2 Major Reasons You Should Never Keep More Than $250K in a Bank

simonkr / Getty Images

Commitment to Our Readers

GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.

20 Years
Helping You Live Richer

Reviewed
by Experts

Trusted by
Millions of Readers

Having more than $250,000 in the bank may seem like more of a blessing than a curse. After all, being able to stash away more than a quarter of a million dollars is certainly indicative of some level of financial success and planning.

The reality, though, is that having that large of a sum of money in a single institution could be problematic. Beyond potential diversification and asset allocation issues, the matter of FDIC insurance plays a large role as well. Here are the main reasons why you should never keep more than $250,000 in a bank.

FDIC Insurance Limits 

When you first start out saving, you might not feel too concerned about how much insurance your bank account carries. However, as you start building wealth, it can become a very important consideration indeed.

FDIC insurance on bank accounts is provided in the amount of $250,000 by the Federal Deposit Insurance Corporation, which is a U.S. government entity. But the rules regarding FDIC insurance can get a bit confusing. In the words of the FDIC, “The standard deposit insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.”

What this means is that you can actually get more than $250,000 in FDIC insurance in a single bank — you’ll just have to hold that money in different “ownership categories.” Per the FDIC, here are the distinct types of ownership categories, each of which gets a full $250,000 in insurance per person:

• Single Accounts
• Certain Retirement Accounts
• Joint Accounts
• Revocable Trust Accounts
• Irrevocable Trust Accounts
• Employee Benefit Plan Accounts
• Corporation/Partnership/Unincorporated Association Accounts
• Government Accounts

For example, if you have $100,000 each in a single-name account, a joint account and a retirement account, your full $300,000 is insured. But if you had the entire $300,000 only in a single-name account, only $250,000 of it would be covered.

This is the primary reason that you shouldn’t keep more than $250,000 in a single bank in a single type of account. Although the risk of your bank defaulting may be low, there’s absolutely no reason to put it at risk. However, there’s another main reason why you might not want to keep $250,000 in a single type of account.

Not Enough Return 

While some ownership categories, such as retirement accounts, allow investments that provide higher potential returns, traditional bank accounts, like checking and saving accounts, typically don’t pay much at all. According to the FDIC, the national average deposit rate on a savings account is just 0.47%, while interest checking accounts pay an average of 0.07%.

This means if you keep $200,000 in a savings account and $200,000 in a checking account, you’ll earn an average of $1,080 annually, or a blended yield of 0.27%. While having some level of money in your checking and savings accounts is a good thing, it’s far from the best way to allocate your investment money.

How Much Should You Keep in a Bank Account

It should be clear that keeping more than $250,000 in a bank checking or savings account isn’t really a great idea. But how much is the right amount to keep there? 

Many experts suggest keeping three to six months worth of income in a savings account as an emergency fund. If you’re self-employed or if your income is variable, you may want to bump that up to 12 months. This should cover you in the event of job loss or large, unpredictable expenses like uncovered medical bills or significant home or vehicle repairs.

Your checking account should have a separate stash of money, but mainly to ensure that you keep on top of your expenses. As rates on checking accounts are low — if they pay anything at all — you don’t want to overstuff your account. For this reason, one rule of thumb is to keep no more than one to two months of expenses in your checking account.

For example, if your monthly bills are normally $5,000, you don’t want to keep more than $5,000 to $10,000 in your checking account. This will help ensure that even in a slow income month you’ll have enough to pay all your bills. It will also help you avoid bank fees like overdraft charges.

Ways To Maximize Your Savings

Once you’ve set aside the right amount in your low-interest checking and savings accounts, you’ll get a higher potential return if you keep the rest of your money in investment accounts. In the example above, your $400,000 in checking and savings accounts only earned you $1,080 per year. But if you instead invested that money and achieved a 7% annual return, you’d pull down $28,000 — more than 25x as much. 

You shouldn’t oversaturate your investment accounts either, as you’ll still only get $250,000 in FDIC insurance per type of account. But you can have a retirement account, a single account, a joint account and other types and still get the $250,000 in FDIC insurance per type of account, even within the same bank.

If you still need additional insured accounts — or simply want to diversify your banks — you can move some of your money to other institutions.

Share This Article: