Is Your Money Safe: FDIC vs SIPC

Quote

“The luckiest people I know have coincidentally been working hard for decades.” - Justin Welsh

SIPC vs FDIC

In this short piece we are going to break down the facts (and misconceptions) of FDIC and SIPC insurance.

Due to interest rates going up, the yields on savings accounts, CDs, and TBills have risen from the dead. All of a sudden you can get almost 5% annually on your money, just for parking it in one of the vehicles mentioned above.

Another popular option is letting your cash sit in a money market account. Basically, these are funds where your money is held right before you choose to invest it in a stock or ETF.

There has been a lot of chatter about money market funds not being FDIC insured, causing many people to think they are “unsafe.”

(says the guy with 10 rock NFTs…I digress)

To knock these rumors off their pedestal, here is my attempt to clarify the differences and similarities between FDIC and SIPC insurance.

And most importantly, why you are likely safe (or screwed) no matter which covers your account.

FDIC For Dummies

Beginning with the basics, FDIC stands for Federal Deposit Insurance Corporation. The FDIC is a government agency that insures bank deposits up to $250,000 per account. Of course, this is assuming that your bank account is FDIC insured.

Most are, but if you are with some bootleg company it doesn’t hurt to check.

In case you didn’t know, when you give money to a bank they turn around and loan it out to other people or companies. In the (normally rare) case that these investments fail and your bank goes under, your deposits will be covered up to $250,000.

Not pointing any fingers, but the Silicon Valley Bank Run is a recent example.

There are some specific details on how FDIC coverage varies with account types and ownership structure, but here is a link to read up on those facts so I don’t bore everyone else.

SIPC For Dummies

Getting into the not-so-cool kid, SIPC is short for Securities Investor Protector Corporation (fancy right?!).

As we mentioned, banks have FDIC insurance. SIPC coverage is basically the same thing for brokerages. With SIPC you get $500,000 in securities protection, of which $250,000 can be cash.

Money market funds like SPAXX (Fidelity) and VMFXX (Vanguard) are covered under SIPC insurance and are actually considered to be securities which means you are insured up to $500k.

In short, SIPC covers brokerage failure, but not money lost to bad investments.

Will You Lose Money?

Now for the question you really care about, will I lose money with SIPC insurance?

Short answer, it’s possible. The logical answer is 99% no.

Money market funds like SPAXX are paired with the dollar. There are only two instances of money market funds becoming unpaired, which is also known as “breaking the buck.”

If this were to occur, your money would not be protected, as this would be treated the same as if you bought and stock and it fell 20% (some of us know that hurts). The good news is this has only happened twice in history, none of which were Fidelity or Vanguard funds.

Conclusion

Don’t sue me over this.

In my opinion, it really doesn’t matter which insurance covers your account. If we see a major institution like Vanguard or Fidelity go under, it likely means the US financial system is collapsing and it isn’t going to matter if you have SIPC coverage, FDIC insurance, or cash under a mattress.

In this case, you are probably going to be using dollar bills as toilet paper and stock-piling gold coins and bullets.

Hopefully, this article has provided you with a foundation upon which to continue your own research. I’ll link a few resources below if you want to continue reading up on SIPC vs FIDC.

Personally, I’m not worried about the “sky is falling” scenario so I’m going to be earning some of that sweet money market interest. - Cade

Cade's Finds

Fidelity Explaining FDIC vs SIPC - Fun fact, Fidelity has their own subreddit and provides some quality write-ups. Here is one where they discuss, different coverages, SPAXX, and the SVB failure.

Cash Is No Longer Trash - If you recently joined, here is a previous article comparing CDs vs TBills vs High Yield Savings Accounts (yields might be slightly outdated).

Best Memes

Actually though, my back already hurts…

There is a new Top G in town…

Nothing in this email is intended to serve as financial advice. Do your own research. Thanks for reading, if you have any questions, comments, suggestions, etc. about the email don’t hesitate to send me a reply.