05/09/2023
How scared or confident are you about banks, the economy, and your finances? If things don’t look sunny for you, here are some thoughts that might help.
Finding Safety During Financial Severe Weather
Financial stress
Being in a state of financial stress can feel like a storm. For some, it’s an onslaught of concern about our banking system or a feeling of profound uneasiness about gusts of government spending. Is our banking system inherently flawed and corrupt? Will the FedNow system or a central bank digital currency invade our privacy or give too much power to policymakers? Some people I talk to seem more worried about the government bailing out banks than they are about some banks failing. For others, the sheer number of obligations and opportunities of regular life that pelt us like hail can lead to questions of “Will I/we have enough?”
Ways to reduce financial stress
Similar to bad weather, when we face scary financial circumstances we can acknowledge the fear we’re experiencing and then get strategic by focusing on the best things we can do in the moment to maintain or return to the safety and security that we want instead. Focusing on what we can control is key.
Verify FDIC and/or NCUA status
Making sure our cash accounts are federally insured is something we can control. Deposits at financial institutions can be insured by the FDIC for banks https://www.fdic.gov/resources/deposit-insurance/faq/index.html or the National Credit Union Share Insurance Fund for credit unions https://ncua.gov/newsroom/press-release/2023/statement-ncua-chairman-todd-m-harper
Both have the backing of the full faith and credit of the United States. When SVB, Signature Bank, and First Republic Bank went down, the deposits at each were either fully guaranteed by the Federal Deposit Insurance Corporation (FDIC), The Treasury Department, and the Federal Reserve (SVB) or assumed by another bank in a process facilitated by the FDIC.
The easiest way to find out if your bank is FDIC insured is to use the BankFind tool on their website: https://banks.data.fdic.gov/bankfind-suite/bankfind The NCUA has a similar tool and allows you to find more information about your credit union https://mapping.ncua.gov/ResearchCreditUnion. The Securities Investor Protection Corporation (SIPC) is different. It helps to ensure the investments in your brokerage account are still there if your brokerage company goes under. It doesn’t protect you against losses in your investments.
As an aside, did you know that the FDIC has a Failed Bank List? https://www.fdic.gov/resources/resolutions/bank-failures/failed-bank-list/ In previous years, there were four bank failures in 2020 and four in 2019.
Improve your diversification
When it comes to investments, we can control how diversified we are. Good diversification isn’t just about putting your eggs in multiple baskets. It’s also about making sure you have variety among your baskets. With investing this means owning a variety of different asset classes that behave differently in different market conditions.
The four main asset classes: are stocks, bonds, cash, and “other”. What a lot of people don’t know is that just owning an S&P 500 index fund is not very diversified. The S&P 500 is a list of 500 large companies in the US. What about other large companies? What about medium and small companies, companies in developed, foreign countries, and companies in countries with emerging economies? Investments in these additional types of company categories would be sub-asset classes. A good, diversified portfolio would include all of them. Bonds (which are a loan from an investor to a company or a government in exchange for interest and a promise to repay the original loan) are categorized by the amount of time until the loan needs to be repaid and the credit quality of the borrowing entity. For example, you can invest in short-term, long-term, high-quality, and low-quality bonds and everything in between. They can also be domestic or international. The “other” category would include things like real estate, commodities, and complex investments created by investment companies. Some would include digital currencies.
With this in mind, having significant amounts of your investments in gold, or any other slice of the market, prevents you from enjoying the risk, dissipating the benefits of broader diversification. Various translations of Ecclesiastes 11:1-2 encourage the principle of diversification. Overall, rather than concentrating your risk on a single or even a narrow group of asset classes, it’s more efficient to spread your investments over all kinds of asset classes.
Increase your savings rate
Whether you’re retired or preparing for retirement, you can increase your financial security by increasing your savings rate. Your savings rate is simply the amount of money you are saving divided by your total, pre-tax income. The higher it is, the better you will be able to weather a financial storm because you will have more savings. Having a higher savings rate also makes it easier to adjust to rising costs in the future. However, if your savings rate is higher than 30%, you might be able to increase your spending in the present without negatively impacting your financial security in the future. To increase your savings rate you can announce to your loved ones which expenses will no longer be covered, but you’ll probably get more buy-in with a collaborative process. Instead of thinking about it as cutting benefits, You could think about it as increasing the savings amount and spend whatever is left. Others like to think about savings as a necessary expense and build it into an organized, cash management system based on family priorities.
Build up, reframe/rename, and transfer your emergency fund
Most of us have heard of the importance of saving for a rainy day, but it can be tricky to know when it’s ok to dip into this fund. The overall purpose of this fund is to create financial security, which means it can be used to cover genuine emergencies, like your insurance deductible for a visit to the emergency room, but it can also be used to cover unexpected expenses like the cost of new tires that ended up being $200 more than your expected in your budget. For this reason, you may want to rename (or at least re-think) your emergency reserve as an unexpected expense fund or a cushion account. Online banks are a great place for your unexpected expenses fund because they allow you to avoid market risk, maintain almost immediate access to the funds, and earn a higher interest rate than most regular checking or savings accounts.
Consider the chances
Prudent risk management considers the probability of potential threats. How does our behavior change when the forecast shows a 20%, 50%, or 80% chance of thunderstorms? Even when there’s a tornado or hurricane warning, sometimes the best course of action might be to get away from the windows or hunker down in an interior room or closet. However, leaving town could clearly be the best choice if a vicious storm with the potential to destroy homes is on its way to our community. How likely is it that the federal government will freeze our bank accounts? Is a terrible storm coming to our financial system? Should we evacuate from the banks to buy physical gold? How do we know if we’re facing a vicious storm or a thunderstorm?
Just one idea: similar to how a deadly storm poses a danger to everyone in its path, threats to our financial system would affect all of us, regardless of our backgrounds or political perspectives. How important is the political affiliation of your local meteorologist? Here in north Texas, we occasionally get dangerous tornadoes. When this happens or is likely to happen, we get warnings from the National Weather Service, tornado sirens, texts on our phones, emails, automatic voicemails, spotters on ham radio, and live news coverage. I believe that when there are real threats to our economy we’ll see an increasing consensus of alarm from multiple sides. If the alarm noises seem to be coming from just one financial or political group, they may be legitimately but unnecessarily scared, or in some cases, they may just be testing to see how well their alarm is working.
Key Takeaways
It’s good for us to recognize our financial fears, whatever they might be. Then, we can try to direct our attention toward things we can control: checking the guarantees on our accounts, assessing and improving the diversification of our investments, intentionally increasing our savings rate, establishing an accessible unexpected expenses fund, and considering the probability of loss as well as the intensity and unanimity of the warning signs around us.
