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Being Fort Knox
3 Steps To Protecting Your Money
By Phillip M. Perr
Cash
is the lifeblood of your business. You need a steady supply for everything from
paying rent and buying supplies to purchasing inventory and meeting payroll.
Keeping your money safe is critical to survival. But how secure is that
bank or money market fund where you park your cash?
Until recently most
of us gave little thought to that question. For many decades financial
institutions seemed as sturdy as the marble pillars that once graced their
porticos.
Times have changed. The housing meltdown eroded the fortunes
of such financial giants as Washington Mutual and Wachovia. Hundreds of smaller
institutions are also being affected.
And banks are not the only
victims. Last year, the nation’s oldest money market fund froze the cash of more
than 400,000 customers for an extended period of time.
The harsh truth
is this: If your money’s in the wrong hands, you may wake up one day to find you
can’t get the cash you need to stay in business.
“When it comes to the
health of our financial institutions, we took a lot for granted in recent years
because things were running nicely,” says Marilyn J. Holt, a Seattle-based
consultant specializing in business planning and mergers and acquisitions. “But
today we are in an upheaval so we have to be more vigilant. If you want to be in
business in 2020, you need to be very conservative with your money.”
Here are three steps to protect your working capital and your business
savings.
Step 1. Put Your Money In An FDIC-Protected
Bank
So where’s the safest place to stash your cash?
“You
should put your money in banks insured by the Federal Deposit Insurance
Corporation (FDIC),” says Norman Katz, managing partner of MCS Associates, a
financial consulting firm in Irvine, Calif. “That is the best idea when safety
and security of your working capital is paramount.”
The FDIC is a U.S.
federal agency that protects you against the loss of your deposit accounts if
your FDIC-insured bank fails.
Unfortunately, you don’t earn much
interest from the typical accounts at these banks. That’s why many business
owners are tempted to invest their working capital where they can get better
returns. These include money market mutual funds and stock or bond funds.
These higher yielding investments come with a downside: Your money may
not be there when you need it.
“People need to keep reminding themselves
that the higher the return, the greater the risk,” says Holt.
So when it
comes to picking a financial institution the catch phrase is safety first. But
is your own business bank insured by the FDIC? To find out visit the agency’s
Web site at www.fdic.gov. Click
on “Deposit Insurance” and then on “Bank Find.” Enter your bank’s name in the
search field.
Step 2. Use Accounts Eligible For FDIC
Protection
Keeping your money in an FDIC-insured bank is important.
But here’s an important caveat: Even at insured banks the FDIC only covers
certain types of accounts. The three most common ones are checking, savings and
certificates of deposit (CDs). Also covered is the money market deposit account.
Avoid confusing the “money market deposit account” with the similarly
named “money market mutual fund,” which banks can also sell but which is not
eligible for FDIC insurance. This vehicle consists of short-term corporate debt,
government securities and similar assets held by the bank on behalf of
customers.
Many people confuse these two financial vehicles, so double
check your own holdings and confirm your FDIC coverage. Also avoid other
accounts that banks sell but that are not eligible for FDIC coverage. These
include stocks, bonds and mutual funds.
Step 3. Stay Below The
FDIC Coverage Limit
The third step to financial safety is to make
sure your deposits in an FDIC-insured bank don’t exceed the limit of FDIC
insurance.
In late 2008, the FDIC increased that limit from $100,000 to
a new level of $250,000 for each depositor at each insured bank. The new level
is effective until the end of 2009, when the limit is scheduled to revert to
$100,000.
And what if your total cash on hand exceeds $250,000? One
solution is to divide your money among several banks, since each bank will
provide you with $250,000 coverage. You must open each additional account at a
new bank, not just a different branch of your current bank.
Alternatively, you can arrange to have more than $250,000 insured at a
single bank. The trick is to store the funds in more than one account under
different ownership categories. For more information see the sidebar, “How Much
Does The FDIC Insure?”
There has been another recent development that
increases the level of funds you can have insured at any one bank. In late 2008
the FDIC fully insured all noninterest-bearing transaction accounts. Your
checking account may be covered by unlimited insurance if your financial
institution participates in the FDIC’s Temporary Liquidity Guarantee Program
(TLGP). The coverage will last until Dec. 31, 2009.
The guarantee
applies to all personal and business checking deposit accounts that do not earn
interest, but only at participating institutions.
The program
encompasses traditional demand deposit checking accounts that allow for an
unlimited number of deposits and withdrawals at any time. (A typical use for
such an account is for company payroll funds.) Not covered are negotiable order
of withdrawal (NOW) accounts or money market deposit accounts (MMDAs).
Before relying on this insurance, make sure your bank participates in
the program. The terms of the TLGP may change at any time. For more information
on the program, visit the agency’s Web site at www.fdic.gov and enter “Temporary Liquidity Guarantee Program”
in the search box.
Checking and savings accounts are great places to
hold cash that you need in the near future. But how about the money you save up
for use down the road, such as a future expansion program, new store fixtures,
computers or a vehicle? It’s possible to get that money working a little harder
for you by selecting investments that offer both safety and higher interest
rates.
“You can earn higher interest by investing your working capital
in a short-term certificate of deposit,” says Holt. “You can invest in CDs as
short as 30 days. If this CD is in an FDIC-insured bank, then your money will be
as safe as it is in a checking account. The longer the term of the CD that you
have, the higher the interest rate.”
The downside of a CD is that you
pay a financial penalty for early withdrawal, says Holt.
“It pays to
select CD maturities that coincide with the times you will need your money.”
Other Places To Put Your Cash
Here are
some additional places to store your money.
Money Market Mutual
Funds
Money market mutual funds are not FDIC insured. The lack of
federal insurance would seem to suggest that most business owners would shy away
from these vehicles as repositories for cash critical to daily operations.
However, money market mutual funds have traditionally been viewed as
nearly as safe as cash because of their short term, and thus very liquid,
assets. And they offer higher returns than many other alternative investments.
Are they right for you? You’ll need to make your own judgment call based
on your individual risk tolerance.
In late 2008 the Department of the
Treasury announced a temporary guarantee program for all money held in
participating money market mutual funds. The terms of this program may change at
any time. For more details visit the Treasury’s Web site at www.treas.gov.
U.S.
Treasuries
U.S. treasuries are considered the most secure of all
financial vehicles. Their attraction is safety rather than return.
“Interest rates are so low today that there is not really a lot to be
gained,” says Katz, managing partner of financial consulting firm MCS
Associates.
Like CDs, treasuries carry maturity dates that you will need
to match with your cash requirements. You can buy treasuries directly from the
government at www.treasurydirect.gov.
Home Office
Safes
Why not lock up your cash in an office or home safe? Many seem
to be doing just that.
The Home Depot recently reported double digit
increases in the sale of home safes. And the Federal Reserve Board is reporting
an increase in the amount of currency in circulation (that is, currency in
people’s hands rather than in banks).
Both reports seem to suggest that
more people are stashing their cash at home. Clearly plenty of people are
concerned about the safety of their corner banks. But, most financial experts
believe this level of security is overkill.
“Most people who are putting
their money in home or office safes don’t have more than what is protected by
FDIC insurance in a bank,” says Katz. “I don’t think it’s a prudent move unless
you have a real doomsday fear.”
Doomsday fear, most economists believe,
is not the most productive response to the current crisis. It’s smarter to
perform due diligence on financial institutions and select the safest ones.
“This is a time for care and caution,” says Katz. “For most
small-business owners there are safe and secure solutions to the problem of
protecting their cash.”