Money Blue Book

So you want to be a millionaire? Well you know what? Me too – and I’m determined to get there in the near future. At this very moment, despite the current state of the economy and the deteriorated condition of the credit markets, instead of just sitting on my hands and wishing upon a star, I’m taking active steps right now to make it all possible someday. While having a financial net worth of a million dollars isn’t what it used to be because of the negative effects of inflation, it’s still the measuring stick we use today to delineate the dreamers from the ones who have financially made it.

I know it’s not an unfathomable dream to have because I’ve seen the system work firsthand. The possibility is not just reserved for celebrities or the elite, but is very real and plausible for ordinary people as well. One of my close childhood friends is a multi-millionaire. And he’s only 30 years old. He’s not a self made millionaire as he inherited the vast bulk of his fortune from his parents, but it was his parents who put forth the gears of financial practice many years ago that brought their finances to what it is today. From the time my friend’s parents married, they lived a very frugal life. While they were by no means cheap, they avoided the peer pressures and temptations of living lavishly, opting instead for a humble home they could afford and limiting pricey expenditures like dining out to only rare occasions. They drove affordable American made cars and stayed away from buying expensive electronics and gadgets. However, at the same time, they by no means avoided the use of debt financing. Instead, they embraced its responsible use, viewing credit cards and balance transfer offers as the means to generate free credit card arbitrage income. Through the use of airline credit cards, they were able to finance family vacations and trips with free frequent flyer mile bonuses, and with business credit cards, they took advantage of high credit limit card financing and business spending rewards to earn cash back income. Quite a few years ago, the American Automobile Association (AAA) permitted its AAA credit card holders to enjoy interest and transaction free traveler’s checks charged as purchases to their credit cards. My friend’s parents frequently took advantage of this perk by depositing those checks into high interest money market accounts and high yield savings to earn free money – the early beginnings of what many now today call 0% balance transfer arbitrage (the ability to make money and generate net profit from a temporary price differential between two markets). However, despite their frequent strategic use of credit, they always made sure that they paid off their non-0% balances every month, thus avoiding high interest payments and late fees.

From their humble dual income paycheck beginnings, my friend’s parents loyally and consistently squirreled away the bulk of their wages into their high yield savings accounts, while always making sure they took full advantage of their respective employer’s tax deferred 401K retirement plans and matching programs. Every year, they maxed out their Roth IRA’s and their traditional IRA accounts as needed, while steadily plowing money into their stock market portfolio. Over the years and through the decades, in good times and in bad, they continued to invest, dollar cost averaging down as the markets dipped but continuing to strategically seek attractive investment opportunities as the markets rose. Their stock and bond portfolio consisted primarily of long horizon mutual funds and index funds, but they also purchased large positions in individual stocks as well. Instead of chasing performance or trying to time the volatility of stock prices, they patiently and wisely sought out long term positions in blue chip, value brands like Coca Cola, McDonalds, Disney, and even Berkshire Hathaway.

With their excess money, they purchased real estate. What started out as a single home, eventually blossomed into a housing portfolio comprised of several million dollar houses and a few very valuable condominium properties. As home values ebbed and flowed with the real estate market over the decades, they rented them out to help pay for their multiple mortgages. With the luxury of time and fiscal discipline, all of their multiple home mortgages have now been fully paid off.

While my friend clearly benefited from the wise financial decisions his parents made, he has also learned to embrace their frugal financial practices for himself. Today, despite his tremendous wealth, my long time friend remains one of the most frugal and unassuming people I know. I often joke that he is the “poorest rich person I know” due to his incredible frugality and disdain for excessive spending. He truly is the millionaire next door as one can’t possibly guess simply by looking at him that he has such vast wealth at his disposal. Meanwhile, though he lives a life of comparative comfort today, he continues to actively practice the financial wisdom of his parents – always looking for ways to broaden his income streams and constantly trying to find new and improved ways to invest his savings.

The Process Of Becoming A Millionaire Is Not A Get Rich Quick Scheme, But A Patient and Systematic Approach To Earning, Saving, and Investing Money

The whole point of this long story about my friend and his parents is to show that with some concerted fiscal discipline through personal finance education and a dedication towards building long term investment positions, anyone can truly become a millionaire. Given enough time, and in his parent’s case – several decades, the amazing power of compound interest can grow any small sum of money and turn it into a significant amount. It is a grossly overstated myth and fallacy that only those who inherited their money, won the lottery, or developed a successful small business can acquire wealth and become a millionaire. While having a very high income, striking it big in the stock market, riding the housing boom to the top, or acquiring riches through the passing of wealthy relatives can certainly speed up the process, even for the rest of us white collar or even blue collar workers who collect weekly paychecks have the potential to reach the promised land of financial independence.

Becoming a millionaire is not an overnight process and there are no gimmicks, scams, get rich quick secrets, or infomercial packages you can buy or learn to turn you into an overnight millionaire. Please stay away from those trashy midnight get rich quick TV commercials. With their flashy salesman approaches to convince you to part with your money, all they will do is lead you further into debt as you spend large sums of money buying their pointless tapes and useless DVD’s. While a tiny portion do manage to offer some substance with their flair, the vast majority of these televised get rich quick programs are basically scams and repackaged junk. There are occasional real money making, wealth building secrets out there in the market, but chances are you won’t find much information when these temporary arbitrage opportunities do crop up. Remember the old adage – “those who can, do – and those who can’t, teach.” It is very true. I personally invest and dabble in several very lucrative income generating businesses, both online and through my legal practice. However I would never reveal the secret and crux of my approaches and methods, at least while the going remains good. Only after I have personally tapped out the financial gold mine opportunities would I contemplate sharing those supposed secrets with others. And only then would I start writing and selling how-to guidebooks to supposedly sell my secret method.

The 10 Automatic Steps To Becoming A Millionaire

Below are the basic ten steps to start you down the road to becoming a millionaire. Every journey begins with a series of fundamental steps. If you truly want to become financially liberated one day, it’s time to start making the commitment to educate yourself and start thinking like a millionaire. Remember, there is no gimmick and it’s a long, steady process, but these steps will put you towards reaching that goal someday.

Earn Money and Seek Out Opportunities To Save:

The 10 basic steps to becoming a millionaire are broken down into two primary categories. The first main series of steps (1 thru 5) involve making money and preserving it. The second series of steps (6 thru 10) involve pursuing income producing investment opportunities:

1) Educate Yourself In Personal Finance, and Develop The Drive To Learn - A few common traits that are almost universally found in full fledge billionaires, and bona fide millionaires is that they are all driven to learn and succeed, and are willing to put their ambitions into action to make things happen. Border line cocky and very confident, self made millionaires operate with a plan and are highly motivated. Most are extremely pro-active and driven to constantly improve their financial lives and earning potential, whether it be through the pursuit of advanced degrees or the taking on of a calculated business venture risk. In my case, I graduated from law school and worked as an attorney for numerous years before I eventually made the decision to get out of that profession. The work was terribly unsatisfying and so I made the affirmative decision to become self employed and start my own online business. The decision was  fraught with greater risk, but the move ultimately reaped much greater rewards.

Aspiring millionaires need to take it upon themselves to fully educate themselves on the nuances of personal finance and strategic financial planning. Even those who ultimately deem it more cost and time efficient to outsource their tax preparation and financial planning work to a so-called expert, it’s still very important to develop a personal groundwork in finance and business concepts. Without a fundamental grasp of how compound interest works or an understanding of investment terminology like stocks, bonds, Roth IRA’s, and short selling, aspiring millionaires may never reach their full potential. As an aspiring millionaire myself, while I can currently afford to hire a tax accountant, I still choose to file my own taxes every year. Eventually as my tax situation grows more complex I may choose to hire a tax preparation expert to make better use of my limited time, but at least I will have already developed a good grasp of basic tax law and the the nuances of capital gain taxation and business deductions. When it comes to personal finance, always learn to do it yourself before hiring someone else to do it for you.

2) Invest In Higher Education, and Pursue Jobs and Professions With High Incomes – Certainly when it comes to becoming a millionaire, the most important entry level step is to develop a steady and predictable stream of income. Unless you have a fixed injection of fresh income on a continuous basis for a good period of time, you won’t have any investment capital to work with. While it has been shown on blogs and websites like CNN’s Millionaire in the Making series that reaching the one million dollar networth mark doesn’t require individuals or families to rake in a high 6 figure salary annually, it certainly doesn’t hurt. Clearly, the more money you make and the higher your annual salary, the sooner you are likely to reach your goal of becoming a millionaire.

When it comes to making more money, proper higher education is key. It’s no longer possible to get by in this ultra competitive world on a college degree alone. In almost all cases of professional advancement, a graduate or professional degree is paramount to future financial success. While a small portion strike it rich without the benefit of advanced degrees, the vast majority of successful millionaires have post graduate degrees. But it’s not just any random degree in higher education either. Certain advanced degrees simply have greater potential to lead to higher income jobs than others – professional graduate degrees like MBA’s, JD’s, MD’s, and advanced certifications in engineering just to name a few.

While it’s true that some jobs and professions are overrated with financial rewards that have been greatly exaggerated, on the whole, certain majors and professions simply have it easier than others when it comes to future income prospects. While many teachers, nurses, administrative assistants, and paralegals have the potential to make good money and live a decent life, their road to millionaire status, with all other things being equal, is significantly more difficult than that of big firm lawyers, doctors, financial planners, and successful small business owners. While I’m sure areas of study like English, music, theater, and history are incredibly rewarding in their own personal ways, the reality is that they aren’t the best majors to have when you have your sights set on becoming a millionaire someday. The professions that they lead to simply aren’t as lucrative as those related to business, health sciences, or computers. Probably the most financially lucrative fields of study can be found in finance and business, advanced health care, and engineering. Those who want to vastly jump start their road to millionaire-hood ought to pursue these specific types of study during their college and graduate school years. It’s where all the high income producing jobs ultimately are.

3) Save Money By Making Financial Sacrifices When It Comes To Small Daily Expenses – An important tenant of becoming wealthy is not only the ability to make money, but the ability to save money by cutting expenses as well. Even those with substantial streams of income can quickly waste away their money through shoddy investments and lack of proper saving habits. Just look at all the formerly wealthy celebrities with money troubles. An important step to becoming a millionaire is to simply spend less than you earn. The less you spend, the more you have to save, and the more money you save, the more money you have to invest and make your money work for you. Aspiring millionaires understood fully, that an affordable sacrifice today will ultimately pay off in the future through the power of compound interest and the passage of time. Along with putting your money towards the building of an emergency fund, there has to be a systematic habit of saving and investing. For some, this requires setting up an automated savings plan that automatically transfers money from your primary checking account into a high interest savings account or makes regular contributions to a mutual fund. For others it means learning to save by cutting back on common expenses – swapping that manicure or new video game, for more interest generating money in your bank account.

Of course, this doesn’t mean you ought to sell your beautiful home or car, and start living in a canvas tent or resort to eating just one meal a day to save money, but you should most definitely live within your means and learn to make some sacrifices in your life. It’s important to recognize that the vast majority of your income is probably discretionary and non essential – probably more than 50%. If you are like most people, you enjoy spending your hard earned money by treating yourself to dinners at fancy restaurants, going to the movie theater, enjoying that daily Starbucks coffee, buying the latest expensive designer clothes, or constantly upgrading your cars and electronic gadgets for the latest model. But by choosing to spend and waste your money on such frivolous and fleeting common luxuries, you are taking money away from your future. There is no need to incessantly pinch pennies like a miser, but try cutting some of these non essential perks and you’ll be amazed at the amount of money saved. That $5 cup of premium coffee everyday may not seem like a lot, but multiply that by 365 days a year and multiply that by the frequency of other luxuries in your life and the amount quickly adds up into the thousands of dollars. Remember, because money saved has already been taxed, money saved is worth much more than money earned, which has yet to be taxed.

As a naturally frugal person, I refrain from chasing after the newest gadget releases. While fancy LCD and plasma high definition televisions have already come out for some time and prices have dropped significantly, I’m perfectly happy with my old bulky CRT television set. Unless my television set gets damaged in the near future, I don’t see the pressing need to upgrade to a flat screen anytime soon. Like TV sets, cars also have a tendency to rapidly depreciate in value within a short period of time. While I can easily afford to buy a fancy, expensive sports car or luxury performance vehicle, I’m quite happy with my modest fuel efficient Honda Accord. I just don’t see the need to upgrade. It’s just a frugal, cost savings mentality that I’ve always had, and a positive trait that I believe will one day help turn me into a millionaire.

4) Seek Out Free Money Offers, Sales, Discounts, and the Highest Interest Earning Opportunities – Aspiring millionaires ought to constantly hunger for savings and finding cheaper and more cost efficient ways of doing things. After all, a fundamental trait of becoming rich is the ability to make and save more than you ultimately spend. Even when you spend money, oftentimes there are ways to structure your actions to end up with a significantly lower net loss. For example, why pay full price for a pair of nice jeans or a new pair of shoes when you can order the exact same item online at a discounted price by using promotional discount codes and by shopping through an online cash back shopping site like Ebates or Fatwallet? Why not stop by your local mall or visit the desired store to try out the product you want, but order the item from your home computer to take advantage of online promo codes and Internet discounts when it comes time to buying. Surely you can wait a few days for shipping and handling for such non essential items. One time savings may not seem like much, but multiply that a few hundred times or even a few thousand times over multiple years, and the money rapidly adds up. These days, it’s significantly cheaper to order most things online, especially when it comes to electronics.

For those with good credit and the ability to properly manage debt obligations, I recommend the use of cashback credit cards to make all of your purchases. By using your reward credit cards as you would otherwise use cash to make purchases, you are able to earn free rewards and cashback savings that you would otherwise not enjoy. So long as your credit cards don’t unnecessarily encourage you to shell out more money than you would ordinarily spend, you’ll accrue attractive rewards and free money in the process. By ensuring that you always pay off your credit card balances every month, you’ll avoid any extraneous finance charges as well.

Savings should never be left idling in a low interest checking account. When not invested, excess money should always be placed into a high yield savings account or CD ladder to garner the highest annual percentage yield possible. While you don’t necessarily have to be a rabid bank interest rate chaser like yours truly, it doesn’t hurt to know where to find the best online savings banks and where to find the top high interest rate offers.

5) Become An Entrepreneur and Run Your Own Small Business – Many millionaires are both entrepreneurs and owners of their own small business. These days, small businesses are the primary drivers of wealth in the United States, and not inheritance. Oftentimes, great financial success comes from the effort and financial gamble of starting one’s own business. While the risks are very real and the stresses of managing your own business operations can be daunting, the financial payoff is potentially much greater than that of working for someone else for the rest of your life. When you work for someone else, you are at the whim of another person’s directive, and as such the fruits of your own labor are not truly your own. Your efforts and talents are used to benefit the company, which is owned and controlled by another, and thus the bulk of the financial rewards do not fully trickle down to you. However, when you run your own business, while the risks are fully attributed to you and your partners, the full tally of benefits are delivered as well. In most cases, becoming a self made entrepreneur requires the assumption of a calculated risk or initial upfront financial investment. However, success sometimes graces people who are simply able to find new and improved way of doing things.

Oftentimes, the best way to become a self made entrepreneur is to take whatever you are good at in your current job and turn it into a self run business. For example, I have a friend who used to work at a landscape company as a manual laborer. After receiving significant exposure to the business of landscaping and the administrative aspects of running such an operation, he ultimately chose to start up his own landscaping company, eventually earning decent profits in the process. As the Internet expands and online commerce grows in popularity, many entrepreneurs such as myself are turning to the web to find ways to make money online. Whether it’s making money on eBay, or generating pay per click and affiliate income with my personal finance or health and fitness blog, aspiring millionaires ought to find ways to break the traditional 9-5 cycle of forever working for someone else. The key to expedited financial independence is to someday get out of the perpetual trading hours for dollars cycle – through self employment and the diversification of alternative income streams.

Make Your Money Work For You:

After generating income and making smart financial decisions based on frugality, the second main series of steps to becoming a millionaire is to take your savings and make them work for you:

6) Start Saving and Investing As Early As Possible – When it comes to saving, the best time to start was yesterday. The second best time to start saving is today. For those set on starting down the path of becoming a wealthy millionaire one day, not only must you continuously enhance and refine your money making potential, you must also find better ways to save that money. Those that want to become rich must make saving money an extremely important priority in their lives and not allow the saving mentality to drift into an afterthought.

As is often mentioned in the lingo of personal finance writers, aspiring millionaires must always “pay themselves first”. Instead of paying down the daily and monthly expenses, and then somehow scrounge up whatever income is left to put into savings, savvy savers must approach savings the right way. The designated amount that you plan to save up each month must be thought of as an expense or bill that must be paid off first. If you wish to save $1,00, $1000, or even $10,000 a month, you must shift those amounts from your daily checking account into your high yield savings bank or your CD ladder savings account immediately before you start withdrawing money to pay off bills or use the money on discretionary expenses like trips to the hairstylist, shopping sprees, or family vacations.

If you can afford to purchase material things and spend your money on life’s little luxuries like your daily coffee or after-work trip to the bar, you most certainly can afford to pay yourself first and save a planned chunk of money as soon as you receive that regular pay check. The key to saving is to make it a systematic practice based on your understanding that delayed material gratification today will beget greater riches in the future as your saved income grows through the magic of compound interest. Remember, frugality and the saving spirit are two lifelong traits of a savvy aspiring millionaire and should never be abandoned.

7) Learn To Manage Debt Responsibly, and Don’t Be Afraid Of Credit - If you genuinely aspire to become a millionaire, you must learn to handle debt instruments responsibly, both long term loans like home mortgages and revolving debt like credit cards. Those who are millionaires are almost always proven users of credit cards and home mortgages – with excellent FICO credit scores to match.

It’s very important to adopt good credit usage habits early on before the bad habits set in. Oftentimes, initial exposure to debt for most people occurs during the early college years in the form of student credit card usage or the taking on of student loans. While these early years are often precarious times for most young people as credit card temptations abound, these are also critical times in a young person’s life when the seeds of fiscal responsibility towards credit and debt are sown. Adults and college students alike, especially those that aspire to become millionaires, must learn to habitually pay off their credit cards in full every month and avoid carrying high interest balances.

Only after you have developed the ability to manage your debt obligations and handle basic credit card usage should you engage in more advanced money making strategies – like the arbitrage use of credit card rewards and cashback programs. Those that know how to use credit cards responsibility should learn to use high reward earning credit cards for all of their purchases, like using a designated grocery credit card at the supermarket, a designated dining out credit card for restaurants and coffee shops, and travel reward credit cards for hotel and airline expenses. Those of you who are able to properly manage your use of credit cards and aspire for millionaire status must develop the continuous and active drive to seek out the best deals and highest free money savings in whatever you do. Millionaires are frequently good negotiators and have developed skills for getting the most bang for their buck. Instead of paying cash for everything and not receiving a single cash back reward or discount in the process, why not use credit cards to make your purchases and earn free cashback bonuses, frequent flyer miles, and reward points without any real significant effort? While it may not make you rich, the credit card rewards can be tremendous – in my case, it’s almost $2,000-$3,000 a year.

The added benefit of active credit card usage is the extra boost it can potentially give to your FICO credit score when used properly. With a higher credit score, you’ll be able to qualify for significantly lower interest rates should you ever decide to take on home mortgage loans or apply for additional credit card offers. While I’m an active participant of balance transfer credit card arbitrage, and have applied for a tremendous number of credit cards over the years, my current FICO credit score is absolutely pristine at 802 (the FICO credit score officially ranges from 300 to a high of 850). This was made possible due to my perfect credit card payment history and my strategic understanding of how credit scores are calculated, as well as my knowledge of what it takes to keep my FICO permanently high.

8) Take Full Advantage Of Tax Deferred Retirement Accounts – If your current employer or employment organization offers employees like you a 401K or 403(b) retirement plan with contribution matching up to a certain percentage of your income, you absolutely must take full advantage. Tax deferred retirement plans like the 401K allow employees to make pre-tax contributions to their special retirement accounts by taking portions of their wages and deferring them into their 401K investments. The great benefit of such retirement accounts is that oftentimes contributions are itself tax deferred as the amounts are taken from your wages pre-tax, and the earnings from your 401K account over its long life are completely tax free when held for the proper period of time.

Within the tax deferred retirement account, participants usually have the ability to invest their account money into a variety of designated stocks, bonds, and mutual fund investments until the time of their retirement. Especially if your employer has a matching 401K where your contributions are equally matched to certain levels by your employer, not taking advantage or making regular contributions to your plan is essentially giving up free money. For typical working class folks, the matching 401K plan is how many of them save and invest significant amounts of money for their retirement. Your goal should be to save up and contribute as much as reasonably possible to such accounts. While retirement may seem so far away in the minds of many young people, the earlier that one starts to save and invest, the better.

Those who are self employed or who do not have 401K’s through their employer but who still want to take full advantage of tax deferred retirement plans should invest in a Traditional IRA (Investment Retirement Account) or open a Roth IRA. These plans enjoy very similar tax benefits as 401K accounts but usually with lower annual contribution limits. In certain cases, those who contribute to a traditional IRA can even enjoy special tax breaks and tax deductions for their contributions, thus lowering their overall tax liability. For most people, the Roth IRA is most advantageous as withdraws in retirement along with the decades of compounded earnings are tax free.

9) Invest in The Stock Market – The stock market is how many people generate significant amounts of money by making wise investment picks and holding for the long haul. In the short run, stock market prices can be volatile and totally unpredictable, but over the span of years and decades (with emphasis on decades), the stock market has historically brought about average annual returns of 8%. Of course, there are bound to be significant stock market crashes and unexpected bull and bear markets during the course of many years, but over a significant amount of time, the vast majority of long term investors have made money. During economic recessions, such as the current credit crisis and housing depression we are undergoing right now, stock prices will inevitably face retrenchment and huge dips. But as billionaire Warren Buffet once remarked, success in the stock market over the very long haul requires an understanding of the interplay between investment fear and greed. As such, it’s very important to continuously seek out bargains and investment opportunities even during the worst of times. It’s how many aspiring millionaires make their riches, by being greedy when the whole world is fearful, and making strategic long term bets during the absolute worst of times.

While stock market investors can participate in the purchase of stocks and options through their own low cost brokerage firms (view my list of the best discount online brokers), a great majority of investors get their primary exposure to stocks through their employer sponsored 401K retirement plans. Whatever the method of exposure, it’s important to invest for the long term. For those of you worried about unpredictable dips and spikes in the stock market, automatic investment plans, whether through your employer’s retirement plan or through automated bank to broker deposits into a mutual or index fund, the key is to keep investing continuously. Automatic investment plans have the added advantage of avoiding the mistakes of buying too much when stock market prices are high and not taking advantage of cheap prices when prices are low. Those that don’t want to deal with the hassle and risk of individual stocks should highly consider low cost no-load mutual funds or broadly diversified index funds that track major stock market indexes. As always, one should always adopt a diversified investment approach and never put all of one’s stock market investment eggs into one basket or company stock.

10) Buy A Home and Invest in Real Estate – While the housing market has been volatile lately, valuations have plummeted, and interest in real estate has waned as evidenced by the drop in house flipping shows on TV, in the long run, home prices have great potential to see positive returns. It’s during those gloomy housing depressions when opportunities and discounted bargains abound. Those that have wisely saved up their money will have the great opportunity to take advantage of such investments during down times through cheaper home prices and home foreclosure bargains. In such down times, it’s even more important to exercise your aspiring millionaire negotiation skills and work out real estate deals that provide for maximum gain. In addition to demanding low ball prices from home sellers, savvy buyers ought to demand significant financial concessions as well, so long as housing supply and demand permit. As always, your home will likely serve the dual purpose of shelter and investment, so you should still make sure you buy a home that fits your lifestyle. Buying too much home may result in the danger of payments that ultimately exceed your ability to pay depending on your mortgage plan.

While the financial and tax saving benefits of the home mortgage interest tax deduction have been greatly exaggerated and blown out of proportion over the years, it’s still an important way for high net worth investors and taxpayers to decrease their overall tax liability. You’re unlikely to find a millionaire who does not own his or her own home. Owning a condominium or a house has traditionally been one of the most proven ways for long term investors to increase their net worth. While in the short term of 10 years or so, home prices can rise and fall like the stock market, in the span of decades due to the finite supply nature of land, home prices inevitably will rise. Of course, the specifics of your real estate purchase strategy should depend on the length of your investment horizon and the remaining time you have left until retirement age.

Whether we want to acknowledge the grim reality or not, the vast majority of the American public is undergoing a mental crisis at the moment during this difficult period of economic recession and housing depression. Indeed, this economic slowdown is causing many Americans to struggle financially, and the series of collapses of major commercial banks and investment brokers have led to a domino effect of pink slip closures and layoffs. With the bailout of major global insurance conglomerate AIG and the takeover of mortgage loan giants Fannie Mae and Freddie Mac by the spend-happy federal government using taxpayer money, significant numbers of shareholders and stakeholders have been financially wiped out in the process. Collapsing under the weight of bad mortgage debts and the loss of value in their subprime mortgage loans, major mortgage lenders like Countrywide and investment brokerage banks like Merrill Lynch and Lehman Brothers have had to engage in significant write offs and ultimately put themselves up for sale at bargain basement discounts.

With the FDIC shutdown of major thrifts and banks like IndyMac and Washington Mutual, as well as the shakeup at Wachovia, even historically secure commercial banks are starting to feel the credit crunch squeeze. With the recent bank safety scares hitting Wall Street and now Main Street, bank deposit customers have been sent reeling and scrambling to check FDIC insurance coverage limits – calling their banks to arrange their affairs for sufficient coverage. When FDIC insured bank consumers are feeling uncertain and fearful, you know the confidence of the American people in their banking and credit systems have been significantly shaken. Many people have been left unable to sleep soundly at night, as lingering concerns of bank safety and security have paralyzed the American economy and investment psyche. So what’s a savvy investor and account depositor to do in this brave new world of financial bailouts and bank closures?

To Survive The Credit Crunch, Financial Crisis, and Housing Market Collapse – Seek Out Security, Stay Optimistic, and Look For Opportunities

Without a doubt, the financial, stock, and housing markets remain volatile as the subprime mess has paralyzed lenders, halting the once liquid credit markets. However, whatever you do, it’s best to avoid the “irrational exuberance” (quoting former Federal Reserve Board Chairman Alan Greenspan’s catch phrase) and stay clear of the overly extreme sentiments of certain doom and gloom naysayers. Remember, the economy will survive and the financial system will be repaired in due time – have a little faith.

Take our current energy crisis and oil supply depletion situation for example. Yes, it’s true the world’s supply of crude oil is steadily dwindling and gas prices have skyrocketed recently – however this doesn’t mean the world is going to come to a screaming halt as supply of our beloved dinosaur juice runs low. Even now, the American and world governments are actively advocating and promoting the advancement of new alternative fuels and alternative power sources such as nuclear, clean coal technology, solar, wind, and all types of clean, green energy. Society is infinitely resilient in the long haul and will adapt to changing times and life will go on as usual. Whatever you do, don’t resort to taking up ridiculous survivalist activities such as building a bunker, withdrawing all of your money from banks, giving up credit card usage, or stocking up on food, guns, toilet paper, and supplies to ride out some silly apocalyptic fantasy future that you irrationally conjure up. Unless you are already doing so, there is no need to start making plans to live off the land, move onto homesteads, and start milking your own cows because you anticipate the need to defend your community from the hordes of starving crowds who did not prepare for the supposed eventuality. The world as we know it will not disappear, so discard those wacky conspiracy theories and economic Armageddon notions immediately. Don’t be a nut. Instead, starting planning for a brighter financial future today for yourself and your family by making smart banking and wealth investment decisions for the long haul. When this economic malaise blows over in a few years or even in a decade, your smart financial steps today will reap dividends in spades. It’s during tough economic times that counter-intuitive minded investors profit in the long run, and it’s how future millionaires get made.

Despite the current market sentiment, I strongly advocate long term investors to not overlook continued portfolio diversification opportunities in the stock market through mutual funds and indexes, and to not neglect true long term bargains in real estate and housing. The age old truism and expression in the world of investing is true – that the greater the risk, the greater the return. This mantra is also strongly tempered by another financial axiom of billionaire investor Warren Buffet and his views on the interplay between investment fear and greed – that the smart investor should seek to be fearful when others are greedy and greedy when others are fearful. It’s how savvy long term investors ultimately pay off in their steadfast investment decisions today. In fact, Warren Buffet, who has successfully made billions of dollars by taking advantage of opportunities during the worst of times, has been actively practicing what he preaches, buying up significant value minded investment positions in severely beat down companies like Wall Street investment giant Goldman Sachs for $5 billion and forking over $3 billion for positions in mega technology services provider General Electric. Of course, during these turbulent economic times and periods of extreme stock market volatility, it’s best not to be overly emotional or make hasty decisions based on short term swings. The world is filled with chicken littles and emotional lemmings so it’s all too easy too succumb to hysteria and Street panic. But those who want to survive this economic downturn and emerge from the recession and credit crisis in stronger financial positions than before must maintain their wits and stay focused for the long term, spreading their financial wealth around through diversified investments and continuing to seek out potential opportunities.

But there is a caveat for this long term sentiment. While I personally have 2-3 decades to go before I need to hatch my retirement nest egg, with plenty of time to build up long term investment positions, as well as continuous steady income coming in to continue dollar cost average investing and taking advantage of interest compounding, not everyone is in a similar position. For many millions of people, the money they have at this present time is all the significant amount of money they will ever have and at their age and current stage in life, they simply can’t afford to risk further loss. These types of individuals are focused on asset preservation rather than opportunistic investing and thus for these investors, they need investment security and deposit safety today. For some, it’s also the need to preserve their cash from loss due to the fact they are close to retirement, or saving up for a specific upcoming expense such as a down payment for a new home. Or perhaps they need to maintain a stash of cash to give them confidence and financial safety net courage to continue investing for the long term, while weathering financial emergencies.

For the asset preservation types who want to ensure their current deposits and investments are shielded from bank failures and investment loss, safety is the paramount concern when it comes to selecting the securest place to put their money. But for the conservative types, they also desire a certain degree of liquidity and convenient access to their money. But with the diminished risk of loss at safer places like bank savings and money market accounts comes substantially lower rates of return. Such deposit and investment sources as the ones listed below will offer you more security for your money, but they will not earn you a lot of interest, and oftentimes will just barely keep up with inflation. Keep that in mind as you evaluate your options and perform your due diligence. Furthermore, while being cautious and putting your money into safe and secure investments will preserve you from drops in the stock and financial markets, you run the very real risk of missing out on major market rebounds and valuable long term opportunities.

For those determined to ride out the volatile economic storm by seeking safety, the following options are the best choices when it comes to answering this question – “what is the safest investment for my money to avoid the risk of loss?”

List Of The Safest and Most Secure Places To Save and Invest Your Money During A Recession Or Economic Crisis:

1) Bank Savings and Checking Accounts – Of all the ideal places to store your money during the worst of times, other than in U.S. Treasuries, the best place is in a traditional bank account. While the rate of interest return on bank account deposits will never beat the long term rate of return on a properly diversified stock portfolio, depositing your cash in something like a high yield savings account is the easiest and most practical solution for those worried about the safety and security of their money. For those searching for the best high yield savings accounts offering the highest annual percentage yield (APY) interest rates, here are the best online savings banks out there (all of the following recommended high interest banks are fully FDIC insured, and all account deposits are protected under the FDIC insurance coverage limits):

1. FNBO Direct – 3.50% APY
2. WT Direct – 3.31% APY
   
3. E-Trade Savings – 3.30% APY
4. HSBC Direct – 3.25% APY
   
5. ING Direct – 3.00% APY

In terms of safety, reliability, and liquidity, putting your money in a bank account is the easiest and most straight forward savings option. Not only is your bank deposit earning interest, it’s FDIC insured and easily accessible. The Federal Deposit Insurance Corporation (FDIC) is a federal government run enterprise that provides insurance coverage and protection for the deposit accounts of participating member banks, guaranteeing their insured accounts from unexpected loss. While FDIC insurance coverage limits vary depending on the number and type of account ownership categories you have at each bank, the rule of thumb to remember is that for each individual, the FDIC protects up to $100,000 in deposits at each banking institution for each ownership category. This means that at each FDIC member banking institution such as Citibank or Bank of America for example, each individual may be insured up to $100,000 for a single account and get additional coverage – like a separate $100,000 coverage limit for a joint account with his or her spouse. Furthermore, for retirement accounts like IRA’s, Roth’s, SEP’s, and Keogh’s held in a member bank in the form of a bank deposit (as opposed to something like a mutual fund), there is also an extra but separate $250,000 FDIC insurance coverage limit.

While skeptical investors and chicken little depositors might cite the recent failures of major commercial banks and thrifts like IndyMac and Washington Mutual as reasons to be wary of the safety of commercial banks, the reality is that in all of the recent bank failure scenarios, all of the FDIC insured deposit accounts that fell within the coverage limits were fully protected from loss. Even amidst the current mortgage crisis and credit crunch, the great majority of commercial banks are considered well capitalized. The possibility of a bank failure and the probability of a sudden FDIC takeover is extremely remote. However, even in the event that a bank does happen to fail, consumers would continue to enjoy uninterrupted and easy access to their FDIC insured bank money.

It is also interesting to note that since the FDIC was established three quarters of a century ago after the Great Depression, no banking customer has ever lost a single penny of their FDIC insured deposit at any failed bank. Your commercial bank may go out of business or suddenly be unable to continue operating as a viable banking institution, but Uncle Sam, bolstered by the virtually unlimited financial resources of the federal government will back up your money in full, up to the guaranteed FDIC insurance coverage limit. Even in the event that allotted FDIC funds become tapped out, the federal government can always authorize itself and the U.S. Mint to print emergency money. It is almost inconceivable to me to even fathom the possibility of the FDIC failing or the FDIC funds to somehow go bankrupt. Such a dire failure would probably require that the United States federal government suddenly cease to exist or be in such horrible shape that losing your checking or savings account deposit would probably be the least of your concerns. At that point of Armageddon, you’d probably be better off investing your remaining money in guns, canned food, and a nuclear fallout bunker. There is a reason why the whole world turns to the U.S. for economic, political, and militarial stability and guidance – we have the most powerful, tried and true system in the world. It’s not perfect, but it’s extremely resilient and will ultimately overcome struggles in the long run.

2) Laddered Bank CD’s – While putting your money in a high interest savings account is your best bet in terms of account safety and liquidity, those who seek a slightly higher APY rate of return may want to consider dabbling in bank certificate of deposits (CD’s). CD’s can be found and purchased through commercial banks and certain deposit brokers (view my list of the best online brokers), and along with regular bank deposits, are both considered very safe investments. Like checking and savings accounts, certificate of deposits are also insured up to $100,000. However, do keep in mind that for each individual customer at each banking institution, checkings, savings, and CD’s are lumped into a single FDIC insurance category for coverage purposes.

While CD’s tend to offer fixed interest rates that exceed that offered by checking and savings accounts, the catch is that unlike the variable interest earning bank deposits, your CD deposit is locked into a fixed interest rate at the time of investment. When purchased, the CD account has a set maturity date such that if withdrawn too early, the CD funds will incur an expensive penalty. When you buy a CD via your bank, you invest a fixed sum of money for a fixed period of time €“ anywhere from six months, one year, five years, or longer. In exchange for your agreement to keep the money invested and locked for the pre-arranged period of time, the issuing bank pays you a high interest rate, typically at regular intervals throughout the year. When you cash in or redeem your CD, you receive the money you originally invested plus any accumulated interest. But if you withdraw prematurely, an early withdrawal penalty may cause you to forfeit a chunk of your original investment.

While CD’s enjoy higher interest rates than traditional savings accounts, the potential hassle with CD’s is that once locked in, their rates of return have a potential to lag behind and become surpassed by variable high yield savings accounts if those interest rates rise. The best way to get around this problem is to ladder your CD investments by purchasing CD’s with staggered maturity dates. For example, for those buying CD’s for a period of just a year, one could purchase multiple CD’s, maturing at dates of 1 month, 3 months, 5 months, 7 months, and so forth, thus ensuring that you will always have money coming in and cash on hand at set intervals. CD ladders are a good idea for those wary about locking up their money for long periods of time, but you have to choose the lengths and maturity dates you’re comfortable with, otherwise you’ll toss and turn at night and stress about your lack of liquidity in case of a financial emergency.

3) U.S. Treasury Bills and Bonds – U.S. Treasury Bills, or T-Bills as they are often called, are extremely secure debt instruments issued by the U.S. federal government. They are mostly notably used by large institutional investors and individuals with substantial assets during times of economic crisis and societal instability when there is an instinctual flight to quality. However, I tend to stay away from these bond instruments and rarely invest in them. Their fixed rates of return are terrible and simply too low for my liking. While they offer rock solid protection backed by the full faith and credit of the federal government, the interest rate yields for U.S. Treasuries are often low and based on auction driven demand. Because Treasury rates of return are based on bidding demand that’s heavily influenced by societal factors, during times of economic crisis or political instability, rates of return on U.S. Treasury Bills and Bonds can plummet. During major economic depressions and recessions, U.S. Treasury yields can sometimes even go negative, that is, investors are willing to accept a small destruction of their investment to guarantee no larger destruction.

While U.S. Treasuries generally provide almost laughingly low rates of return on investment, they provide near iron clad safety and protection for your money. Treasury Bills are essentially “IOU” debt instruments issued by the United States federal government to any consumer, business, or institutional investor willing to buy them, and they are used to pay off the U.S. government’s own maturing debt paper and to pay off its own bills. By issuing short term U.S. Treasury Bills, mid term Treasury Bonds, and long term Treasury Notes to consumers, buyers essentially lend the government money in exchange for a fixed rate of return and a solid promise by the U.S. government that the debt investment will be repaid back in full upon maturity due date. Along with FDIC protected banking assets, the world also regards U.S. Treasuries as credit risk proof – the perfect place to store money for the extremely risk adverse.

U.S. Treasuries range in maturation from a few weeks for the short term T-Bills to as long as 30 years for the Treasury Notes. Of course, the longer the maturation date, the higher the fixed interest rate the U.S. debt instrument pays out, same as the case with ordinary bank CD’s. Same as with CD’s, for those who want to inject greater liquidity into their Treasury investments, they may want to consider laddering their Treasuries as well, by purchasing multiple U.S. Treasuries simultaneously offering different maturity dates. The recommended way is to purchase multiple Treasury bills and notes that will expire at regular set intervals and have them automatically rolled over into newly issued Treasuries for continuous interest earning effect, but still maintain a semblance of liquidity.

The simplest way to purchase U.S. Treasuries is to go through the federal government’s Treasury Direct website. There you can follow the instructions to open a new account for individual investors by providing your personal and financial information such as name, mailing address, Social Security Number, bank deposit account, and bank routing number. You can purchase as little as $100 worth of U.S. Treasury “IOU’s” (the current minimum investment) or you can purchase millions of dollars worth. While there is a competitive bidding process of yield prices, most ordinary non-expert individual investors can opt for the non competitive process and simply agree to the current spot offering rate. As such, the service is probably more beneficial to extremely wealthy investors unable to find full protection under the FDIC limits and needing to preserve their millions of dollars in extremely safe lock box type of accounts. There is currently no limit to the amount of U.S. Treasuries that may be purchased and interest income derived are exempt from state and local taxes.

4) Money Market Funds – Money market funds are conservative mutual funds that invest in short term, stable debt instruments, high quality securities, and other forms of top rated short term commercial paper that can be easily sold, making the likelihood of any loss of principal extremely rare. Unlike traditional mutual funds and index funds, asset preservation minded money market mutual funds do not invest in stocks, which while lends itself to greater stability, also results in a much lower rate of return compared to their growth oriented counterparts. While most mutual funds, particularly those that invest in riskier stocks and investments are not all that safe and secure from investment loss as they ebb and flow with the economic cycle and the plight of underlying corporations, money market mutual funds tend to substantially more stable.

However, while money market mutual funds have been traditionally regarded as solid and reliable investments, they are not without a tinge of risk, depending on the composition of the money market fund’s portfolio. While the great majority of these funds have never lost money or failed, recent money market fund events in the news have sent a chill through the financial world. Recently, the Reserve Primary Fund, a giant money market mutual fund, announced its investors would lose money. Instead of each money market fund share being worth the customary $1, each would now be worth 97 cents, essentially “breaking the buck” in the process, forcing investors to eat a 3% loss. The loss was triggered by the fund’s purchase of debt securities issued by Lehman Brothers with a face value of $785 million that ultimately became worthless, as Lehman Brothers ultimately spiraled into bankruptcy and ended up on the chopping block for sale due to failed investments in subprime mortgages.

The moral of the story in terms of flight to quality is to seek out high yield bank accounts and U.S. Treasuries for safety first before seeking out money market funds. While money market funds are significantly more secure than stock based mutual funds and are generally still considered decently safe places to invest your money, in today’s dangerous and ever shifting credit markets, they simply do not offer the same 100% protection as that offered by savings accounts, CD’s, and U.S. Treasuries.

5) Gold Investments – This is most definitely not a recommendation but rather the raising of another interesting alternative way to hedge against economic risk, inflation, and the weakening dollar. I hesitated to even mention gold and such hedged investments against risk, but everytime the economic and credit markets head south, the subject of buying and investing in gold always comes up. Gold, silver, and other valuable commodities are tangible material investments that always skyrocket in value during difficult economic times. When there is political and social instability due to frozen credit markets or news of terrorist attacks that shake up the financial system, the housing market, or the stock market, the value of commodities not tied to a variable money system but that is instead linked to underlying rarity based on exchange driven supply and demand goes up.

But remember, buyers beware – one thing to keep in mind is that gold is just like any other investment – it’s still a bet against economic times and prices do fluctuate with great volatility. Like with any other educated bet, your gamble may pay off big or backfire significantly. While prices of gold are almost certain to remain high as the economy flirts with a full blown economic recession and the financial markets continue to flounder, prices of gold have the potential to decline significantly should there be signs of an economic recovery. Thus for the conservative investor who is seeking a flight to quality in his or her investments with pure asset preservation in mind during times of economic instability, I would recommend treading with great caution when it comes to investing in gold. Unless you have experience with gold investments, stick with Treasuries, high yield bank accounts, and CD’s instead.

Updated With The New and Current FDIC Insurance Limits For Bank Deposits! (New Law Went Into Effect October 3, 2008)

As the American and world economies endure a period of economic recession, the once stable and thriving marketplace can seem like a distant memory. Not only does it seem like unemployment warning flags and disappointing corporate earning reports lurk around every corner, it’s all too easy to succumb to the financial despair. When you combine the mortgage market meltdown with increasing housing foreclosures, and you mix that with high gas prices, fears of another major Islamic terrorist attack, and snowballed consumer pessimism, you have a spicy cocktail for widespread financial depression. While I’m not a financial fortune teller, nor am I a guru who can predict when the recession or lingering credit crisis will pass, all I can do is reassure you of areas in your life where you ought not to be overly distraught or paranoid about.

One segment in the economy that has spawned a huge surge of concern and irrational panic is the area of bank failures and bank bankruptcies. Because of the excessive subprime lending to consumers totally unqualified to receive home mortgages made by irresponsible mortgage lenders in the past few years, the economy is now reaping the terrible financial whirlwind result of defaulting loans and home foreclosures. This calamity is currently happening on a massive scale as huge banking giants like Citibank and Bank of America, as well as major thrift saving institutions like Washington Mutual are getting pummeled for their ties to bad mortgage loans. Unable to recoup their housing mortgage investments, many of these financial service providers are having to write off billions of dollars of unrecoverable bad loans, triggering serious questions by creditors, deposit account holders, and shareholders of their ability to continue as viable going concerns.

Bank Failures Have A Way Of Sparking Emotional Panic, Regardless Of The Government Effort’s To Alleviate Fears

While most major banks have healthier segments of their financial businesses to siphon assets and capital from, thereby allowing them to stay afloat, a few have not been so lucky. Netbank, an online banking institution that was one of the first early adopters during the initial Internet banking craze, ultimately keeled over due to the disintegration of its mortgage business segment. When its asset position could no longer meet depositor demand, federal regulators swooped in to shut it down, forcing Netbank to ultimately file for bankruptcy.

Banking and mortgage services giant Countrywide Financial recently faltered under the crushing weight of bad mortgages as well, and was ultimately acquired by Bank of America at an extremely huge discount, saving it from near collapse.

Most recently, IndyMac Bank fell flat on its face, triggering shock waves that signified the United States’ second largest banking collapse in history. Due to the sheer financial size of IndyMac bank, and the large scale and huge number of account customers the banking collapse affected, the news triggered panic attacks and resulted in reports of huge lines of desperate customers clamoring to get their deposit money out of the bank out of fear of the unknown. Despite the federal government’s announcement that the vast majority of deposit holders would not lose a single cent of their money, news of catastrophic bank failures have a way of making consumers go crazy and act in irrationally frenzied ways. As someone who considers himself relatively educated about the subject of finance, even I have to admit I was disturbed by the sheer magnitude of the Indy Mac bank collapse. After all, if IndyMac could fall, who else could potentially be next? I felt a slight tinge of emotional panic despite my otherwise logical and rational mental faculties – and I wasn’t even an IndyMac banking or home mortgage customer. But yet, I still felt the reactive emotional ripples that made me question my faith and trust in my bank and the economy at large. While bank failures are incredibly rare, they do happen – especially when there is a significant and pervasive trigger (the subprime mortgage meltdown) that is causing the financially destructive domino effect.

Thus, that is why it is extremely important for us, as cool headed consumers, to greatly educate ourselves on the types of financial and banking protections the system has in place to shield the money we save up in banks, savings and loans, and credit unions from loss. By learning more about how the federal government, the FDIC, and private bank risk sharing agreements protect our deposits, the more our fears will diminish, thus helping to solidify our faith in our banking institutions. We live in an efficient market where there are powerful protective systems in place, and proper financial education will help to reinforce that confidence. Thus sometimes, “the only thing we have to fear is fear itself – a nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance” (a powerful quote made by former U.S. President Franklin D. Roosevelt during the Great Depression).

How Does FDIC Insurance Keep Our Bank Accounts and Deposit Money Safe?

The Federal Deposit Insurance Corporation (FDIC) is a federal government run entity that provides deposit insurance protection for participating member banks – guaranteeing their deposit accounts from loss. The FDIC system was set up to instill consumer confidence in our nation’s banking system during a time of severe economic recession and financial turmoil. To prevent massive runs on banks triggered by irrational consumer panic to withdraw money during times of crisis, the United States government set up the FDIC to guarantee depositors at insured banks that their money would always be safe, even during the worst of times.

As a general rule of thumb, the current FDIC insured amount per depositor at each bank is $250,000 (with extra exceptions for different ownership categories). This blanket protection insures member bank accounts from bank failure loss, up to the maximum insured amount of $250,000. The FDIC protection covers a variety of bank deposits, including – checking accounts, savings accounts, money market accounts, certificate of deposits (CD’s), and even bank money orders and cashier’s checks. However, the FDIC protection does not cover non bank deposit type accounts and assets like – stocks, bonds, mutual fund investments, variable or fixed annuities, U.S. Treasury securities, or contents stored in safe deposit boxes. As FDIC insurance only covers bank failure loss, it also does not provide protection against bank fire, fraud, or theft, although in the overwhelming majority of cases, individual banks usually have their own private hazard and casualty insurance coverage against these other types of loss.

The FDIC also provides loss protection for retirement accounts held in member banks in the form of deposits. The FDIC limit for retirement accounts, which includes self directed plans like Roth IRA’s, Traditional IRA’s, SEP’s, and Keogh’s, currently stands at – $250,000. The higher FDIC limit for retirement accounts is a clear recognition by the FDIC of the importance of ensuring that consumers always have their retirement nest eggs to fall back on.

How Does The Federal Government and The FDIC Monitor The Banking Industry?

While by no means a perfect system, the banking industry is highly regulated by the federal government and watched by multiple federal agencies – including the Federal Reserve, the U.S. Treasury’s Office of the Comptroller of Currency, the FDIC, and the Office of Thrift Supervision. Along with state banking regulators, there are multiple sets of eyes at all time on the state of the banking market. While bank failures are incredibly rare, they do happen on occasion unfortunately.

In such an occurrence, as soon as the federal and state regulators determine that a bank no longer has the capacity to meet depositor demands and sustain sufficient capital due to insolvency problems, the FDIC barges in to take command. Once it takes control, the execution is usually fairly rapid as the FDIC is highly motivated to ensure a seamless transition. Until the FDIC can find a suitable buyer of the failing bank’s assets, the bank generally continues to run as usual without significant interruption. In the rare event the FDIC cannot find a suitable buyer, it closes down the ailing bank and sends out checks to all account holders within the FDIC insurance limits along with interest. Usually the FDIC payments are sent out in a matter of days.

For Those Banking Customers With $250,000 Or Less In Total Bank Deposits, Your Money Is Fully Covered By The FDIC

If you are a young student or a person with relatively low income with little in the way of financial or banking assets, you probably won’t have to worry too much about losing your money in the event of a bank failure. If your total bank deposits are less than $250,000, you can rest assured that the full faith and credit of the United States government has your back. The ones that have to be more vigilant in how they structure their checking and savings account deposits are those with more than $250,000 in total deposits. Those with more than $250,000 in deposits will need to pay greater attention to how they break up and consolidate their money among FDIC insured banks to ensure maximum FDIC protection against loss.

For Those With More Than $250,000, You’ll Need To Pay Attention To How The FDIC Provides Separate Coverage For Different Ownership Categories At Any One Bank

While I personally don’t have more than $250,000 in total bank deposits that require me to even worry about this problem (yet!), it’s something I want to know more about because I know one day I will reach that goal (why dream if you can’t dream big). It’s better to know how to structure your bank deposit portfolio now and plan for that occasion, than not know what to do when you reach that point someday in the not too distant future.

While the FDIC insurance program protects individual bank depositors up to a maximum of $250,000 per bank, there are clever ways and not-so-secret methods to get you around this protection limit. The primary way to accomplish this is through deposit account diversification. By splitting your total deposits into multiple ownership category accounts or splitting your assets among different FDIC insured banks, you can ensure full protection of your money. Remember, bank deposit accounts at different banks are insured separately (although all bank branches are considered part of the same bank). Thus, each bank has its own complete set of FDIC coverage limits.

At any one bank, the FDIC offers each category of ownership account its own individual coverage cap. There are different types of ownership categories, each with its own $250,000 FDIC insurance limit. You can go straight to the official source if you want to know more about the FDIC’s policy on ownership categories, but the more common ownership categories are listed here. Remember, each ownership category (single account, joint accounts, etc) gets its own $250,000 FDIC coverage limit:

• Single Accounts – Most consumer bank accounts fall into this category, which covers checking, savings, and CD’s. Basically, if your bank account is in your name only, its ownership category is probably that of a single account. Single accounts also include sole proprietorship business accounts you may own at the same bank (DBA, “Doing Business As” type businesses). All personal and sole proprietorship business deposit accounts at the same bank are added together as single accounts and insured up to the combined maximum FDIC limit of $250,000.
• Joint Accounts – Joint accounts are simply bank deposit accounts that are owned by two people or more at the same bank. While most joint accounts are held by married couples, joint account owners don’t necessarily need to be married. For example, while I have my own individual bank account at a local Chevy Chase Bank, my mom and I also jointly hold a separate shared deposit account at the same bank. Individuals can have multiple joint accounts at the same bank, each with joint ownership involving different people, but when it comes to calculating the total FDIC limit for the joint account category, all proportional shares that each individual owner owns in all joint bank accounts at any one bank are added together and insured up to $250,000 for each individual. Thus, while a joint deposit account for a married couple may appear to enjoy a higher $500,000 FDIC limit, it’s actually made up of two separately capped $250,000 limits – one for the wife, and one for the husband.
• Trust Accounts – Both revocable and irrevocable trusts get their own FDIC insurance limits of $250,000. By listing others as beneficiaries, one can strategically use trust deposit accounts to get around the usual FDIC individual caps. For example, both a husband and wife can set up 2 separate revocable trusts in each other’s names to get an extra total $500,000 FDIC limit on top of their other single and joint account limits.
• Business Accounts – I’m sure business owners feel the FDIC insurance deposit limit for business accounts are currently much too low, but as it currently stands, bank deposit account funds held by corporations, limited liability companies (LLC’s), and partnerships at any one bank are combined and insured up to a maximum FDIC limit of only $250,000 (much too low in my opinion). Keep in mind, sole proprietorship business accounts are lumped in with single accounts.
• Retirement Accounts – Self directed retirement accounts where the account holder gets to decide what to do with his or her money, are offered much higher insurance limits under the FDIC – at $250,000. This particular ownership category includes the following retirement plans – individual retirement accounts (IRA’s), Roth IRA’s, Simplified Employee Pension Accounts, and Keogh Plan accounts. All retirement account deposits held by an individual at a single bank are added together and insured up to a maximum FDIC limit of $250,000. However, keep in mind, retirement account assets invested in stocks, bonds, and mutual funds are not FDIC insured as you’re actually investing through a broker with a working relationship with your bank. The FDIC coverage only protects retirement bank deposits, not investments.

Those With More Than $250,000 In Bank Assets Should Shift Bank Deposit Money Into Joint Accounts To Maximize FDIC Coverage

Because the FDIC provides $250,000 total protection limits for each ownership category, including $250,000 for self directed retirement accounts at the same bank, consumers may be able to greatly increase their total overall financial protection by splitting their money among different types of ownership accounts at the same bank. For example, if you have an individual savings account with total deposits valued at $600,000, you need to be extra careful about bank failure. In the event your bank fails or is suddenly unable to meet depositor demands, you stand to potentially lose $350,000 because only $250,000 worth of assets in the single account category are covered. The solution is not to open up multiple bank accounts like checking accounts or CD’s as they are all of the same ownership category and doing so won’t increase your overall FDIC limit. The best way to diversity and boost your FDIC limit is to spread your deposit among different ownership categories or among different banks. In the case of the hypothetical individual $600,000 savings account, it would be advisable to take at least $350,000 from that savings account and shift it into a joint account with your spouse, thereby sheltering the $350,000 under the $500,000 ($250,000+$250,000) total joint account FDIC limit. You might even want to make sure you give each deposit account extra room under the FDIC cap to allow interest to accrue, but still remain fully protected.

To reiterate the point about ownership categories, let’s say you went to Wells Fargo and opened up a brick and mortar checking account, an online high interest savings account, and set up a few CD’s – your total coverage limit will still only be $250,000. However, if you opened a joint account with you and your wife or husband, while opening up your own individual checking account at the same time, you will be able to receive $250,000 coverage limit for the checking account, and another separate $500,000 total marital pool coverage limit for the joint account.

Business Accounts Are Covered By FDIC Insurance, But Depending On Type Of Business Entity, They May Or May Not Boost Your Overall Coverage

Depending on business type, a business bank deposit account may or may not enjoy its own separate $250,000 FDIC limit apart from the individual’s cap for single accounts. Because a sole proprietorship and the individual running it are regarded as one and the same for taxation and legal purposes, the FDIC treats sole proprietorships as single accounts for assessing the extent of FDIC coverage. Thus, opening a sole proprietorship business at the same bank as your consumer checking or savings account will not allow you to gain extra coverage.

Only partnerships, limited liability companies (LLC’s), and corporations are able to qualify as separate ownership categories for additional FDIC insurance coverage. Because the FDIC regards certain business entities as separate ownership categories for FDIC insurance purposes, it is not uncommon for clever but sneaky business types to express interest at creating phantom, dummy businesses for the sole purpose of inflating FDIC limits. However, FDIC regulations expressly forbid this practice and stipulate that business accounts for partnerships, corporations, and other unincorporated associations need to be engaged in an “independent activity” such that the business is not engaged primarily in boosting FDIC insurance coverage.

Further Bank Account Diversification Strategies Using Multiple Banks To Increase FDIC Coverage

Because FDIC insurance coverage is offered for not only different account ownership categories, but also for different banking institutions, the recommendation by some pundits for high networth individuals is to spread one’s assets among a multitude of banks. Because each bank offers its own set of bank failure protection limits by the FDIC, savvy account holders are often advised to sacrifice some of their deposits made at just a handful of high yielding banks for greater diversity by spreading it among a greater number of deposit institutions. Let’s say you have $750,000 in a high yield savings account at HSBC Direct that you want to fully protect under the FDIC. If setting up joint accounts to boost FDIC coverage is not available to you as a viable option, you could instead open up accounts at say, Bank of America and Wachovia, shifting $250,000 into each of those two new savings accounts. Thus, your total $750,000 portfolio would now enjoy separate $250,000 FDIC coverages at three different banks. As I mentioned above, in such an event, you may actually want to consider breaking up the $750,000 into four total banks instead of just three to give yourself room to grow in interest and stay fully protected.

One alternative way to shift your banking assets among different banks without actually having to run around the neighborhood or Internet looking for new banks is to participate in a Certificate of Deposit Account Registry Service (CDARS). Banks that are members of the CDARS network do the leg work for you by breaking up CD deposits into smaller size chunks that are separately held at different participating network banks. However, your funds continue to enjoy a single point of access at your primary bank with one statement and one interest rate. The practice is rapidly growing in popularity and I highly recommend it as a wonderful and hassle free way to diversify your banking holdings for maximum FDIC protection. Here’s a list of banks that participate in the CDARS network. One downside of using a CDARS bank is that they tend to be smaller, regional size community banks. Some people like smaller community banks, the type of place where everybody knows your name. However, I highly prefer mega-corporate size banks as they tend to resonate more stability and are better capitalized in my opinion. There are only a tiny handful of large institutional banks participating in the CDARS network at this time. Furthermore, because of the CDARS network fees that banks pay for each CDARS transaction (there is no fee to the customer), CDARS deposit account interest rates tend to be lower than that offered by more competitive non-CDARS banks.

However, if I had financial assets in the neighborhood of millions of dollars and account diversification was on my mind, it is unlikely I would be spending my time worrying about FDIC insurance limits. I would probably have the bulk of my money either invested in mutual funds, index funds, money market funds, or other broadly diversified investments that have never been known to actually fail. Frankly, I don’t even think broadly diversified investment assets could ever technically fail – in the worst case scenario, they would simply gradually lose their stock value over time. Buying super secure assets like U.S. Treasury Bills and Treasury Bonds would be viable alternatives for high net worth individuals as well. While U.S. Treasury products are not FDIC insured, they are fully backed by the full faith and credit of the United States government. The federal government could simply print more money if financial Armageddon necessitated that course of action.

Life is unpredictable. As much as we may try to project what is to come in the future, our feeble attempts at fortune telling and soothsaying inevitably fall short of reality. That’s life and that’s just the way of the world. We may try to walk the steady and safe path paved with good intentions, but sometimes life just insists on chucking a banana peel to trip you up when you least expect it. It’s not always fair and it’s not always just. Bad things happen to good people and sometimes unfortunate circumstances befall even the best of us. But the unforeseen and the unexpected don’t have to ruin our lives and cause everything that’s going for us to fall apart at the seams. We can plan for such an occurrence and protect ourselves the best we can by creating a back up financial contingency plan. Having a “Plan B” savings account and readily accessible emergency fund set aside will give you piece of mind in knowing that you will be taken care of should the worst case scenario occur.

I’ve personally had many unforeseen and unexpected situations spring forth in the last couple of years, and have learned that life comes at you fast. In the last few months, I’ve had to deal with a family health emergency due to the sudden passing of my grandfather which required me to go on emergency leave to fly overseas to be with him. I’ve also had to deal with a significant tax liability bill recently that seemingly came out of no where in the tune of almost $10,000. Most recently, my car suddenly broke down, necessitating me to pay out a good chunk of cash – $80 for an emergency taxi ride, $140 to tow my car to the car dealership for servicing, and an additional $1,200 for the cost of repairing my vehicle’s broken alternator, car battery, and to replace the break pads. All of these sudden expenses are part of the natural course of living but they weren’t expected. Thankfully, I’ve learned to practice what I preach and have been able to maintain sufficient emergency funds to deal with most of my financial emergencies.

Anticipate the Unexpected, and Save Up Enough Money In Readily Accessible Accounts To Cover Several Months Worth Of Living Expenses

There is no hard and fast rule as to how much one needs to have stored away in an emergency fund, but most personal finance bloggers such as myself advocate sufficient liquid savings to survive for at least a few months with no incoming funds. That is, you need sufficient savings to pay for the cost of living in case you are suddenly bed ridden for whatever reason, at least until you can get back on your feet and generate income again. Personally, I keep at least $5,000 cash stored in my bank account for emergency purposes that I try my best to not co-mingle with other investment objectives. That amount of money that I keep aside is designed to handle financial emergencies such as sudden large tax bills, health related injuries or medical bills, emergency car repair, and even the lack of income due to unanticipated unemployment. While some financial advisers advocate earmarking one’s backup emergency fund savings to cover only truly emergency living expenses, I personally take a broader approach and use my  emergency fund money as a monetary buffer for various out of the norm, over the limit type expenses that include necessary car repair charges and unplanned vacation trips. Of course, I make a very strong effort to rapidly replenish the funds as soon as the temporary financial emergency crunch subsides.

So what should we consider as ideal assets for emergency fund planning purposes? Obviously the best sources are ones that are very liquid, that earn interest, that imposes no penalties or interest charges for withdraw, and those that are easily accessible and able to be withdrawn at a moment’s notice preferably in cash money form or equivalent. The most liquid form would clearly be money stored in a piggy bank or bills stashed under your mattress, but with bank branches located everywhere and interest generating accounts easily accessible through the Internet and 24 hour ATM machines, bank related holding accounts are the supreme form of emergency fund savings. Such bank related accounts and assets would include checking accounts, savings accounts, certain forms of laddered CD’s, and money market accounts. The recommended emergency fund storage solution for most people would be to keep at least 3-6 months worth of living income stored in a high yield savings account or money market account. Bank savings and money market accounts (not to be confused with broker based money market funds) are ideal for emergency fund saving purposes. They offer not only high interest earning opportunities but they also provide instant account access, allowing funds to be withdrawn quickly for emergency situations.

While it’s nearly unanimous that putting your money in a high interest savings account is the best way to save and contribute to an emergency fund, there is much greater debate when it comes to two other commonly used forms of emergency funding – money invested in the stock market, and credit cards (specifically 0% credit cards that offer introductory 0% APR interest for balance transfers).

Using Your Stocks, Mutual Funds, or Retirement Savings As Your Emergency Fund Is A Bad Idea

Personally, I have used my brokerage account as my emergency fund before, however I highly advise against the practice. Not only is the money not very liquid and difficult to convert to immediate cash to pay off emergency debts, but oftentimes such hasty and immediate sales of stocks and mutual funds end up being very counter productive and detrimental to one’s overall long term investment strategy. Currently I have a decent amount of money invested in various individuals stocks, mutual funds, and exchange traded funds (ETF’s) through my online discount broker. Most of my brokerage money is being invested as part of a long term investment strategy. Having to sell my equity positions immediately and prematurely would disrupt my investment approach and force me to incur unplanned short term capital gains or sustain premature capital losses. Worse yet would be to withdraw funds from one of my retirement investment accounts such as my 401K, Traditional IRA account, or ROTH IRA. Not only would I disrupt the compound interest process that such tax deferred retirement accounts offer, but the withdraw itself may require me to pay out hefty early cash out penalties. While your investment account is obviously there as a final dead end source of money, one should look to other more liquid and less financially detrimental sources of emergency funds.

I Frequently Use No Fee Balance Transfer Credit Cards To Handle Emergency Expenses, But The Practice Is Only Suitable For Those Who Can Responsibly Handle Credit Card Bills and Payments

The use of 0% credit cards and balance transfers is my favorite and most commonly used source of emergency funds. I know this practice is highly frown upon by anti-credit card types, but it’s worked well for me over the years. Of course, the use of credit cards and particularly the practice of carrying large balance transfer balances (even at 0% APR) isn’t suitable for everyone. For those that have a history of overspending, or who have not demonstrated a responsible and mature ability to micromanage credit card balances, payment due dates, and minimum payment requirements, 0% balance transfer credit cards should be avoided. Those that can’t properly handle the use of credit cards and manage the logistics of balance transfers will risk making a terrible balance transfer mistake and wind up getting themselves into deeper financial trouble with credit card debt than they started out with. But for those who know how to make a balance transfer and know how balance transfer credit cards work, they are an invaluable financial tool to have in your emergency fund holster.

Back when I incurred a sudden and very unexpected $10,000 tax bill, I utilized my excellent FICO credit score to secure an attractive balance transfer card offer of 0% APR interest for 12 months. I utilized the 0% credit card’s high credit limit to pay off the $10,000 IRS tax bill and took advantage of the balance transfer card’s one year introductory period to slowly pay off the credit card debt which was basically the same IRS tax debt except in a much more manageable no interest form. Because I was diligent in making regular payments, I eventually paid back the entire liability and incurred absolutely no interest or penalties in the process. Balance transfer credit cards, when used properly, can help get you through such tough times and offer you a readily available source of interest free funds when you need them the most.

Of course, if the sudden financial emergency is quite substantial and the amount owed greatly exceeds what you anticipate being able to cover within the balance transfer card’s introductory rate period of 6-12 months or longer depending on whether you can keep rolling the balance onto a new 0% balance transfer credit card offer, I would suggest using something like a low interest balance transfer credit card for the life of the loan instead. While you’ll be paying a little bit more with a low interest balance transfer, at least the payments are predictable and you can take your time making regular payments towards paying off the bill without worrying that interest charges will drastically spike after the promo period is over.