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Living on a Budget
by Jonathan D. Pond, May 22,2009
Q: One of our local banks is getting some bad press, and I have a savings account with them. How do you know if a bank is still in good standing? –Jean, Washington
A: Bank failure is a rarity, even during these tough economic times. I find that people worry too much about the health of their banks and credit unions.
Instead, concern yourself with the following:
1. Does your bank or credit union have federal-insurance coverage on its deposits? Be sure you don’t exceed the insurance-coverage limits in a particular bank or credit union.
2. How soon would your deposits be made available in the unlikely event that your bank or credit union fails?
There’s confusion about the deposit-insurance limits on money deposited in banks or credit unions.
The Federal Deposit Insurance Corporation (FDIC) insures all deposits at insured banks, including money in checking and savings accounts, money-market deposit accounts, and certificates of deposit (CDs)—up to the insurance limit.
The FDIC does not insure the money you invest in stocks, bonds, mutual funds, life insurance policies, annuities, or municipal securities—even if your purchase these products through an insured bank.
All non-interest-bearing transaction deposit accounts at an FDIC-insured institution, including all personal and business checking accounts that do not earn interest, are fully insured for the entire amount in the deposit accounts. This unlimited insurance coverage is temporary and will remain in effect for participating institutions until Dec. 31, 2013.
All other deposit accounts at FDIC-insured institutions are insured up to at least $250,000, per depositor, until Dec. 31, 2013.
On Jan. 1, 2010, FDIC deposit insurance for all deposit accounts—except for certain retirement accounts—will return to at least $100,000 per depositor. Insurance coverage for certain retirement accounts, a category that includes all IRA deposit accounts, will remain at $250,000 per depositor.
For more information on FDIC insurance coverage, visit the FDIC Web site. The site has an online tool, EDIE (Electronic Deposit Insurance Estimator), which can help you assess whether or not your various deposits are covered by FDIC insurance.
For more information on insurance coverage for credit-union deposits, visit www.ncua.gov.
Access to Money in Case Bank Fails
Federal law requires the FDIC to pay 100 percent of the insured deposits—including principal and interest—"as soon as possible" after an insured bank fails.
In practice, the FDIC pays insured deposits within a few days after a bank closes, usually the next business day.
In most cases, the FDIC provides each depositor a new account at another insured bank. Or if arrangements cannot be made with another institution, the FDIC issues a check to each depositor. The same general rules apply to credit-union deposits.
Q: I have CDs coming due and want to find a list of financially sound banks. Where would I find this? –Rita, California
A: With all the turmoil in the financial market and the increasing number of failed banks, big and small, it’s no wonder you’re looking for a financially-healthy institution.
Bankrate.com has developed a system for evaluating a depository institution’s relative safety. Its Safe & Sound® service provides ratings information on the relative financial strength and stability of U.S. commercial banks, savings institutions, and credit unions.
The Bankrate.com system applies 22 tests to each institution to measure the institution's capital adequacy, asset quality, profitability, and liquidity. Combined results form the basis of the Safe & Sound® ratings. Institutions are ranked from five stars (best) to one star (worst).
While no rating system is fail-safe, the Safe & Sound® program can help you at least steer clear of financial institutions that receive very low rankings. As noted earlier, however, you shouldn’t be terribly concerned about bank failures, because they are such a rare occurrence.
In case of a bank failure, the FDIC usually provides you access to your funds within a period of 24 hours, so it’s a seamless transition for you. Just be sure that your bank is an FDIC member or your credit union is an NCUA member and that you don’t keep more than the prescribed limits in any one financial institution.
Also keep in mind that the maximum insurance-coverage limits are scheduled to decline as of the end of 2009, so you’ll want to avoid taking out CDs that mature after 2009 and that exceed the insurance-coverage limits.
How do I find a financial manager who is trustworthy? What Web sites are available to verify financial managers’ credentials, financial management history, etc.? – Margaret, Texas
While financial planning sounds like a service everyone could use, you’re advised to first ask yourself what you want to accomplish. Many people think that planners can turn their finances around. But financial planners aren't miracle workers.
Second, many financial planners are simply not capable of dealing with the multiplicity of matters that affect a person's financial well-being, including insurance, investments, credit management, retirement, and estate planning. That's because a lot of people who call themselves financial planners are primarily salespeople. They may understand investments or insurance, but they don't know a great deal about other important financial-planning areas.
If you feel you need a financial planner (perhaps for a particular problem rather than for a comprehensive review), you have many to choose from. All sorts of people call themselves financial planners. In fact, anyone can call himself or herself a financial planner.
Here’s what you should consider when choosing a financial planner:
Typically, financial planners charge hourly or flat rates for services (“fee-only”) or earn commissions. In the latter arrangement, a commission is paid if your planner sells an insurance or investment product.
Of course, a planner who is paid commission may have a conflict of interest in selling insurance or investments. One reason so many people are sold annuities they really don't need is that planners generally earn high commissions from selling annuities.
What makes a financial planner right for you? That depends on your needs.
If you want to be assured of getting objective advice, use a fee-only planner (a planner who charges a fee, usually based on an hourly rate), but be prepared to pay for the service. If you don't want to pay what may amount to a large fee, consider a commission-only planner, but be sure to select one who would put your interests first.
There is an alphabet soup of financial-planning designations. Some come with stringent requirements and require certified professionals to take continuing education thereafter.
In addition, the Financial Industry Regulatory Authority (FINRA) has a helpful Web site. It contains information on selecting a financial or investment adviser and a summary of almost 100 different financial-planner designations—most of which are of dubious value.
If you are interested in finding an investment adviser rather than a financial planner, the above Web site also lists Internet sites where you can check an investment advisor’s registration and disciplinary history.
Whomever you choose, be sure he or she is truly qualified to be a financial planner. Accreditation is certainly a plus, but it doesn't guarantee competency.
The way to find a good financial planner is no different from the way to find a qualified lawyer, insurance agent, or tax preparer: word of mouth. Seek referrals from acquaintances or coworkers whose financial and family circumstances are similar to yours.
Many financial planners run seminars to drum-up business, but don't be swayed by a slick presentation or a “free” lunch.
I’ll now say more bluntly what I said first: Do you really need a financial planner?
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