Saving for a Really Big Purchase? Be Aware of This Risk

When you're saving money, a savings account is often a good place for it -- which shouldn't be a surprise, given the name.

Savings accounts allow you to access your funds when you need the cash and provide a return on your investment (which could be pretty generous with a high-yield account). Typically, they also come with FDIC insurance, which also means you can't lose the money you put in, up to a certain amount.

If you're saving for a really big purchase, though, there's a very important risk you need to be aware of.

The insurance risk of a big savings account balance

When socking money away for a huge purchase, you should be aware that there is a limit on FDIC insurance.

Specifically, the FDIC will cover up to $250,000 in deposited funds per depositor, per bank. So if you and your spouse have an account at a bank together, you'd each be covered for $250,000 for a collective total of $500,000 in protection.

But if you were a single person and had $250,000 in savings and $50,000 in a checking account, you'd still have just $250,000 in coverage at that bank, and $50,000 of your funds would not be protected.

Now, it may seem hard to imagine that you'd end up with more than $250,000 in the bank at any one time. But if you're saving for a down payment for an expensive home or for some other major purchase in the future, this very well could happen. And if it does, you need to know that you're not fully protected against losing all of your hard-earned money.

It may also seem far-fetched that a bank would fail in this day and age. But it absolutely does happen, and some bank failures occurred pretty recently. You don't want to take any chances, especially when you're talking about such a big sum of money.

How can you protect your funds if you're above FDIC limits?

If you're saving money for something really big and have more than $250,000, one option is to just open accounts at different banks. Keep each account's balance below the insured limit and you'll be fine. It's a little extra hassle, but it's better than losing your funds.

Another technique is to use a cash management account. These accounts are non-bank cash accounts that typically provide hybrid savings/checking services.

Cash management accounts often come with higher interest rates, and if you pick the right one, they can spread your money among different FDIC-insured banks. This means you can get more coverage -- often on up to $1 million or more in deposited funds. There are some risks, including the fact that before your funds are transferred to the program banks, they're unprotected unless your cash management account is a member of the Securities Investor Protection Corporation (SIPC). But if you do your research, this can be a great solution.

The important thing is to be aware of the problem and explore one of these options so you don't find out the hard way your money isn't as safe in the bank as you thought it was.