Many so-called experts encourage people to use the banking system and promote that banks are safe. The idea of banking, being a central part of your life is not even given much thought anymore. It’s just widely accepted that banks are where you put your money. It’s believed that your money is safe in the bank.
I would argue that over the last hundred plus years we have seen a decrease in understanding about banking, how they work, and the risks involved with banks. We need to realize that banks have not always been the safest place to store wealth or your reserves. You can look throughout history and see different times where there were run on the Banks. The running on the bank is simply a time when depositors go to the bank out of fear that the money is not there and want to take it out. The truth is your money may not be there.
Banks are in the business of holding deposits and lend money to borrowers. The fractional reserve banking system allows for a fraction of the reserves to be held. The rest can be lent out. There’s definitely a false sense of security with the banking system because of the FDIC. It is believed that the FDIC will bail out the bank and ensure that the depositor is paid if the bank fails. The problem with this idea or sense of security is that the FDIC doesn’t have enough to insure you get paid back.
The FDIC will only pay depositors up to $250,000. If you have more than $250,000 in reserves, you will be out of luck in getting the full amount paid back. The other unfortunate part of the FDIC is they only have a reserve of about $126 billion. I’m sure that sounds like a lot of money but you must keep in mind. That there is about $9.8 trillion in insured deposits in the US. If you do the math that means the FDIC reserve has about one penny for every dollar of the insured deposit.
The other issue that most people don’t realize is that once you deposit money in the bank, the money really no longer belongs to you. The bank is simply promising to pay you back. The deposit becomes the property of the bank, and they are simply promising an IOU. Most people don’t understand this concept.
With the failure of multiple banks recently, it should alarm people. This could be just the beginning of more bank failures. If that happens it could be devastating to depositors. Many people could lose out.
From an educational standpoint here are some of the ways that people could respond to the banking system and bank failures.
Acquire Non-Cash Assets
Many people throughout history have acquired assets to protect and preserve their wealth. They do this by working with assets outside of cash reserves. They look for hard assets. A hard asset is an asset is that is inflationary proof. It’s an asset that will hold its value and not be as impacted by inflation.
Here are some strategies that I’m considering as hard asset options. These are my strategies and I’m only sharing this for educational purposes.
Option 1 - Commodities
I’m buying gold and silver. I believe that having physical gold and silver coins is wise. They have conservative growth, but in times of inflation, they hold value and can increase in value during crashes and recessions. It’s also gives me money without counterparty risk.
Option 2 - Bitcoin
I see Bitcoin as another hard asset. There will only ever be 21 million Bitcoin, so it is a non-inflationary asset. One of the benefits to owning Bitcoin is it separates money from the Government. They can’t manipulate the asset. You can use Bitcoin as a store of value and an exchange of value source of money. This makes it both a good reserve and a form of money you can exchange. It is important to remind people that you should hold Bitcoin in a non-custodial wallet. You want procession of it.
Hold Your Own Cash Reserves
Another thing that many people have done is to withdraw cash. They hold the cash themselves in a self-custodial manner. This is definitely an option to consider for many people. Holding your cash reserves can be wise under the right circumstances. Dave Ramsey has promoted this idea for some time, and I believe there is wisdom in it.
Consider The Risk
The risk involved with this though is that it’s not guaranteed the bank will honor your request. Withdrawing large sums of money can be very difficult. The other danger is protecting the self-contained cash. You need a plan and system in place if you’re going to hold cash. The other issue to consider is that with inflation, your currency is getting debased. That will mean always accumulating more physical cash as inflation increases.
Banks and My Thoughts
I'm not a big fan of banks. I find them to be highly profitable by limiting their liabilities at my expense. They're in the business of taking my money and giving me next to no interest, and then they lend me money at a high cost. They are profiting at my expense.
I do of course have to use the banking system. I have just chosen to only leave what I consider the bare necessity in the hands of the banks. I do this, both in my personal life and business. I keep what is necessary in the bank, but any exponential surplus goes into deferred investment strategies or in physical cash personally. My family has used the Dave Ramsey philosophy of physical cash on hand for years. What I'm speaking about is something I actually practice.
Moving forward, people need to realize that you can’t trust your financial future in the hands of others. This is why Explore Financial Freedom promotes personal sovereignty. The idea of personal sovereignty is simply the ideas of self-responsibility and good stewardship. This is why we provide financial education because we want to help you learn financial concepts and systems to become personally sovereign.