Protect Your Wealth Without Spending a Dime
“When will I get my money?!” I demanded.
“I’m sorry, sir. There’s no way of knowing at this point.”
“Will I get all of my money back?” I asked a little less forcefully.
“I apologize, sir. Again, we don’t know.”
This was a conversation I had with my brokerage company every month in 2008. I had fired my financial planner in 2007, sold all of my investments with him, and was sitting on a lot of cash.
I put the money (rather smartly, I thought) in seven-day notes. These are essentially bonds that mature in a week
They earned about half a percentage point more interest than a money market and were safe. After all, they mature every seven days. If things got bad, I’d simply not roll it over the next time. Typically, events leading to bond defaults take weeks or months to unfold.
But in this case, things did get bad – in a hurry. And my money was frozen.
I won’t go into the technicalities of the notes and why I couldn’t get my cash out. I’ll just say that it was about a year and a half before I had access to the funds. I didn’t lose any money, but I wasn’t paid any interest for that year and a half.
Fortunately, I didn’t need access to the cash. I had investments in other places I could have sold if I needed to.
But it was unnerving to lose access to my savings…
Around the same time, my bank – Washington Mutual – collapsed. Luckily, JPMorgan Chase quickly came to its rescue.
Since then, I spread my investments (and especially my cash) across several financial institutions. That way, if one of them goes belly up or there are other problems, I’m not stuck without access to my money.
Accounts are protected by the federal government in many cases.
If your money is in a bank, the Federal Deposit Insurance Corporation (FDIC) covers each depositor up to $250,000 per bank.
If you have more than $250,000 in your bank account, consider adding an account with someone else’s name on it, like a spouse or child. You can make it a joint account or an individual one in the other person’s name.
The benefit? Each different name on the account is considered a separate depositor.
So Joe Smith’s account, Joe Smith and Jane Smith’s joint account, and Joe Smith and Joe Smith Jr.’s joint account would count as three separate depositors. And each is entitled to $250,000 in FDIC insurance.
Better yet, move funds in excess of $250,000 to another bank. That way, if something happens to bank 1, while you’re waiting for the feds to get you your money (which is unlikely to be a fast process), you still have cash available from bank 2.
Protection for Your Stocks
There’s also federal insurance for brokerage accounts.
The Securities Investor Protection Corporation (SIPC) insures $500,000 with a $250,000 limit for cash. If you have multiple accounts, they should be in different names and capacities.
For example, you could have an account in your name and a joint account. Both accounts would be protected up to SIPC limits.
You could also have a Roth IRA account in your name and a regular IRA in your name. These would be considered separate capacities, and each account would be protected.
When Lehman Brothers filed for bankruptcy in 2008, SIPC insurance was at work. Lehman customers got all their money and securities back after the firm collapsed.
If there’s a huge national or international financial crisis that takes down many big banks and securities firms, you might be waiting for a long time to get your dough.
But if you spread the money around different accounts and institutions, you’ll increase the chances of being able to access your funds should calamity strike one or more firms.
It won’t cost you anything to open an account, and many banks and brokers offer incentives for opening new accounts.
If you’re in the market for a new toaster, you’ll have to buy it on your own. But banks and brokers often offer cash bonuses and free trades for new accounts.
If they don’t offer, ask – especially for free trades. You’ll likely get it.
So spread the wealth, and make sure you’ll always be able to access at least some of your funds should the spit hit the fan.