What are the top lessons you – as a consumer – can learn from the recent banking crisis and turmoil in the financial industry? (First, there were the failures of Silicon Valley and Signature banks, the takeover of Credit Suisse by its smaller (but better-run) competitor UBS, and now First Republic is teetering on the edge.)
The most important thing is: Try to keep your deposits under $250,000 per individual or $500,000 per joint account (in line with the limits set up by the FDIC, which insures bank deposits, and NCUA, which insures credit union ones). But that’s really just the start of the lessons in this huge financial mess.
So explained Peter Polson, CEO of Tiller Money, who got caught up – and, by the way, caught off guard – because he, like many FinTech founders, had all of his company’s deposits at Silicon Valley Bank. “In the short term,” he said on the HerMoney Podcast, “I think most consumers aren’t prepared to evaluate the creditworthiness of the institutions they bank with.” (In fact, you could make that argument about the regulators who either ignored or did not see what was happening in plain sight at SVB. As ProPublica’s Jesse Eisinger aptly detailed, in its own SEC filings from the third quarter of 2022, “the bank’s parent company disclosed that it was sitting on losses from its bond purchases big enough to swamp its total equity.”)
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There’s the “Big E” Economy, comprised of interest rates, inflation, stock market moves, corporate earnings, bank failures and a host of other factors that impact your bottom line, but over which you have no control. And then there’s the “small e” economy, your personal economy, where in reality you have a number of levers you can pull to move yourself closer toward meeting your goals. One of those goals is (or at least should be) keeping your personal economy as insulated as possible from a loss you can’t weather.
Shoring Up Your Finances
Have you done enough to shore up your finances? In other words, how financially resilient would you be if an emergency hit? Polson posed a series of questions to help you spot the holes in your financial plan.
What would happen to you if…your bank shut down?
Okay, you knew this question would be the first on the list. Bank failures don’t often get as much ink as those in the past couple of weeks (the banks aren’t typically that big) but they do happen – almost every year, in fact. In the case of Silicon Valley Bank, which shut down on March 10, the FDIC posted a notice on its website alerting depositors that they would have access to insured deposits no later than the following Monday morning, March 13. (It actually backstopped all deposits whether they were insured or not, so depositors didn’t lose anything – but that’s not the norm.) Would you have been able to get through the weekend? This is a good reminder of why it’s always a good idea to have a little, yes, cash at the ready. At least enough to get through a day. Preferably enough to get through a weekend…And maybe a little more than that. (Personally, I don’t think you should leave the house without a little cash.) This is not just a bank failure precaution. Think about a natural disaster that took out the power that runs the credit card networks and ATMs.
What would happen to you if…your paycheck didn’t arrive?
You might think this would never happen. It actually did happen to me, or something similar. I was working for a start-up travel publication in my early 20s, and my paycheck bounced. Many people would be in a serious financial pickle. According to Bankrate (2022), 56% of Americans would be unable to cover an unexpected $1,000 bill from savings. Chances are, your bi-monthly paycheck is significantly more than that. This is why building an emergency cushion that would cover, preferably, 3 to 6 months of living expenses is so important. If you’re not there yet, set up a series of automatic deposits every time you get paid into a separate savings account that you designate for emergencies. While you’re there, make sure you’re earning a decent rate of interest. But your emergency cushion does not have to be your only backup plan. This is where a credit card with a sizable limit comes in handy – and it’s reason enough to preserve the vast majority of that limit for a just-in-case event. (Charging your card past 30% of its limit is similarly lousy for your credit score, just as carrying revolving debt is for your budget.)
What would happen to you if…you got really sick or incapacitated?
Could another person step in and run your financial life? Could they access your statements, pay your bills, or manage your investments? In order to do that legally, that person should be given durable power of attorney. In order to do it in practice, that person needs to be able to actually get into your accounts, many of which likely live online behind a morass of passwords (more on that in a sec.) The other big question is who would make health-related decisions for you if you’re unable to make them yourself. By signing a medical directive (sometimes called a healthcare proxy or a durable power of attorney for healthcare) you appoint someone to do it for you. If you don’t have this in place, family members in the order that your state prioritizes them (spouse, parents, adult children, siblings, typically) will likely be able to make them. Naming individuals to step up on your behalf is particularly important for the growing number of single adults in the U.S.
What would happen to you if…the phone that has all of your credentials in it goes missing?
This is more than a small headache, it could be a financial migraine if someone is able to access your personal data, bank or brokerage accounts. The first thing you should do is call your phone. Perhaps you misplaced it and it’s been found by someone eager to return it to its rightful owner. (Miracles do happen.) No dice? Use the built-in tracker to find it. Apple has Find My. Android has Find My Device. Samsung has SmartThings Find. If and when that doesn’t work, shut the device down. Often, the tracker will give you a way to do it but if it doesn’t, suspend your service by calling your service and asking if there are other ways they can help you. You may be able to transfer your service to an older phone you’ve kept in a drawer because, hey, you never know. Finally, change all the passwords to your financial institutions, your social networks and – most importantly – your email, because you don’t want a bad actor to use your email to reset passwords in the interim. Then, start monitoring your credit report every month or so (it’s still free weekly from annualcreditreport.com) to make sure nothing out of the ordinary transpires.
MORE ON HERMONEY:
- Lessons Learned from the Silicon Valley Bank Collapse
- “Is My Money Safe?” Real Answers For What’s Happening At U.S. Banks
- What Happened at Silicon Valley Bank, In Plain English
- What The Silicon Valley Bank Collapse Means For Your Investments
SUBSCRIBE: Own your money, own your life. Subscribe to HerMoney to get the latest money news and tips!
