Sunday, August 3, 2008

Beyond FDIC: Ideas for Protecting Your Cash

Most consumers and small business owners in the US are aware that the FDIC insures individual accounts up to $100,000. That is the figure that each account holder is insured for in the event of a bank failure, such as the one that just occurred at IndyMac Bank in California.

FDIC insurance provides adequate protection to consumers with total cash assets below $100,000. However, retirees and small business owners need to look at things a little differently - that $100,000 limit may not be nearly enough if your retirement savings are $1,000,000, or the monthly payroll for your landscaping business is $200,000.

I saw a number of worried-looking retirees (and possibly a few landscapers) standing behind the television reporters in the IndyMac parking lot as they announced the failure.

Hopefully, some of these retirees had split their funds into multiple sub-$100k accounts at different banks, or, if a couple, split their deposits into separate joint accounts registered to the couple, single accounts registered to the husband, and another single account registered to the wife.

However, the looks on the faces of the folks I saw on television tells me otherwise. I think it's fair to say that a lot of people who saw the same images are looking to take action. If you're one of them, here's some ideas:

One option is the one I just mentioned - if you have $200,000 in a single account at a single institution, you may want to consider splitting it between yourself and your partner, or moving half to a different institution.

Another option that concerned retirees and small business owners might also wish to consider re insuring larger short-term cash deposits is CDARS. CDARS is a program that enables small businesses to split larger (e.g. >$100k) deposits into individual, FDIC-insured CDs.

CDARS was founded in 2003 by Alan Binder, former Vice-Chairman of the Federal Reserve. Around 2,200 banks in the US now offer this option. The program offers insurance for amounts up to $50mm - but even small business owners/sole proprietors with much smaller balances of working capital should take a look at CDARS.

The typical term of the CDs is four to six weeks. The CDARS web site is here.

Another investment category that concerned consumers need to keep an eye on is their stock portfolio. Because it is so convenient, a majority of consumers now trade their portfolios online. But accounts with online brokerages are not insured by the FDIC.

If you have $100,000 on deposit at one of the leading brokerages, you are SIPC-insured by a private non-government group. How much insurance is offered depends on the individual brokerage.

Many online brokerages offer 100% coverage, but the system has not yet suffered a test involving the closure of a large brokerage. Read the small print carefully - and look at their balance sheets - before you sign up.

Finally, one additional piece of "insurance" that retirees and small business owners should definitely consider is using Authentium SafeCentral - especially while banking or trading online.

The criminals behind last year's multimillion dollar thefts from online brokerages used stolen user credentials to steal $26 million in cash from online accounts in 2007. SafeCentral was designed to prevent that kind of fraud.

SafeCentral protects consumers and small business owners from key-loggers and screen-stealing malware better than anything else we've tested. If you're worried you and your funds may become a target, just go the web site: you can download SafeCentral for free.

Note: PC Magazine just gave SafeCentral an excellent review. Check out my blog post for the link.

Note: I'm not a financial advisor, or a banker - I'm a consumer and small business owner, just like you. I suggest you check out the above suggestions with your bank - they will undoubtedly have some excellent additional suggestions.

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