Here's What Happens When You Have Uninsured Money in a Bank Account

One benefit of keeping money in a savings account or certificate of deposit (CD), as opposed to the stock market, is that you can avoid the risk of losing money. When you invest in stocks, the value of your assets might rise or fall with market conditions. But if you put $20,000 into a bank account, the only way you're going to end up with less than $20,000 is if you actively take a withdrawal.

This assumes, however, that your money is insured. Keeping insured money in the bank could put you at risk of losses. But that's a pretty easy thing to avoid.

A risk you don't need to take

Savings accounts and CDs tend to deliver lower returns than the stock market. But in exchange, you're taking on less risk -- provided you're being savvy about how you save.

If you want to make sure you don't lose money due to something like a bank failure, you need to do two things:

1. Bank at an FDIC-insured institution
2. Make sure your deposit doesn't exceed the FDIC insurance limit

There are different steps you can take to find out if your bank is FDIC-insured. First, you could ask your bank directly. Or, you can use this tool to look up your bank and find out.

Meanwhile, the FDIC insurance limit is $250,000 per bank for single accounts (a deposit owned by one person). That limit rises to $500,000 when you have a joint account holder.

Let's say you're a solo account holder with $100,000 in a CD and $160,000 in a savings account at the same bank. Here, you're $10,000 over the $250,000 limit for that bank. If the bank in question were to fail, you'd potentially be out $10,000.

But, let's say you have $100,000 at one FDIC-insured bank and $160,000 at a different FDIC-insured bank. Here, you're fine.

Given the vast number of FDIC-insured banks out there, there's really no reason to ever put yourself at risk of losing money to a bank failure. If you're in a position where your savings are growing and you're about to exceed the $250,000 (or $500,000) mark, just move some money to another bank. It's really that simple.

Think about how much cash you should have in savings in the first place

Keeping more than $250,000 (or $500,000) in deposits at a single bank could put you at risk of losses. But that aside, if you really have that much cash in savings, you may want to consider moving some of it into stocks.

It's a smart idea to keep money in savings for emergency fund purposes. And if you're saving for a near-term goal, then the bank is the best place for your money, not the stock market, since you may not have time to ride out a market downturn. But for long-term goals, keeping your money in a bank account may not serve you so well.

If you earn a 4% return in the bank on a $200,000 deposit over 20 years, you'll grow that sum to about $438,000. But if you earn 10% on a $200,000 investment in the stock market (which is in line with the market's long-term average), in 20 years, you'll have about $1.35 million.

As such, it's a good idea not to keep too much cash in the bank not just due to FDIC insurance limits, but also, because you may be able to do more with that money by investing it.