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Sunday, September 25, 2011

Banking, Cash Reserve & being Pro-Active

I wanted to take a moment to write about something more relevant than commenting on the news of the day; to ask an important question both rhetorically and directly--  Why do you keep your money in a bank?

I am not asking this so I can pitch some hot stock tip or way to invest in some scheme.  Other than a deep distrust and disliking of banks, there's no agenda to the question posed..  So I will ask it again- sincerely.. Why do you keep your money in a bank?

I was discussing this question in a phone call with a relative yesterday.  She was expressing frustration at the extremely low interest she was receiving though she had a sizable amount of savings being held.  For privacy reasons, I won't specify how much was in her bank account, but her total interest on that savings after 9 months was $41.22, which would be just enough to take a date to Olive Garden, including drinks and tip.  To give perspective, if savings was paying at a 1% rate, she would have received $1,500 on her money thus far.

So what does she gain in return for keeping her money held in a banking institution?  Well, she gets the privilege of having limitations placed on how much cash she could access from an ATM machine in a given 24 hr period.  She also gets the 'honor' of being looked upon as a criminal if she ever withdrew more than a couple thousand dollars cash at a time.  And if her money was in a Money Market, she'd get to experience greater lack of control over her finances as her monthly withdraws would be limited to 2 or 3 per month.

In addition, she gets to help provide the bank she's using with the means to acquire greater amounts of profit off her money in two ways primarily.  First, let's say she had $10,000 in her checking or savings account (she has more but let's just use $10k), the bank takes that money along with every other customer's money and invests it in the stock market.  Sometimes banks will place the funds into their own coffers via buying their own stock.  Other times, they'll invest in riskier ventures like commodities or derivatives.   

Second, thanks to something called fractional reserve, for every $1 a bank holds of a depositor, it means they can lend out $10 to others.   So my family member's $10,000 would allow the bank to lend $100k.  She gets 0.01% (one-hundredth of one percent) interest off her money while the bank gets 4-9% interest profit off their lending.  That's equitable, right?

To be fair, she does get a few really super perks.  The tellers are always super friendly and always ask how she's doing, which is really nice. Also, there's always a bowl of lollipops or peppermints on the counter for her to take one of after she deposits more money.

So we talked on the phone a while, my relative and I, trying to explain why it was wrong to keep so much of her precious money in a bank.  She wasn't too open-minded at first..  well not until I explained what happens if the market crashes and the government declares a bank 'holiday'.  

As you know from the last couple weeks following A&G, the global financial system is very turbulent.  Markets going up and down in dramatic spikes... maybe its related to real news or maybe its rigged to be so volatile like in 2008.  There are many insider whispers I've been hearing which say the market will drop very hard between now and the end of October.  And if/when it does, the government will reflexively shut down the market meaning you can't get access to your money market or cash out CDs.   And if things ever got bad to the point the government had to shut down banks to prevent a run,  you are severely Fucked.  Cash will become king, at least until the banks reopen and more money is flooded into the market to smooth things over.

Every person should have ample cash reserves for such emergencies.  Even if they never ever happened, what did you really lose?  98 cents a month in interest??  I do not suggest closing a bank account.  We need banks to hold enough of our money to write checks to pay bills or use debit cards for things like food or gas where carrying large amounts of money on you is unsafe & unsound.

But I do also say in sincerely and seriousness, that people should be taking out cash now for emergencies- enough to be able to survive for a few weeks at least, if things ever get truly bad. Even a well-stocked person eventually runs out of supplies and you need cash to obtain items or services. The money can always be re-deposited if nothing bad ever occurs but really.. you the reader sense all is not well in the US and global economy, and it goes beyond simple recession vs recovery debate.  This autumn will probably be the most unstable since October 2008.

Some will read that and snicker and brush it off.  That is fine- in America, you're free to be a grasshopper to the very end.   Others will take pro-active steps, to ensure in a true worst-case scenario, they have the financial means to acquire the essentials to survive independent of whether a bank's doors are closed or open.

By the end of the conversation with my relative, she thanked me and said she would withdraw cash on Monday.  She expressed appreciation that I cared enough to make sure she'd be alright if an emergency occurred.  I told her that her 'Thank you' was my reward.