Is My Money Safe in a Checking Account?
As the musical Cabaret says, “Money makes the world go ’round.” You work hard for every dollar and cent you earn, and you want to make sure your money will be safe and sound where you leave it. But it can sometimes feel risky to not have physical dollars in your possession when you use a bank or credit union. You might ask yourself: is my money safe in a checking account?
At Rivermark Community Credit Union, we know how important it is to know whether your money is safe, wherever you bank. In this blog post, we’ll explore that question, look at common concerns with giving your money to banks and credit unions, and show that your money is absolutely safe in a checking account with a lending institution of any size.
Is My Money Safe in a Checking Account?
The very short answer: yes, of course, your money is safe!
If you’re just looking for the answer to that question, then this is a very short blog indeed. Short of a global catastrophe of an unimaginable scale, every dollar that you put into a modern lending institution is one that you’ll be able to withdraw again, no matter what.
However, why do people ask this question? To fully explore the topic, we should look at the history of banking and why some people might have concerns.
Is My Money Safe in a Checking Account: Why Ask the Question?
Once upon a time, it would have been much harder to answer this question with an unqualified “yes” as we can now. Throughout most of the history of banking since the first modern banks, like those operated by the Medici family, arose in Renaissance Italy, banks were places where you physically deposited money and other valuables.
In other words, if you left a dollar with a bank in Renaissance Venice (or rather, a gold ducat), you were physically depositing an actual coin with the bank. However, when you came to withdraw that ducat, you probably wouldn’t get the same coin—instead, when you deposited the coin, the bankers marked down that you had deposited one ducat with them and would in turn give you one ducat from their treasury and mark your balance down as zero.
All of this meant two things: One, when historical bankers lent out money, they were physically lending out money—potentially your specific coin. And two, this money could be stolen.
Is My Money Safe in a Checking Account: Lending Risk and Bank Runs
One way that lending institutions make money is, well, lending. Banks throughout history have funded projects large and small, giving out loans and having them repaid in interest. Historically, they would do this with the physical coins in their vault. If our hypothetical Venetian bank needed to fund a loan of 100 gold ducats, it would do so by giving those physical ducats, many of which had been deposited by other people. Letting your money be loaned out is the reason that the banks give you interest for keeping your money there—a sort of payment from them to you.
For the vast majority of the time, this practice worked fine. If you came to withdraw your ducat while that physical coin had been lent out, the bank would give you someone else’s ducat and mark your balance accordingly, and give that person yet another ducat, and so on. However, what would happen if all of a bank’s customers came for their money at once?
This is what’s known as a “bank run” or “run on the bank,” when so many people withdraw money that the bank cannot pay everyone. At this time, the banking crisis can cause the bank to go under, and then those who banked with that financial institution are in trouble. This was one of the major problems in the Great Depression.
Is My Money Safe in a Checking Account: Bank Robbers
Much like pirates are fun pop-culture heroes these days, bank robbers like Bonnie and Clyde can be romanticized. However, they were—and are—a very real threat to lending institution workers and those who bank with them.
In the days when banks maintained vaults full of physical coins and paper money, a bank robber could get away with much of the money that people had deposited. Obviously, this was terrible for those who banked there. A bank would have to find the money elsewhere, or they simply couldn’t repay someone looking to withdraw stolen dollars.
So, between banking runs and banking robbers, why isn’t this a problem anymore?
Is My Money Safe in a Checking Account: Fiat Currency, the FDIC, and the NCUA
One of the major developments in modern banking is the concept of “fiat money,” which is money that has no intrinsic value. It represents a promise to pay X amount of money, and that is how our modern system works. When your employer pays you a dollar, that dollar is just a piece of paper. But it represents a promise that society finds valuable, which can be redeemed for the value of a dollar.
Ever since the 1950s, banks have steadily moved to electronic systems. When was the last time you physically deposited a physical dollar at a bank? A bank robber who holds up a bank won’t find millions of dollars in its vault, because they’re all numbers on a computer somewhere. But more important than fiat currency are the FDIC and NCUA.
Created in 1933 as a reaction to the Great Depression in the United States, the Federal Deposit Insurance Corporation (FDIC) is a federal corporation that guarantees the safety of any money you deposit in an FDIC-backed lending institution. The Federal Credit Union Division was created in 1934 and became the National Credit Union Administration (NCUA) in 1971 with the purpose of providing the same guarantee for credit unions. This means that if your financial institution is robbed or if there’s a run on your local credit union, Uncle Sam will step in to make up the balance. Federally insured banks and credit unions are insured to at least $250,000. No matter what, you’ll be able to withdraw the money you deposited.
Even if your lending institution goes under, the NCUA and FDIC guarantee the balance sheets of failed institutions. So you can be confident that even in the worst-case scenario, like robbery or a run on your lending institution, you’ll always be able to get a dollar you’ve saved.