Have you been keeping up with the news lately? If so, you may have heard about the recent bank failures. As someone with an account, you may be feeling uneasy about the safety of your hard-earned money. However, I’m here to tell you that there’s no need to worry. In this blog post, I’ll explain why you can rest easy knowing that your hard-earned savings are secure.

Understanding Bank Failures

First things first, let’s talk about what “bank failure” actually means. In simple terms, a bank failure occurs when a bank is unable to meet its regulatory financial obligations. Safeguards are put in place and those safeguards are called regulations. When a bank slips outside of those regulations, the enforcers (government) steps in. This can happen for a variety of reasons, such as bad investments, fraud, economic downturns, and it could also be completely rumor based (whispers of a bank run). When it deems a bank has failed, the Federal Deposit Insurance Corporation (FDIC) steps in to protect depositors. The FDIC is an independent agency of the federal government that provides insurance for deposits at banks and savings associations. This means that if your bank fails, your deposit is insured up to $250,000 per depositor, per insured bank. Then the feds sell the bank to a more “responsible” bank. So even if the bank fails, you won’t lose your money.

It’s also important to note that bank failures are relatively rare. According to Forbes’ 2023 May 01 article, “Failed Banks In The U.S. — An Analysis By Year, Size And More,” there are typically 25 bank failures per year. And you didn’t know that many banks failed every year because it’s not newsworthy and you did not care until the news dramatized on a very risky bank closing down in the Silicon Valley. Compare that failure rate to the hundreds of thousands of banks and savings associations in the United States, and you can see that the chances of your bank failing are very low. What is the failure rate? Well, there’s about 18,000 financial institutions, so about 0.14%.

Furthermore, the FDIC has a strong track record of successfully resolving failed banks and returning depositors’ funds. In fact, since the FDIC was established in 1933, no depositor has lost a single penny of insured funds as a result of a failure. So you can have confidence in the FDIC’s ability to protect your savings.

The Strength of the Banking System

Another reason why you don’t need to worry about bank failures is the overall strength of the banking system. The banking system in the United States is highly regulated and closely monitored by federal and state agencies. Banks are required to meet strict standards (regulations) for capital, liquidity, and risk management, which helps ensure their stability and safety.

In addition, banks are subject to regular stress tests (more regulations) to assess their ability to withstand economic shocks. These stress tests simulate a variety of scenarios, such as a severe recession or a sudden drop in the stock market, to determine if the bank has enough capital and liquidity to survive. Banks that don’t pass these stress tests are required to take corrective action to improve their financial position.

Overall, the banking system in the United States is one of the strongest and most stable in the world. It has weathered numerous economic downturns and financial crises, and has emerged stronger each time. It’s been the world leader for 78 years! So, even in the unlikely event of a bank failure, you can trust that the overall system is strong enough to prevent a widespread collapse.

And remember, most of these bank failures are regional banks that cater to specific crowds. For example, the Silicon Valley bank was known to be the bank for high-risk startup companies and investors. Well, if the saying is true that 50% of startup businesses fail within the first 5 years then there’s no doubt why that bank failed. If you walk into your bank, be sure to check out how hard or easy it is to get things like loans – just don’t get one, debt is terrible! If it’s too easy, the bank may be unstable. If it’s rigorous and has a competitive interest rate, then it may be more sound.

Diversification and Risk Management

Finally, as a saver, there are steps you can take to further protect your money and reduce your risk. One of the most important is diversification. Diversification means spreading your money across different types of accounts and institutions. The FDIC insures $250,000 per account per insured institution. So as long as your financial institution is FDIC insured and your specific account doesn’t hold more than $250k, then you’re golden. If you have more than $250k, then simply open up another account at the same location or a different bank if you want to branch out.

In addition to diversification, it’s important to practice good risk management when it comes to your emergency savings. This means avoiding risky investments or accounts that promise high returns but come with a high level of risk. Stick with FDIC-insured accounts and institutions that have a solid reputation and track record of stability. And make sure you have a six month emergency fund that is separate from all other accounts. But remember, money needs an assignment, so don’t just have a bunch of savings accounts without purpose. Have one account with a 6-month emergency savings, if you’re self-employed have a second account to act as a “Feast or Famine” fund to cover expected slow months, and use the rest of your money on purpose.

By following these principles of diversification and risk management, you can further protect your savings and give yourself peace of mind.

In conclusion, while the news of bank failures may be concerning, there’s really no need to worry – especially when you look at it in historical context. The FDIC is there to protect your savings, the banking system is strong and stable, and there are steps you can take to reduce your risk and those risks exist with or without a bank account. So, keep saving, keep diversifying, and rest easy knowing that your money is safe, secure, and has a purpose.

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