Ideally, nearly everyone has some safe, ready money on deposit with a bank or credit union. But… when that amount is in the hundreds of thousands, a different set of risks (and alternatives) emerge – “gotchas” that can sneak up on the best of us.
Gotcha #1 – The amazing shrinking bank balance
Keeping your ready money in an insured financial institution is certainly better than keeping it under the mattress, but at today’s prevailing deposit rates, the spending power of that money is likely still shrinking with each passing month. The U.S. inflation rate has averaged 3.23 percent from 1914 until 2021 and was 4.2% for April 2021.1 If you’re not earning an equivalent rate on your bank balance (and if you are, please tell us where!), then that money is effectively shrinking.
In investment terms, most portfolios experience some degree of drag from their allocation to cash as an expected cost of liquidity. But if your bank balance is disproportionately large, or if the returns from the rest of your portfolio aren’t making up for that cash drag, you may be growing poorer rather than richer over time.
Gotcha #2 – Uninsured balances
FDIC insurance caps out at “$250,000 per depositor, per FDIC-insured bank, per ownership category,”2 and the same goes for NCUA insurance provided for credit union deposits. You may be able to increase the insured amount by spreading your balances across institutions or through account structure or ownership changes, but for any given account, odds are that only your first $250,000 are insured.
Gotcha #3 – Disappearing investment goals
For many of us, a savings or money market account feels like a safe and easy place to park our money, and this is largely true. But all too often, large balances that we originally planned to sit in a bank account “just for a few months,” “until the markets settle down,” or “until I figure out what to do with it” can slumber there for years. We don’t believe in letting money be lazy. It needs to work hard for you every minute of every day if it’s going to help you reach your long-term goals. It should also be working for YOU – making you richer rather than some banker.
Avoiding these “gotchas”
Your investment advisor can help you “right size” your bank balance to ensure adequate liquidity while keeping your money a) insured and b) working hard for you. They can also guide you through a wide variety of low-risk investment alternatives for the rest of that money to help you find a solution that’s right for you. One designed to help you outpace inflation and stay on track to accomplish your unique investment goals without adding an undue amount of risk to your portfolio. The key is to get started – to take that first step towards waking up that slumbering bank balance and sending it to work!
Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.
LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.
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Sources:
1 https://tradingeconomics.com/united-states/inflation-cpi
2 https://www.fdic.gov/deposit/deposits/faq.html