(soft music) - Oh, I feel like I slept on a pile of bricks.

- Well, I slept like a baby, knowing that all our cash is safe and sound right in our mattress.

- No wonder my back hurts.

Why'd you do that?

- Well with all these banks closing, I just figured it was the safest place to put our money right now.

- You know the banks are insured, right?

- Well, yeah, but what if the insurance companies go under too?

- I think that's a lot less likely than someone coming into our house and stealing it.

- How would anyone ever find out we keep all our savings in our mattress?

Maybe I'll put it back in the bank.

(upbeat music) - Most people know that the image of all your hard-earned paper dollars sitting in some dusty vault isn't actually how it works.

Though the first banks were likely ancient temples that guarded wealthy people's currency, the Renaissance brought a major financial innovation called Fractional Reserve Banking, which allowed banks to lend out the majority of their deposits at interest of course, and only keep a fraction of them on hand.

- See, this is exactly why I'm so freaked out.

What happens if everyone wants to withdraw their money at once a la Mary Poppins?

We'd be out in the cold.

I want my tuppence with me.

Thank you very much.

- Well, it's true.

Bank runs and failures were a common consequence of fractional reserve banking in the past.

In the mid 1800s, rampant railroad speculation led to big losses for banks and hundreds failed in an awful domino effect.

After the Great Depression of 1929, FDR stepped in to stabilize things with the Banking Act of 1933 which created the Federal Deposit Insurance Corporation.

The FDIC is a government corporation that provides insurance for depositors.

If a banking institution covered by the FDIC fails, account owners are made whole up to $250,000.

- Now, this insurance is something you'll never have to pay for, at least not directly.

The FDIC is not publicly funded.

They get their money by charging the banks for their membership based on the bank's level of risk.

This ranges from well-capitalized, which means a 10% or higher reserves to debt ratio all the way to less than 2% known as critically undercapitalized.

The lower the reserves, the higher the banks dues.

- The FDIC also plays an oversight role.

When an insured bank drops to around the 6% reserves mark, it can force the bank to take corrective action like change management or sell off assets.

It can also take over failed banks and manage the sale of remaining assets and debts like it did for Silicon Valley Bank in March of 2023.

In that particular case, since so many of the depositors had more than $250,000, the government made an exception and reimbursed everyone in order to shore up confidence in the system and prevent a contagion of collapse.

- So it sounds like I can take a breath.

It also makes me feel better knowing that since 1933, not a single depositor has lost a penny of an FDIC insured deposit and the government seems more committed than ever in making sure the banking system is stable.

So I think our checking and savings accounts are as safe as I could hope for.

But what about our retirement funds, our investments?

And now that I think about it, we're not even at a bank.

We're with a credit union.

- Don't worry, Henny Penny.

There's another acronym that's got us covered.

The NCUSIF is basically the same thing, but for credit unions.

And as for our IRAs and investment accounts, well that's where the Securities Investor Protection Corporation comes in.

The SIPC is actually a non-profit governmental organization that insures the investment accounts and member institutions, again, up to $250,000 per member.

- But keep in mind, these forms of insurance only apply if the institution goes under.

It doesn't mean we're protected against our investments losing value.

Commodities, fixed annuities, hedge funds, crypto, money you park in these kinds of financial instruments is uninsured.

That's a big reason why the crypto crash was so hard on people.

- Overall, the government and financial institutions have done a lot of work making the banking system pretty safe for your average person, which means the 48% of Americans who report feeling moderately to very concerned about the safety of their money can relax a bit, even though times seem especially turbulent post COVID.

- But in reality, there's no such thing as a perfect store of value.

Whether it's stuffed in a savings account or a mattress, cash is always susceptible to inflation.

Certificates of deposit and treasury bills might have really long and steady track records, but they're not gonna return enough to help you retire on time.

And as we've talked about in other episodes, stocks, mutual funds and even real estate naturally gain and lose value in cycles over time.

There's nothing out there that's perfectly impervious to loss.

- But when you find yourself getting especially nervous, try asking yourself the question, what are you wanting to keep your money safe from?

- If you're nervous about inflation eating away the purchasing power of the cash you have, then you could move some into an investment.

If it's about your company's stocks losing value, you might wanna mitigate that by moving it into a broadly invested mutual fund.

- But if you're worried that you might wake up and see the name of your bank on the news, making sure your accounts are with insured institutions and under $250,000 per bank should do the trick.