From a young age I have been told to save my money under the premise that my money is safe in the savings account. My parents taught me this. And they learned from their parents.
You would think with generational saving accounts that we’ve all created we’d create generational fortune by the time my parents were babies. But we didn’t
If saving is so important why haven’t my parents become rich saving their money away? Why can’t I seem to find a single rich person who got rich by saving only? And how safe is my money there anyways?
Let’s find out…
How safe is my money?
Risk is inherent in anything we do. Even an action we don’t take is an action of sorts and that too carries risk.
Savings is often seen as a lower risk activity for a few reasons:
- Money is in a bank account that is protected by FDIC
- It is liquid and we can access it whenever
- There is a return on the money we have in the savings account
Let’s consider all three reasons in more depth.
Yes, FDIC (Federal Deposit Insurance Corporation) insures our money in the majority of the U.S. banks. This gives us a sense of security. However, it would be imprudent to not consider that there have been some findings that FDIC could not possibly insure all of the depositors in the banks and there is some risk that if some major calamity was to happen, they would not be able to return your money back to you.
This is very unsettling and not something that is widely talked about. While the risk of it imploding are on the lower end of the spectrum, there is a risk of it.
There are laws and rules that allow the government to take money out of the savings and checking accounts to cover for the loses that are experienced. This is similar to bail outs, where money is printed out to bail out important financial entities. Instead of printing money, the government has power to simply shut down the bank, take the money out of savings, and apply it towards the losses that those financial entities (often banks) experience in order to save them.
It is what some have called a freeze and seize methodology of doing business to ensure “too big to fail” can survive.
If this sounds impossible, consider what happened in Cyprus in the not-so-distant history. The banks closed and they took the money and gave it to the big guys. Of course, they did not steal the money. In exchange for taking the money out of the account, everyone received shares in those companies. The sad part is that no one asked people whether they wanted those shares.
When the banks reopen from the freeze, you are often left with only a portion of your money with perhaps a thank you for supporting your country and maybe some type of bond that you may (or may not) be able to cash in at some point in the future and of course with discount.
Money in your savings account is liquid. Meaning, you can access it whenever by simply visiting a bank branch or using your debit card at your local ATM.
While the system runs smoothly this is absolutely the case. As long as your bank is operational and there are no large systematic issues, you can access your cash.
However, even when things run well, requesting for larger sums of money can be a tad problematic.
If you need to withdraw a few hundred dollars, that’s typically not an issue. Not even from the ATM. Most are rigged to give you no more than $500 (some a bit more, some a bit less). So, if you want to withdraw a few thousand dollars, you must visit a bank teller.
Are you a terrorist?
If you are withdrawing $10,000 or more, the bank is legally required to report the activity to the authorities, under the Bank Secrecy Act (a premise to fight fraudulent activity and terrorism). If you are not doing anything illegal, this is, of course, not an issue. There is a requirement for you to provide a few different IDs, to prove your identity and the bank teller may ask you some questions.
If you are withdrawing more money than the bank has in their vaults (most of the banks don’t have that much cash, so the movies portraying banks having substantial cash in their vaults are pretty much Hollywood spin on old fashioned banking). Most of the bank transfers are done digitally today. The banks send a string numbers over networks. If you are wanting to withdraw a particular amount of money and the bank doesn’t have it, you may be asked to return at a later date. You will be asked, yet again, to return another day, if you are asking for more money than the government deems “terrorist activity”.
So, your liquidity is not all that liquid after all. Especially if you need quite a bit of it. And this is when everything runs smoothly.
Now, let’s consider that a major event happens that shuts down the system and creates bank holidays.
Yes. It’s a fancy name to basically state that you can’t have your money. Your money is locked up and you can’t access it.
In 1933, FDR called a bank holiday to preserve bleeding of cash from the U.S. banks. The government closed the banks for an entire week. Meanwhile, the government officials were searching for creative ways to restore the banking system confidence.
Greece is one of the more recent example of a bank holiday (closure). This event occurred a few years ago.
Not only were people not able to withdraw money from their banks. The entire system shut down. This prevented all lending and bank services.
Of course, the food, rent, transportation, and other basic living expenses were not free during that time. People were required to pay, right away.
So, if a bank closes for a period of time, the real question is do you have sufficient funds elsewhere to pay for your living expenses until the system is restored?
Savings Account Interest
Now let’s assume that FDIC runs like a clockwork and will never get in trouble. Let’s also assume that the systems is a well oiled machine that will never break and there will never be a bank holiday or calamity of any kind in our future.
If these two are true, then we must consider the interest we earn on our savings account to see if there is risk there.
For the past decade or so, the banking rates have been ridiculously low, both on the lending and the saving side. Since we are not talking about lending here, I won’t even get into that side of things. But I will focus on the savings returns.
Not long ago, I have received a letter from a well-known bank inviting me to save money with them. Their bragging rights of why I should give them my money is the “high yield savings account” that gives a whopping 2.1% APY (Annual Percentage Yield), which as they state is substantially higher than the national average of only 0.9% APY.
A thing to note before we move forward is that APY, just like interest rates, is subject to change without notice and this change can go in any direction before or after your account is open. Translation: this is not guaranteed.
Sounds good, doesn’t it?
The government reports that the U.S. inflation rate, as of the same date that the above bank is offering savings yield, is 2.4%.
So, we have 2.1% savings rate and a 2.4% inflation rate. Great! But what does that mean?
This means that your money grows at a slower pace (2.1%). And the inflation destroys if faster (2.4%). Therefore resulting in a 0.3% loss on your purchasing power.
Now, that doesn’t seem like a lot at a first glance. But I want you to look at it from a different angle. If I was selling you a boat that is taking water by tiny holes you can’t fix, would you buy it?
Most people would say NO. Most would not even want it as a gift.
But for some reason, we rush to the banks and gift them our money only to lose it long term.
Let’s look at it from a different perspective to ensure you understand the problem.
Let’s assume you put down $10,000. That means that you gain $210 each year you leave your money in the account. It also means, that the purchasing power of your money goes down by $240 each year. So in effect, you lose $30 each year by putting it in savings.
Truth About Inflation
Now, the inflation of 2.4% is what’s officially reported by the government. However, shadowstats.com claims and reports inflation to be very different and roughly in the range of about 6%.
If John Williams of Shadow Stats is accurate in what the actual inflation is, that would mean that you, are losing a whopping $390 each year.
So, how safe is your money in the savings account really?
Perhaps it was this math that deemed the savers not rich regardless of how long they save. They bought a boat that was taking on water, consistently. Eventually it capsized, only to be rescued by another foolish person who used the same boat to sail the world.