How Safe is Your Client’s Cash?

CFP Board expects certificants to understand “safe haven investments” of cash.  A safe haven in this context is an account with a low default risk, as in bank deposits guaranteed by the Federal Deposit Insurance Corporation (FDIC).

 You may have heard that cash deposited into a federally chartered bank is guaranteed up to $250,000 by the FDIC, an agency of the U.S. Government.  While that is true, it’s vastly understates the guarantee available.  For example, assume your married clients Jack and Jill have a total of $2,000,000 in savings accounts in two Federally chartered banks. They plan to invest this $2,000,000 gradually into the market over the next 18 to 24 months.

• They’re entitled to $250,000 in guarantees per ownership category per Federally chartered bank.
• The chart below shows three ownership categories (there are 14) including accounts owned in Jack’s name, Jill’s name, and joint name.
• Interestingly, the FDIC coverage is $250,000 per joint owner in jointly owned accounts.
• They have FDIC coverage of $1,000,000 in ALPHA Bank plus $1,000,000 of FDIC coverage in ZED bank.

Here’s an interesting question.  Could your clients use FDIC to protect themselves from equity market losses?  That answer is a resounding no!  Only traditional bank products such as checking, saving, money market, and CDs qualify for FDIC coverage.

Here’s the bottom line, leaving $2,000,000 in low-return traditional bank products for an extended period of time leaves Jack and Jill’s purchasing power open to inflation, but as a tool to keep cash safe from default risk during a short period, it may well have a place in Jack and Jill’s financial plan.