The Planner's Perspective: Breaking the Banks
By Paul Morrone CFP®, CPA, MSA
Speaking from experience, it’s a pain to change banks in today’s digital world. Online information, the interconnectivity between financial institutions and the automated nature in which we live our day-to-day lives all make it easier to not take action when in fact we should. There are many valid reasons to utilize multiple banks, however, for most people there are likely more reasons than not to consolidate your assets in one place. Debunking some of the common misconceptions about banking may help you make the decision for yourself as to what is best for you and your family.
One of the common arguments people make when using multiple banks is that they ‘don’t want all their eggs in one basket’ because if one bank goes under their cash is safe at another. While this theory does hold some water, it really only applies to those with large cash or CD balances. The Federal Deposit Insurance Corporation (FDIC) is an independent entity set up by congress to protect depositors in the event that a banking institution fails. The insurance provided by the FDIC provides depositors with protection of up to $250,000 per individual, per account registration. If structured correctly, a married couple could easily obtain over $1.0mm in FDIC insurance protection at one bank, alone! Of course, the caveat here is to make sure that your bank of choice participates in the FDIC insurance program to ensure that this protection is available to you and your deposits.
Another reason many individuals have multiple accounts is because they took advantage of special introductory interest rates, cash bonuses or offers for a free iPad for opening an account. While these incentives are simply there to get you in the door, an extra .05% interest credit isn’t going to materially change your financial status, even over the long-term. In many ways, the additional compensation you receive from the incentive offer isn’t worth the time or aggravation that you have to put in to obtaining it. If you do not end up moving all of your assets to the new bank, these one-off bank accounts are often neglected (or even forgotten) and can create confusion as your financial life becomes more complicated. Dormant bank accounts can also wreak havoc for your executor/executrix in the event your or your spouse passes away as these accounts often have inaccurate registrations, small balances and ultimately may require distribution through probate.