When you entrust your savings to a bank, they don’t simply put your money into their vault and wait for you to make withdrawals. Instead, your bank loans those funds to other customers.

If the economy goes bust and many borrowers default on their loans, it’s possible that your financial institution might fail. Some risk always will exist, but savings accounts generally are extremely secure places to deposit your money. There are two major reasons why this is true.

First, most governments limit a bank's loans based on how much money is deposited with them. Typically, banks lend between 7 and 20 times the funds they hold in savings accounts. Loan default rates would have to be very high before a bank goes bankrupt.

Second, most personal bank accounts are insured. As of June, 2006, some 95 countries had deposit insurance systems in place. In Canada, for instance, the Canada Deposit Insurance Corporation (CDIC) is a federal agency that protects personal, Canadian funds up to $100,000 per depositor in each member institution. If your bank is covered by deposit insurance and fails, your funds will be returned to you.

What if you have more than $100,000 in a single bank? You can get more insurance protection by dividing those funds across multiple banks and limiting your deposits (plus interest) to no more than $100,000 at any one CDIC-insured financial institution. Of course, you must weigh this extra security against the inconvenience of dealing with many banks.

If you are putting your money in an Internet bank, be sure to thoroughly check into the bank’s legitimacy before handing your savings over to them. Check with a banking professional organization (e.g., Canadian Bankers Association) if you are concerned about your bank—Internet or otherwise.

Savings accounts are very safe and usually provide good liquid cash, but their rates of return usually are relatively modest. At some point, you probably will want to learn more about investing your money.

Learn about protecting your investments.

Learn about protecting your credit cards.

Learn about preventing gambling harms.

Return to the main Wealth Protection Tips page.