Should I Take Money Out of the Bank?

Deciding where to keep your money involves understanding security and accessibility. Many consider whether funds are safer in a bank or as physical cash. Informed financial decisions require evaluating bank protections alongside the practicalities and risks of holding cash.

Understanding Bank Account Security

Bank accounts offer a layer of security through federal insurance programs. The Federal Deposit Insurance Corporation (FDIC) insures deposits at banks, while the National Credit Union Administration (NCUA) provides similar protection for credit unions. These independent federal agencies safeguard your money in the event of a financial institution failure.

Both FDIC and NCUA insurance cover up to $250,000 per depositor, per insured institution, for each ownership category. This means funds held in different account types like single accounts, joint accounts, and certain retirement accounts are separately insured. For example, if you have a checking account and a savings account in your name at the same bank, their balances are combined for the $250,000 limit. However, opening accounts at different institutions or in different ownership categories can increase your total insured amount.

This federal insurance primarily covers deposit accounts such as checking, savings, money market deposit accounts, and certificates of deposit. It does not extend to investment products like stocks, bonds, mutual funds, annuities, or the contents of safe deposit boxes, even if purchased through an insured bank or credit union.

Assessing Your Need for Physical Cash

Having some physical cash on hand is practical for certain situations. It is useful for emergencies, such as power outages or natural disasters, when electronic payment systems may be unavailable. In these scenarios, cash allows for the purchase of necessities like food and fuel when debit or credit cards cannot be processed.

Cash is also necessary for small transactions or at businesses that do not accept card payments. Some vendors, especially small businesses or those at farmers’ markets, prefer or only accept cash to avoid processing fees. Additionally, cash transactions offer privacy, as they do not create a digital trail.

The amount of physical cash needed for these purposes is limited. Financial guidance suggests keeping a small amount, perhaps a few hundred to a few thousand dollars, for immediate, unexpected needs. This amount is distinct from a larger emergency fund, which is held in accessible bank accounts.

Considerations for Storing Cash Outside a Bank

Keeping significant amounts of cash outside a financial institution carries risks. Physical cash is vulnerable to theft, accidental loss, or damage from fire or flood. Unlike banked funds, lost or stolen cash is unrecoverable. Homeowners or renters insurance policies have low limits for cash coverage, offering minimal protection.

Inflation erodes the purchasing power of physical cash over time. Money not earning interest in a bank account loses value as prices for goods and services increase. For example, if inflation is 8.5%, $1,000 kept at home would have the purchasing power of $985 after one year.

Holding large sums of cash at home means missing out on potential interest earnings offered by savings accounts or other deposit products. This lost opportunity cost can be substantial over time, as banked funds can grow, even modestly.

Large cash holdings can create challenges when proving the source of funds for significant transactions, such as purchasing a home or vehicle. Financial institutions require documentation, like bank statements, to verify funds for anti-money laundering compliance. Cash transactions lack this formal documentation, which can complicate large purchases.