082: Should I withdraw cash from the bank right now? Stan from South Park thinks so!
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Should I withdraw cash from the bank right now? Stan from South Park thinks so!
Most people are optimistic about the bank and believe banks are the safest place to store your cash. What we’ve learned is actually the opposite of that. While your cash may deem “somewhat” safe in the bank, and the Federal Government (via the FDIC) insures deposits in most institutions up to $250,000, there’s a problem with this insurance.
It’s surprising and it’s weird, so let us explain why.
One of the things we’ve learned from our research is that the FDIC currently has far less money in its fund than it has insured deposits. As of September 1st, there is about $41 billion in reserve against $6 trillion in insured deposits.
To put this in context, there is over $9 trillion on deposit at U.S. banks, so more than $3 trillion in deposits is completely uninsured.
Here’s another truth, your cash in the bank earns less than 1%. Over the 12 months, for the period ending June 2022, the Consumer Price Index for All Urban Consumers increased 9.1 percent. That means your cash in the bank is actually robbing you blind.
We aren’t here to tell you that banks are all bad. But inflation is like that iconic battle scent in the video game Street Fighter where Ken and Ryu send out their fireballs at each other. The one who ends up winning is the one who sends out the most fireballs 🔥 .
Here’s one of our favorite clips about “storing your cash in the bank” from one of our favorites shows, South Park.
▶️ Clip from South Park: The Importance of Saving Money ◀️
For us, this South Park episode truly epitomizes the “saver” mindset. It isn’t enough to earn more than you spend, the next and most important step is making sure that you don’t let what happened to Stan, Mrs. Farnickle, and Randy (Stan’s dad) happen to you!
For the longest time, we have been told that depositing cash in the bank is the safest option when it comes to securing and growing our long-term wealth. Keeping your cash in a bank account means you can access it when you need to, but it also means you have a lot of money sitting in one place, depreciating with interest.
The bank is in the business of cash flow. 🏦 Banks make money from lending out your money. So when they say it takes money to make money, what they actually mean is “it takes your money for them to make money!”
As you might remember, we’ve already made a whole episode about how growing up, most of us were taught that banks are fine and safe institutions to store our money and watch it grow. But in reality, and through life experiences, it became evident that banking institutions were not helping us get back on our feet. ✨
Bank Run
With the Great Recession not too far in the rearview mirror, you may be wondering “I remember institutions failing, what if that happens again?” While rare, it does happen – dozens of banks went bankrupt during the Great Recession.
If that’s not scary enough, according to FDIC data, between 2008 to 2015, more than 500 banks failed. You may even recall scenes of people lined up outside their bank demanding their money.
Keep in mind that banks keep only a percentage of deposits on hand at any time and lend the rest out in the form of credit, a process known as fractional reserve banking. If everyone demands their full deposits at the same time, the bank will not be able to cover it.
You might have heard this referred to as a ⭐ bank run. ⭐ In a famous bank run scene in the movie It’s a Wonderful Life, George Bank tries to avoid the inevitable of having a person left behind when the bank’s cash reserves are depleted.
We already know that bank runs were a big problem during the Great Depression, and many people lost their savings due to bank failures. Not long after, the Federal Deposit Insurance Corp. (FDIC) was formed to make sure that no bank customer loses insured money due to bank runs or other institutional insolvency.
FDIC Insurance
That’s good news, right? Your money is protected as long as your bank is federally insured (FDIC).
Yes and no. Let’s learn more about the FDIC. Basically, it’s an independent agency created by Congress in 1933 in response to the many bank failures during the Great Depression. The idea was, and still is, to instill public confidence in the banking system by insuring consumers’ deposits. Today, that means all FDIC insured deposit accounts are protected to at least $250,000 per depositor across all of the protected account types.
The good news is that since the creation of the FDIC, not one cent of insured deposits has been lost. But not all banks are insured by default, so it’s important to ask your bank. 🤩🤩
On the flip side, the FDIC’s insurance coverage is not unlimited. While the FDIC’s standard coverage limit is $250,000 per institution – per ownership category, you can avoid the $250,000 limit by opening accounts under different ownership categories.
For example, if you keep $500,000 in a mix of savings and checking accounts in your own name at the same bank, you could lose $250,000 if the bank fails. If you move half of that balance to a savings account held jointly with your spouse, you won’t lose a dime.
What Is, and What Isn’t Covered
Let’s talk about some things that the FDIC does cover ⏬:
- Savings accounts
- Checking accounts
- Money market deposit accounts (MMDA)
- Cashier’s checks, money orders, and other official items issued by a bank
- Negotiable Order of Withdrawal (NOW) accounts
- Time deposits such as certificates of deposit (CDs)
That’s encouraging. But be aware that the FDIC does not cover ⏬:
- Mutual funds
- Life insurance policies
- Stock investments
- Bond investments
- Safe deposit boxes or their contents
- Annuities
- Municipal Securities
If Something Happens, How Long Will It Be Until I Get My Money?
Believe it or not, even federally insured banks can fail, and when that happens, the FDIC will sell deposits and loans from the failed institution to a solvent one. If a sale is successful, customers’ accounts are simply transferred. 😅😅
If a sale can’t be made, customers from the failed institution will receive checks from the FDIC for the insured balances of their deposits, usually within a few days of a bank’s closing.
So Should I Withdraw Cash From the Bank Right Now?
We can’t tell you the answer to that, because it’s very personal. While storing cash under your mattress is also not advisable as well (due to inflation, burglary, and/or fire scenarios), we highly recommend you consult your trusted financial professional as each individual situation is different, and all investments have some form of risk.
One of our favorite quotes from Robert Kiyosaki states it best “if you don’t know how to care for money, money will stay away from you.” Many people are simply either uneducated or don’t care about it.
Now that we’ve talked about some of the bad things that can happen, let’s take a look at some solutions and alternative places to care for your money. 💵
Real Estate
The first solution is widely talked about, yet also misunderstood. We are talking about real estate. 🏬
In disquieting times for the banks and the stock market, the allure of real estate investment can be strong – particularly in our favorite asset class – multifamily apartments.
Done right, real estate can have a huge financial upside. While the multifamily sector isn’t 100% immune from the uncertainty brought on by COVID-19, we can study past recessions to understand what may lie ahead.
Data from prior recessions shows that the multifamily sector consistently outperformed other real estate asset classes. According to a 2019 report by CBRE, in both the 2001 recession and the 2008-2009 recession, multifamily rental rates exceeded those in the office and industrial sectors and all major property sectors, including office, industrial and retail.
Precious Metals
A commonly known doomsday scenario is one in which financial markets cease to function yet 💰💎 gold, silver, and other precious metals will continue to retain their value (and sometimes even appreciate).
Precious metals have historically provided a low or negative correlation to other asset classes like stocks 💹 and bonds—which is to say, when those investments go south, metals are unlikely to follow, at least very far, and may even increase in value.
Keep in mind 🤓 that the likelihood of having to return to a barter system with physical goods is less likely, but it may make sense to hold a certain percentage of your assets in this form.
Luxury Assets
Another category of tangible assets encompasses fine art 🖼️, cars 🚗, watches ⏱️, 💎 diamonds, and other jewels, basically anything that qualifies as a collectible. These objects can be touched and seen, compared to a bank account statement that could take time to collect on if the financial institution that housed it ceased to exist.
But watch out! 🧐 (pun intended). Luxury investments are hardly a sure bet. While data on their historical returns are elusive, they are generally thought to have lagged stock market returns, while having periods of rapid appreciation due to either strong financial market performance or periods of popularity, which increases underlying demand and resulting prices.
Buy a Business
Finally, buying a business can ensure a return on your investment, provided that the enterprise generates a profit. In very bad times, we know businesses suffer as well, but in the world of investing, nothing is ever certain. 🙌
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