worth my while for me to want to loan you my money, because sure as shootin' you're going to use my loan to make yourself wealthier.

A wealthy person will choose a set of investments that represent an overall level of risk that he is comfortable with, much like you or I would do the same with our retirement funds. Early in life, we're willing to take a lot of risk, because there's a lot of money to be made and time to recover from any losses. Closer to retirement, we're much more risk-averse, because if the market takes a sudden downturn, we lose a significant portion of our nest egg with little hope of regaining it before we have to start cashing out.

The very wealthy have similar variances in risk, with the significant difference that they are typically already drawing a living from their investments. As such, they already have some risk aversion, but at the same time they need good returns, and so they must pay more attention to this balancing act between risk and return. Managing their investments in effect becomes their new job, once they don't have to work for anyone else anymore. The money does the "real work", and they make the executive decisions about where best to put it.

The tools they use to make these decisions are the same ones we have; they watch market trends to identify stages of the economic cycle that predicate large movements of money to or from "safe havens" like gold and T-debt, they diversify their investments to shield the bulk of their wealth from a sudden localized loss, they hire investment managers to have a second pair of eyes and additional expertise in navigating the market (you or I can do much the same thing by buying shares in managed investment funds, or simply consulting a broker; the difference is that the wealthy get a more personal touch).

So what's the difference between the very wealthy and the rest of us? Well first is simple scale. When a person with a net worth in the hundreds of millions makes a phone call or personal visit to the financial institutions handling their money, there's a lot of money on the line in making sure that person is well looked-after. If we get screwed over at the teller window and decide to close our acocunts, the teller can often give us our entire account balance in cash without batting an eyelid. Our multimillionaire is at the lower end of being singlehandedly able to alter his banks' profit/loss statements by his decisions, and so his bank will fight to keep his business.

Second is the level of control. The very wealthy, the upper 1%, have more or less direct ownership and control over many of the major means of production in this country; the factories, mines, timber farms, software houses, power plants, recording studios, etc that generate things of value, and therefore new wealth. While the average Joe can buy shares in these things through the open market, their investment is typically a drop in the bucket, and their voice in company decisions equally small. Our decision, therefore, is largely to invest or not to invest. The upper 1%, on the other hand, have controlling interests in their investments, often majority holdings that allow them far more control over the businesses they invest in, who's running them and what they do.

5
  • 2
    "If, in some alternate universe, charging interest were illegal across the board, nobody would loan money, because there's nothing to be gained and a lot to lose." Do note that recently, various sovereign bonds (I think Switzerland, Germany and Denmark) yield or have yielded negative interest rates. In other words, on occasion a known, small loss is preferable over a feeling of insecurity about whether one would get the principal back. (And in principle, this makes sense; you are effectively paying a small fee to have someone safekeep your money.)
    – user
    Feb 7, 2015 at 14:25
  • @MichaelKjörling - This is true, however this example is a "best horse in the glue factory" type situation; negative yields are only tolerated by the market when there's an unacceptable level of risk everywhere else. Your comparison to a "safekeeping fee" is valid, however; if your money was in the form of gold bars, you'd need to build your own vault and hire people you trusted to guard it (which in part means paying the guards enough to keep them honest).
    – KeithS
    Oct 26, 2015 at 19:14
  • I agree, negative yields "shouldn't" happen in a normal situation, but it does show that the blanket statement of illegality of charging interest leading to nobody loaning money isn't necessarily true.
    – user
    Oct 26, 2015 at 21:15
  • @user then the rates will then be high enough to make the illegal activity be worthwhile. Markets do work, whether the government wants everything to be legal or not.
    – Nelson
    Mar 13, 2023 at 6:35
  • Interesting (to me anyway): Kiplinger claimed "People with the top 1% of net worth (opens in new tab) in the U.S. in 2022 had $10,815,000 in net worth. The top 2% had a net worth of $2,472,000. The top 5% had $1,030,000. The top 10% had $854,900." By that definition, including the house... Hmmm.
    – keshlam
    Mar 15, 2023 at 23:38
9

I found out there is something called CDARS that allows a person to open a multi-million dollar certificate of deposit account with a single financial institution, who provides FDIC coverage for the entire account. This financial institution spreads the person's money across multiple banks, so that each bank holds less than $250K and can provide the standard FDIC coverage. The account holder doesn't have to worry about any of those details as the main financial institution handles everything. From the account holder's perspective, he/she just has a single account with the main financial institution.

1
  1. Most people who have over $250,000 in liquid cash savings would not want to start putting their money into regular savings accounts in different banks, especially with interest rates as ridiculously low as they are now in 2014-15. People with money will want to diversify their investments in ways that will potentially earn them more money, and they can also afford to seek the advice of financial planners who can help them do this wisely.

  2. Even if you decide to put $250,000 into various accounts at different banks, I wouldn't necessarily trust that the FDIC will be able to help you recover your money in the event that your banks go under. The amount of money available to the FDIC to cover such losses pales in comparison to the actual amount of money that Americans have in their bank accounts.

1
  • 1
    Sure, but the odds of many banks failing at once are normally pretty low, so the reserves are usually enough to cover it. They seem to be going over and above this time partly to stop people from triggering further runs on banks. (It's A Wonderful Life, while being unbearably sappy, does actually include a good basic tutorial on how banks work and what constitutes a run... At least, those banks which are still savings-and-loan institutions.)
    – keshlam
    Mar 15, 2023 at 23:43
1

Government bonds allow putting large amounts of money into guaranteed investments. The risk is that of inflation hurting the buying power of the principal. The government will almost always return the principal amount at redemption.

In the U.S. a Treasury Direct account allows the buying of government bonds, notes, and bills as directly from the government.

0

The FDIC has been pretty good at recovery lost money from failed banks. The problem is the temporary loss from immediate needs. The best thing for anyone to do is diversify in investments and banks with adequate covered insurance for all accounts. Immediate access to available cash is always a priority that should be governed by the money manager in this case yourself.

2
  • 1
    That's right. FDIC is misnamed because they rarely act as an insurer making payouts to replace money that is gone. The vast majority of failed banks in the 2000s Great Recession involved FDIC payouts of $0. And this is when assets of all classes were in free fall. Banking laws seem to work. Mar 11, 2023 at 20:56
  • Banking laws worked better for a while. Then the deregulationists argued that since there hadn't been a fatal crash that week, seat belts were no longer needed...
    – keshlam
    Mar 15, 2023 at 23:48
0
  1. Same bank: Open accounts in different ownership categories (single, joint, retirement account, trust, business, etc.)

  2. Open accounts at more than one bank.

  3. Use a network service which divides big deposits into smaller certificates of deposit at FDIC-insured banks

  4. Buy Treasury obligations.

  5. Open a brokerage account ($500k in house insurance). FDIC insurance covers each individual bank; therefore, you can purchase as many different bank $250k CDs as you like at your broker. Perhaps a slightly lower face value due to interest to be received.

I am not a financial adviser so do your own due diligence.

0

You need to check your risk. Even if only $250,000 is insured, you are not going to lose 750,000 out of a million dollar deposit. Banks have huge amounts of loans that people need to repay as well. If those loans are 90% of the deposits then the bank is in deep trouble, but you still get 90% of the uninsured money back. Eventually.

-3

Even assuming hypothetically that you are able to split money in different bank accounts to get full coverage and all your accounts are in top ranking financial institutions in USA, you can not rely on FDIC if all or most of those banks go broke. Because FDIC just has a meagre 25 billion dollars to cover all bank accounts in the USA. And you know the amount of bank deposits in USA run in at least a trillion of dollars.

US Deposits & FDIC Insurance figures

2
  • 3
    The FDIC insurance is really there in case a limited number of smaller banks actually go out of business and the assets aren't capable of covering the depositors. In the event that multiple bank failures, or even one large bank, are likely then the Fed itself steps in - as we saw several years ago.
    – NotMe
    Feb 7, 2015 at 20:26
  • 1
    Note that banks generally go out of business not because the money doesn't exist, but because most of it is loaned out and then some panic triggers a run on the bank, causing them to run.out of immefiately available cash and forcing them to resort to shutting down until loans and investments can be sold off to meet that demand. The fact that rushing that process means taking a serious loss is what causes the bank to fail as a business.
    – keshlam
    Mar 16, 2023 at 6:51

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .