Spreading Money Around

(Photo by Andreas Steidlinger at Scopio)

Where do you keep most of your money? Yours, or that of your business?

One bank?

As I write this, news mostly talks about the collapse of Silicon Valley Bank, which has been a favorite of technology companies. The subsequent collapse of Signature Bank is also getting some coverage, but not as much.

On the whole, your money is safe in a bank, credit union (USA) or building society (UK). But in life there is seldom such a thing as 100% safe. Spreading your money around a little gives you more of a buffer against things going wrong.

For protection against institutional collapses like the bank failures everyone is talking about, you can keep your money in institutions where the government guarantees depositor’s funds. If the bank collapses, you won’t lose your money as long as you don’t keep more in the bank than the maximum amount the guarantee can cover. But it can take months to get access to your money if that happens…

Or you could find yourself blocked from touching your money by someone’s mistake in the bank. Imagine being 91 year old “Marjorie Roper” (a pseudonym used by the Guardian to protect her privacy). After she told her bank that her husband had died and asked to replace him with her daughter as a second signatory for the account, the bank declared her dead. They closed her account and rejected her pension and benefit payments, thereby telling the government she was dead. They stopped all bill payments, causing her utilities to be cut off and the local Council to start hounding her for payments…

Or if you are in the UK, as I am, you could be unable to access your bank account for days or even weeks at a time due to information technology failures. In training courses all over the world, the UK’s IT blunders are cited as examples of how to do it wrong. Banks here spend stacks of money on their IT, yet somehow repeatedly deploy updates that grind everything to a halt. Several years ago my main bank in the UK went through two such episodes within six months…

Enough blather about what can go wrong. Our easiest defense can be simple, not necessarily investing in precious metals or anything complicated. It can be along these general lines:

• Stash your money in institutions that are covered by a government guarantee. Only put money elsewhere that you would be willing to lose in a worst case scenario.

• If you’re fortunate enough to have more money than the government will guarantee, don’t keep it all in one place. Open another account somewhere else that is also guaranteed. Spread your money around so that your accounts are under the limit for the guarantee.

• If you don’t have that much money, it’s still a good idea to open another account at another guarantee-covered institution and try to build up enough there to carry you through at least a couple of months, just in case something goes wrong with your main account. It’s important for the banks you use to be unrelated so things that go wrong at one can’t easily spread to the other.

The fallback account need not be a checking account. It can be a savings account that earns higher interest than a checking account. It can be an account you use to invest in certificates of deposit. For expats like me, sometimes it could be another account in a different currency. Being able to get access to the money in it easily enough and quickly enough in a pinch is essential. Earning more interest or using currency exchange movements to retain or even gain value is a bonus.

Does anyone actually do this? Yes. I didn’t invent these ideas. I grew up with them.

Does it only matter for big businesses? No. A couple of years ago I got involved with a small business that was a mess. You don’t need that whole story here, but the banking part is pertinent. When my colleagues and I stepped in, I was uneasy about the way the bank was behaving. At my urging, we set up a secondary account at an unrelated bank and began to funnel a slice of revenue into it. Then the bank that held the primary account froze the account for over a week. They cited a different reason every time we talked with them, so we didn’t know what they wanted. Things got ugly. But it would have been a lot worse if we didn’t already have another bank account that we could use to collect payments from customers and use for bill payments.

Sometimes spreading your money around is the smart thing to do.

General Notes

Shareholdings in companies aren’t covered by government guarantees. Ditto for annuities, cryptocurrencies, derivatives and so on. Depositor guarantees provided by governments typically only apply to conventional money.

USA Notes

In the USA, deposits in banks, credit unions and savings & loan institutions are generally insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA), whichever is appropriate. The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.

It’s possible to have more than $250,000 in coverage at an insured bank when an account has multiple owners or when there are multiple accounts of different ownership types. An example? A traditional savings account has $250,000 in coverage, and a separate trust at the same institution that has multiple beneficiaries would get $250,000 fin coverage for each beneficiary.

UK Notes

In the UK, the Financial Services Compensation Scheme (FSCS) provides deposit protection up to £85,000 for an individual or £170,000 for a joint account at banks or building societies. Unlike in the USA, this is at each financial institution where you have an account, not for each account. When you have a current account (like a checking account in the USA) and a savings account at the same bank or building society, if the total of the two accounts together is more than the protection limit, some of your money is not protected.