I work in the IT industry as a virtualization engineer, and 90% of my job is about reducing risk, eliminate single points of failure and implementing redundancy. Everyday a number of situations arise in my regular job that make me think of how my requirements can apply to personal finances.
Recently, when Cyprus depositors lost 47.5% of their deposits, I was quickly reminded of the 1930's bank runs (risks) and the “what if this would happen here” entered my mind. As many people know most of our deposits in banks are FDIC insured, but very few realize that a majority of banks are underfunded. With that in mind, it's helpful to have a backup plan in place in case you are unable to gain access to your money.
Here are a few ways I view my finances through the lens of a geeky IT guy:
Look at your personal situation with your finances. Where is most of your money? If it's like most American's, then 100% of your paycheck goes directly to your checking account. A few of the risks associated with this are “having all your eggs in one basket”, the lower interest rate (or no interest) typically earned in a checking account.
Single Points of Failure
In most people finances they don't view their bank as a single point of failure, but the mindset of people from the depression era was a lot different. In talking with my Grandpa, he mentioned frequently about how neighbors and family were extremely skeptical of banks after the bank failures. People also talked very negatively of loan officers, and for an understandable reason. Grandpa mentioned how folks would hide money and coins in furniture, the wall, attic, and the typical under the mattress. These means weren't exactly conventional, but was another way for them to ensure all their money wasn't tied up in the bank (post-Depression).
In your own life consider having at least two checking accounts that are housed at separate buildings in your local area and which would have an equal portion of your savings in. For my family, we direct deposit about 50% of my paycheck to one checking account and 50% to the other bank. We do this to both split up our fixed expenses and variable expenses, and help make sure we have multiple banks we can go to in case we need to gain access to our money. With each bank account, it's also important to know how much you can withdraw from them (ATM) in case of an emergency (typically $300-$500/day).
Finally, in looking at single points of failure, it might be helpful to consider having a set amount of cash at home. During the bank runs in Cyprus, citizens were prevented from withdrawing money from the banks and cash became a hot commodity. As a starting point, consider having one month of cash, gold, and/or silver in a safe at your residence.
Prior to the Great Depression, most individuals had one job and relied solely on a single source of income for their families. In my Great Grandfather's case he was a farmer, and a farmer only. The only difference in his situation was that he not only raised corn and beans, but raised hogs and sheep as well.
In your life what do your income streams look like? Does 100% of your income come from your regular 9-5 job? Do you have any other avenues in which you are earning money?
Self Redundancy, is one's ability to earn multiple streams of income and not rely on one sole income stream. Consider starting a blog, write an ebook, invest in tax liens, or start a home-based business. The best type of income streams are those that earn money while you sleep (easier said then done!). Seriously though, every type of investment takes a little elbow grease, but can pay serious dividends long term. Start brainstorming today on what your next business venture will be, because if the economy tanks, then it'll be a lot harder then!
Am I the only one that thinks about bank failures or considers my finances in terms of risks or single points of failure? What are your thoughts? I'd love to hear how other mitigate their financial risks, or lessons they heard from the Great Depression.
You’re absolutely on the right track regarding diversification, not only in regard to spreading your accounts to different (RELIABLE) banks (we avoid the big banks like the plague and rely solely on two separate credit unions for our loans and savings/checking accounts). For example, paycheck direct deposit goes to the credit union which holds our mortgage. Other income streams go to a separate credit union. If our checking account at the first bank starts to accrue too much, we take the withdraw the excess and deposit into the other checking account. Your advice regarding variable income streams is also good advice. Stashing money in a safe place for emergency purposes is advisable, ALTHOUGH I wouldn’t exactly suggest some of your options (in case of fire, for example). Your Grandpa is a smart man (as was mine). We discuss ALL of these decisions. We also maintain separate savings accounts in separate banks, though both spouses have access to either. We mostly don’t touch our savings. We also pay off our credit card balances at the end of each pay period so that we don’t overspend or accrue interest payments. It’s always a good idea to approach life on the basis of: What would I do if…. When you witness the horror stories befalling others, consider that if it can happen to them, it can happen to you. The financial crisis should have taught working people a valuable lesson. Did they learn? NOPE. A thieving con man is now running the country.
I don’t often think about the Great Depression but after reading your article I will be keeping it in mind when I decide where to invest/save my money. One alternative I don’t feel gets enough attention at least with young people is whole life insurance. If a whole life insurance policy is started at a young age the guaranteed returns can give you piece of mind against the volatility of most other investments.
Charlie, I think about this all the time too. I think about the Depression, and how terrifying it must have been to go to the bank, only to find all of your hard-earned cash GONE. What a sick feeling that must have been, and if it happened today, it would most likely lead to riots in the streets. Rick and I are working on all of your tips above as we learn to prepare for whatever may come with America’s economy. Thanks for a great post!
As the economy has gotten worse we have started putting money away in alternative place s other than banks for emergencies. We’ve also looked at other sources of potential income such as coins and junk silver. These are items that could be potential sources of money or bartering items if an emergency arose and banks had to close. Diversity is good!