That would fall under the same limits of insurability. The 250K is per person in an institution. So if you have 100K in a money market account, 150K in a regular savings account, and 50K in checking, that’s 300K and you are not fully insured.
You can increase that somewhat by doing things like joint accounts - e.g. you have 250K, your spouse has 250K, and you have a joint account for 250K. And IRA accounts are handled separately.
Note that this is based on my recollection of doing some work for RTC (Resolution Trust Corporation) 30+ years ago - I may have some of the nuances wrong.
Aside from the limits: a money market account will pay more than a regular savings account, but not as much as a certificate of deposit, but is of course more immediately accessible. You can get your money out of a CD, but it’ll cost you a couple months of interest.
Not sure how the FDIC works, but from what I’m told, the Canadian CDIC only insures cash deposits. Mutual funds and similar, even with a bank, are not insured.
This is false, if you’re talking about a money market fund at Fidelity or some other brokerage. There’s no guarantee at all for those, but if it’s a Government Money Market fund, it will probably
be safer for values above 250k than a bank account would be.
For that matter, they probably can’t sell any significant chunk of it without actually flooding the market and lowering the value-per-share, which is bad, because most of Bezos’ and Musk’s companies don’t actually pay dividends, so any wealth gain is through increasing the value of the company.
Does the US Government issue money market funds? I know we had some Treasury Bills at one point, is that the sort of thing you’re talking about?
Re Fidelity: yes and no. Depending on how Fidelity presents the fund, it may be stated as being invested in basically cash equivalents (i.e. invested with real banks), or perhaps it’s held by Fidelity itself. If it is invested in an institution, then it falls under the same limits as if you had placed the money yourself at that institution - and it’s something I learned in the Summer From Hell, back in 1991.
This was a huge part of what we were doing at RTC - back in 1991, when a lot of S&Ls were failing due to junk bonds and the oil crash. The ones I worked on in Texas were failing largely due to oil prices etc. - and relatively few depositors lost much money because they simply did not have that much in the bank. I seem to recall that uncashed cashier’s checks etc. were counted among your assets - e.g. if you got a certified check on Thursday, for 50,000, leaving 75,000 in the bank… then when it closed on Friday, it was treated as if you had 125,000 (the limit was 100K back then). And you’d lose 25,000. Not sure what would have happened if you’d gotten a certified check for over 100K… these were small S&Ls, so the problem did not arise. All in all, the one where I was involved in actually printing the checks, nobody lost more than a few thousand dollars.
Now… if it’s invested in an institution, it really got fun. The brokerage houses would pool a bunch of money together from a bunch of depositors, and get a huge (millions of dollars) CD, paying 15% or whatever. The S&L had no idea who all these depositors were. When it was shut down, that million dollar CD was not treated as a single depositor - i.e. not, in effect, telling Schwab or whomever that “hah, here’s the 100K, you gotta eat the other 900K”.
And as an individual investor, you don’t necessarily know where your brokerage is putting your money, you just know that they’ve promised you 14% income (I’m guessing there was some kind of spread, so the brokerage got its cut, but I was not in that loop). And you know it was FSLIC insured, so you couldn’t lose your 100K. I once invested a bit in a CD-type of investment through Fidelity, and I think I knew what bank it was placed in, but that was 15 or so years after this whole mess so I think things had changed in the meantime.
Now, let’s say you’re ultra-cautious, and you don’t want to get anywhere NEAR that 100K limit (using that figure instead of the current one, 'cuz I’m lazy and the math is easier), and you put have Schwab invest 50K for you, and Merrill Lynch another 50K, and Fidelity another 50K. You’re under the limit at each… but WHAT IF THEY ALL INVEST IT IN THE SAME PLACE?
Plus, what if you have money yourself in such-and-such S&L?
That all has to get figured out before you see any payout.
So as of closing, the brokerage houses had to provide a list of all the participants in that million-dollar CD… and the payout was literally first-come, first-serve. If Schwab and Merrill Lynch got their client lists in to RTC first, that would use up the entire 100K in insured funds… and Fidelity would be on the hook for that 50K you had invested through them.
This meant that (since the closing itself was not a surprise, just the actual date it would take place), the brokerage houses literally lined up to hand-deliver tapes of clients, every Friday, for several weeks.
So we computer people had to do all sorts of comparison and crunching on all this data. First to try to guess “is John Smith at 123 Any Street” the same as “J. Q. Smith at 123 Any Street Apartment A”. This was lots of fun for the one based in San Francisco… as a large percentage of their clientele had very similar-sounding names - “all the Chins in Chinatown” was not a joke!
Then we had to bounce it against the feeds from the brokerage houses. In the same order the tape (yes, these were reel-to-reel tapes) arrived. So imagine this:
75,000 in savings directly with the bank
50,000 placed in a CD through Schwab
50,000 placed in a CD through Merrill
50,000 placed in a CD through Fidelity.
The depositor would get a check for 75,000 from Resolution Trust. Then 25,000 went to Schwab - who had to pay the depositor the full 50,000: half from the RTC money, and half from their own pockets.
And Merrill and Fidelity would both have to dig through a WHOLE lot of sofa cushions to find 50,000 for the same customer.
So the whole thing could cascade badly, if enough people fell into this situation. The S&L I spent the most time on was not Lincoln - but it was definitely triggered by the Lincoln meltdown. If the brokerage houses had enough customers fall into the “too much money” bucket, they might fail.
If it’s money that Fidelity is handling in-house, they’ve likely invested it elsewhere - possibly in government entities, possibly in stocks or other vehicles. The fund sold to an individual investor may or may not claim any sort of guarantee. Presumably if the underlying investments do badly enough, and enough investors attempt to withdraw their cash, that could trigger the brokerage house itself to fail. Or the money market investors might be told “too bad, so sad, the price per share has dropped to less than you put in”. It’s not an area I know that much about.
Not that I know of. Fidelity puts together a money market fund, and if it’s a Government Money Market Fund, it will have to invest in short-dated assets that are explicitly backed by the Federal Government. This will be mostly T-bills, but it may also be in short-dated Agency debt, since that’s backstopped, or short Federal Student Loan stuff, or other government agencies.
There are tons of rules around what can go into a money market fund, and I think one of them “broke the buck” during the last financial crisis, resulting in still more rules. I think the chance that you lose anything at all in a Government Money Market fund is vanishingly small, about the level of the chance you lose money in a T-bill.
Know a guy that use to work at an auto dealer that sold high end cars, Ferrari, Rolls, etc. He said the nice thing about selling expensive cars is the sale, most buyers don’t need to wait on financing, they just whip out their American Express card. To me that would be a lot easier that worrying about having a bunch of cash available.
When I tried to use my credit card to buy my not-particularly-high-end car, the dealer said no to letting me charge the whole deal, because of the transaction fees. And I’ve heard that American Express cards have particularly high transaction fees.
A credit card is a bad idea, but the idea is right: you invest your money wherever you want, and then get a loan backed by those assets. Not all that different from a home equity loan.
In fact, I have one of these through my financial advisor. I can easily buy a house with it (and did). A pretty low rate since it’s backed by assets. They call it a “Liquidity Access Line”; pretty explicit that the goal is to turn illliquid assets into liquid.
The other convenient aspect is that I don’t have to pay taxes on the “income” right away; only when I pay it off. This is one thing that gets brought up a lot when it comes to taxing the super-rich; they defer taxation via loans.
(I see @md-2000 said essentially the same thing above, but it bears repeating)
Apparently this is the thing to do, as also noted by several other posters upthread. The problem for someone newly and suddenly wealthy, however, is how to know who to trust. I’ve read and seen enough stories about rich folk getting scammed out of their money by their “manager” that it would take a lot of convincing for me to go that route.
‘Breaking the buck’ is a bad thing & could very well cause reputational harm & a run on the institution that did. (“You can’t manage a simple money market account, there’s no way I’m trusting you to manage my portfolio”) Some brokerage money markets actually pay for private insurance to ensure they don’t break it. Conceivably, they did break it at some point, you just never heard about it.
As for the OP, there’s a difference between cash & liquidity. One typically doesn’t buy a car or house for cash - ie. Benjamins Usually those large purchases are done with a check or a wire.
People with boatloads of money rarely need the entire boatload at the drop of a hat. Leave the money with your brokerage, which is experienced with moving millions quickly; you can even invest it, as they will issue you a SBLOC good for about half.
That’s a layman’s take. The party line is to get a lawyer, who will find you a reputable cash management firm to advise you based on your requirements.
I haven’t read the other replies but the answer is buy Treasury bills and keep them in cash accounts (meaning accounts that don’t have margin features) at a couple of US broker-dealers. You can keep $250,000 in cash that will be covered by the Securities Investor Protection Corporation even if the broker-dealer goes bankrupt. The broker-dealer will issue you an ATM card and checkbook to give you perfect liquidity for those assets. If you have the T-bills in a cash account, all of your assets should be segregated from the assets of other customers’ and from those of the broker-dealer. The Treasury bills are backed by the full faith and credit of the U.S. government and are every bit as safe as insured bank deposits. There’s no practical limit to how much you can keep this way or for how long. As the old T-bills mature, you just buy new ones.
You would just buy or sell Treasury Bills as required. There’s no reason to mess around with funds containing government-backed securities, just buy or sell the Bills themselves in the secondary market via a brokerage account. Short enough maturity that there’s no significant interest rate risk, and there is (by definition) no credit risk. It would take a few seconds to buy or sell billions of dollars across a few issues, and it would not move the market.
Larry Ellison was legendary for taking out loans to purchase his various extravagances. Yet he was in the worlds top 10 wealthiest for a time.
But if your backing assets are appreciating in value faster than the interest rate you pay on the loan, you are nuts to liquidate in order to pay for something.
It’s a minor point, but a margin account is also segregated. If you are not actually using the margin facility to borrow against the assets in the account, I’m pretty sure there’s no difference - the broker cannot lend out securities in the account without permission.
So does Musk. It’s worked out since he still owns 17% of Tesla, which is a $900B corporation. Though as far as I know, he still hasn’t bought a Hawaiian island like Ellison.
