Having too much cash at the bank can pose a problem if the bank’s health is questionable. Nevertheless, it is a relatively dilemma many people wish they had.

Following the collapse of the financial industry, much of the American population was standing on their toes as they watched their money disappear on the stock market. Banks were failing left and right – 297 banks closed down in 2009 and 2010.

It doesn’t come as much of a surprise that people are being more careful with their banking, particularly if they have a substantial amount of money.

Conventional money wisdom advises against holding too much in cash – especially at younger ages – because you forfeit the greater return potential from riskier investments such as stocks, mutual funds, and bonds.

But, many others will say that cash allows them to sleep at night. Additionally, older folks will hold more of their assets in cash as they near retirement.

The Federal Deposit Insurance Corporation (FDIC) insures a maximum of $250,000 per depositor, which is the permanent limit as of July 2010, in the event that a bank fails. Deposits in excess of that limit may never return to its rightful owners.

That is a hefty amount of cash that a majority of the American population do not have, and therefore do not worry about.

Those who should be concerned are windfall recipients (such as large inheritances or lottery winnings) and retirees.

For interest-bearing accounts, the $250,000 is not the realistic maximum for a single depositor because interest earnings would put the account over the limit. Assuming that the deposits is left untouched for several years, the interest earnings over that time period would need to be taken into account.

Someone who invests $250,000 in a 5-year CD earnings 3% APY would end up with roughly $290,000 at maturity. Should the bank close its doors near the end of maturity, the depositor could lose nearly $40,000.

Someone who invests $215,650 in the same CD would end up with just a few dollars short of $250,000. The depositor could transfer some of the funds to another banks and reinvest in more CDs.

Read: What to do When Your Bank Fails

Whether it is an interest-bearing or non-interest-bearing deposit account, it is a good idea to leave a cushion for interest earnings or a sudden inflow of cash.

If you don’t want have your deposits at separate banks, you can open a joint account at your current bank, which will offer an additional $250,000 in FDIC insurance coverage because the $250,000 FDIC insurance coverage applies to a person’s name per account ownership category.

A couple could have $1 million in insured deposits if each spouse had $250,000 in their single accounts and $500,000 in a joint account.

In any case, the investment principle of diversification applies to cash. Using different savings products and separate banks is a good idea. Savings accounts, MMAs, and CDs offer varying rates. One bank can have a lenient ATM policy while the other has terrific in-person customer service.

Follow Simon on the MyBankTracker.com Community and on Twitter: @simonzhen.

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