Over on this post Placebo has a question:
I’ve noticed you’ve posted quite a bit on banks failing. So where are you parking your money in light of this widespread problem? I know gold is one place …
Thanks!
Right now the FDIC is still guaranteeing everything. I don’t think anyone needs to panic as long as their accounts are FDIC-insured. Keeping your money in the bank is still safer than keeping it in your mattress where robbers and fire can take it. Bear in mind that the government recently stopped its temporary protection of money market accounts, so you may want to move money markets to an FDIC account or Treasuries.
Having said that, here are some things I’ve done in light of bank failures and other potential problems. All of my amateur investment advice is worth exactly what you paid for it.
Diversification
Over the years the money for the entire family – my wife and I, our children, my mother, and my brother – wound up in the same bank. That’s too many eggs in one basket. My wife and I recently opened a vacation and Christmas savings account at a credit union so that not all of our money is in one bank. As our CDs mature we’re going to move some of them to the credit union.
Incidentally, we’re discovering that the credit union has much better interest rates than our bank. So besides the protection of putting our eggs into different baskets we’re earning more interest. It isn’t big money, but it pays for the inconvenience of moving the money.
Pre-payments
A few months ago I made an advance payment on the car. If the banks went totally wonky I’d have a month to get things straightened out with my car payment. That extra payment is also a form of savings – if I couldn’t pay my other bills I could call Honda Finance and tell them to not withdraw money from my checking account that month. (Check with your finance company to make sure that’s true for yours before you send in that extra payment.)
Likewise you can put extra money in your account at the utility company, phone company, cable company, etc. Normally you pay those bills in arrears, but there’s nothing stopping you from sending them more than you owe. With passbook savings accounts paying much less than 1% there’s not much incentive to leave money in savings anyway.
Naturally you should pay off credit cards, not just now but always. You should never let money linger in your savings account at 0.5% when you have a credit card balance that’s charging you 10%. Even in good times that’s bad math. In really super bad times it’s worse – the bank behind the savings account balance might disappear, but the credit card company behind your debt balance never will.
A little in cash
I keep a little more cash in my wallet than I used to a year ago. After payday I typically get $200-300 in cash from the bank.
In general, most people are too dependent on plastic for day to day expenses. It isn’t just bank failures that are a potential problem. A few years ago one of the satellites that processed credit cards stopped working. Some travelers found themselves out on the road with no way to buy enough gas to get to the next gas station, much less get home. If there’s a natural disaster that knocks out power no one will be able to take plastic. It’s been reported in some recent disasters and hurricane evacuations that ATMs ran out of money and there was no one around to refill them. Keep some cash in the car – small bills, with dollar bills for vending machines, and a roll of quarters.
A little more in cash
I’ve also moved a little more money to cash in a safe deposit box at the bank. Not a lot, but enough so that if we couldn’t use the debit card or credit card we’d be able to pay for gas and food for a couple of weeks. The safe deposit box is inside an alarmed, fireproof vault that’s hurricane- and earthquake-proof and that’s under the watch of an armed guard during bank hours. We also keep important documents and a backup hard drive in the box. Cost is $35 per year, a bargain.
The contents of the safe deposit box aren’t part of the banks assets, so they aren’t subject to bank losses. However, if the bank is shut by regulators you won’t be able to access the safety deposit box until the bank re-opens. Typically the bank is shut down before the weekend and the FDIC re-opens it after the weekend. However, there’s a possibility that might not be true in the event of some unforeseen series of events or national crisis. It’s something worth thinking about. Once again, don’t put all of your eggs in one basket.
What about inflation?
Inflation – not bank failures – are why you should move a portion of investment and savings intended for later use to something besides cash. Typically that means things like retirement funds or college funds with a long investment horizon.
Gold
For inflation protection gold is excellent and is on a roll. China, Russia, and Middle Eastern states are buying gold to get rid of their dollars. Hong Kong is recalling its gold to put into its own vaults. Barrick, the world’s largest gold miner, issued several billion dollars in new stock to close its gold short position. More arguments for gold can be found in this Doug Casey interview.
Think of gold as insurance. It might or might not dip a little in the next few months or next year, but it won’t get wiped out and it could do phenomenally well. The conditions that will cause gold to do well will cause a massive writedown in many of your dollar-denominated assets (which for most of us is all of our assets), which makes it an excellent hedge against not just inflation but against an extreme event like the collapse of the U.S. dollar.
Physical possession of metal is best because it doesn’t involve any counterparty risk. American Precious Metals Exchange sells bullion for a small premium over the spot price. The spot price assumes you’re moving gold within the assayed gold vault system in 100 ounce bars, so it’s fair to charge a premium over spot for things like U.S. gold double eagles or Canadian maple leafs.
For those of us investing in 401Ks there are ETFs (Exchange Traded Funds), which are traded like stocks but are based on holding commodities rather than shares of a company. I have shares of GLD, CEF, and GTU in my 401k and I’d like to add some SGOL. A conservative position might be 10-15% of your long-term investments, even for people who aren’t gold bugs. (LATER: I’ve gotten out of GLD over concerns about their finances. All of my 401K investment in gold is in CEF, GTU, PHYS, and SGOL. As of August, 2010 about 70% of my 401K is in gold and silver.)
Absolutely avoid leveraged and inverse ETFs, which are intraday plays for traders, not long-term investors. If the name mentions 2x or 3x it’s leveraged. Run away.
Other commodities and metals
I also have some other metals and energy ETFs, including SLV, OIL, UNG, and a little platinum. (LATER: As of Auguest, 2010 I’m strictly in gold, silver, and cash now. Be wary of SLV for the same reasons as GLD. I don’t have solid picks in silver, but I have some SIVR.) In the event of inflation commodities and metals should rise. Diversification here seems prudent. I wouldn’t mind picking up some uranium and some broad food commodities.
TIPS
Another, more conservative option is TIPS – Treasury Inflation-Protected Securities. They’re secured by the U.S. Treasury, just like traditional Treasury notes. The difference is that TIPS have a variable rate. They pay a low base interest rate plus the official U.S. government inflation rate.
Bear in mind that TIPS aren’t 100% inflation-proof for two reasons. One, the government manipulates the official inflation rate, whose definition keeps getting revised. (No, really. See Shadowstats.com. The official inflation rate hasn’t kept up with rising costs of health care, education, energy or assets in forever. Subsequently Americans have much less purchasing power now than they did a few decades ago.) Two, once inflation really gets going the government will likely shut the door on TIPS sales the same way they shut down inflation-adjusted Series I Bonds.
Still, TIPS are a simple, safe investment with no real downside that I can see. I have about 10% of my 401K in these via Vanguard Inflation-Protected Securities (VIPSX) and they’ve appreciated about 11% in the last few years. Get ‘em while you can.
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Canned food and ammunition, folks.
[rq=713752,0,blog][/rq]Dangerous Women
Thanks. It is interesting for me to gauge how my financial strategy compares with like-minded others who believe we may have more pain to endure. It looks kind of similar.
“Canned food and ammunition, folks.”
That, too, up to a point. I don’t think we’re going back to a barter economy and living in huts. I’m planning to live pretty much the life I do now, but with a worsened economy for a while.
That means I only need so many guns and so much ammo, I have extra food but I can only store so much, and I still need money because I can’t pay bills with canned goods.
Right now the FDIC is still guaranteeing everything. I don’t think anyone needs to panic as long as their accounts are FDIC-insured.
This is the same FDIC that’s now broke and wanting to borrow money from banks, right?
Pre-payments
A few months ago I made an advance payment on the car. If the banks went totally wonky I’d have a month to get things straightened out with my car payment.
Check your contract – the two car loans I’ve had didn’t allow you to “pre-pay” – you could pay it off early, no problem, but any extra payment didn’t allow you any slack, they wanted 12 payments a year. If you’ve got one that allows this, that’s great, but many don’t. (Same deal with my mortgage, paying extra is great and fine, but on the 5th, the payment is due.)
[rq=721261,0,blog][/rq]The Real World, American (Western) Chauvinism and free software.
If you have cash in a safe deposit box, when you die, the IRS seals it until an IRS rep can be there when your successor and the bank open it. Any cash in it will be considered unreported income.
There is no telling how long the box will be sealed, which is why that’s not a good place to keep the will.
A better idea is to keep the safe deposit box in the name of a corporation or LLC which obviously can’t die. Check your state’s laws to see which would be better. California has a minimum annual tax on LLC’s of around $800 (if it, in its money-hungry desperation has not increased the amount). This, formation costs, and the tax rate for each will vary by state.
TD: Heh. That’s why I followed with “Having said that…”
Unix-Jedi: I checked. It’s treated as an full advance payment and I specifically asked if I could call and suspend an automated payment in lieu of the advanced payment. But you’re right, that is important to check first.
Windy: The IRS does not routinely seal safe deposit boxes when people die. It’s true that if the only person who had access to the box dies then it’s going to be mighty hard to open the box to get their will. Both of the deposit boxes I use have two people on the signing card for this reason.
FDIC statement on safety deposit boxes here.
Gold is an excellent investment but not all that good for “the day after.” Pre-1964 silver coins will be handier for the daily purchases we make. No one wants to pay a whole Krugerand for a loaf of bread. And merchants will be more likely to make change for silver than gold.
Forget gold. You can’t eat gold. Find a copy of “Alas, Babylon” – then stock up on drinking alcohol, sugar/honey, flour, and salt. Batteries are good, too, and razor blades if you don’t look good in a beard!
Always make sure that you have someone you can trust on anything you have with the bank. If you die, they’ll have access to it. If they are a signer on the account, and you’re a sole owner on the account, it’s useless. An AAS is only good for as long as you’re alive. Don’t set up things at the bank as an LLC or a Corporation, the paperwork is not worth it, and makes it appear like you may be laundering money if you don’t need an LLC or Corporation designation.