I’ve been seeing it everywhere. People are posting on social media, my family’s texting about it. SVB has collapsed, there’s a run on the bank, all of this stuff, all of these headlines. Thankfully, like I do, you also have people in your life like Bo Hanson, who might be able to shed some light on what this what is happening with the situation and what it actually means for you and your money. So first of all, Bo, you know I’m not a financial person. Can you kind of lay out what happened with SVB in this whole situation?
Yeah, I’m really excited to be going through this because I think there’s a lot of fear out there, right? And one of the things I love that we’re able to do is speak into the fear to kind of calm people’s nerves, settle them down, and separate the facts from fiction, the good information from the misinformation. So you’ve probably been seeing headlines like you mentioned about Silicon Valley Bank, right? It’s this bank that has collapsed, that has now been this big thing. And so a lot of people are like, ‘Okay, what happened? What do I need to know? What is important about this?’ So I was trying to think about how to distill this down and explain it. So I want to explain sort of what happened in a way, and I want you to ask me questions. Like, yeah, absolutely.
The first thing you need to know is that in this country, we work on a fractional reserve system. Our banks work on a fractional reserve system, and the way that works is, let’s say that you want to deposit your money into my bank. Well, you might deposit some money with me, and then Nate might deposit some money with me, and then Daniel might deposit some money with me. Well, I recognize that it seems pretty unlikely all of you are going to want all of your money at one time. So what I decide to do is, I take some portion of your deposits and I go invest them elsewhere because I’m a bank, I’m for profit, I want to make money. And so I take those dollars, and I go invest them.
So, Silicon Valley Bank was doing this, but they made some pretty, in my opinion, aggressive and unfortunate investment decisions. It is a bank that caters to a lot of smart up and a lot of startups in the tech industry, right? So there’s a lot of small venture capital funds and startup funds that use this bank. And what we’ve seen is since the pandemic, a lot of money has flowed to these institutions. There’s this great chart that came in from Charter a couple of days ago that shows just how rapid the assets at SVB grew. That is wild. There’s all this money flowing in, and so the bank is thinking, ‘Okay, we have all this capital coming in. We need to figure out how to go out and invest this.’ Well, two years ago, yields were super, super low. Interest rates were super, super low. And the bank said, ‘You know what? Let’s go out and make a little bit more money. Let’s figure out how we can make a little bit more money.’ And so they went and bought longer-dated bonds because the further out you go on your maturity, the greater the rate of return you can receive. Well, unfortunately, since that time, interest rates have risen very rapidly. We all know that the way that fixed income works is that as interest rates rise, if I push that up, the value of the bonds that you own decrease.
Okay, you’ve read the headlines. Now, you’ve kind of gotten this download from Bo. You’re still like, ‘The bottom line is still okay. What does this mean for me and my money? Do I need to be doing something?’ What does this mean to help us out with that? Most of us are not like Roku; we don’t have 480 million dollars deposited in our bank. So, what does this mean for you if you’re someone who holds less than $250,000 in cash? Not a whole lot. If you are an individual depositor and you’re with what’s known as an FDIC-insured bank (and you can actually go to the FDIC website to make sure that your bank falls under there) and you have under $250,000, there’s not a whole lot of risk. Your deposits are guaranteed by the full faith and credit of the federal government. They say, ‘We’re going to make sure that if something happens with the bank, if something happens to the institution, your dollars will be there when you need them.’ That’s good news. So, the only thing you need to do if you have less than $250,000 in cash is to make sure you’re banking at a reputable institution that has FDIC insurance. Or, if you’re with a credit union, they have the comparable insurance called NCUIF. That’s the National Credit Union Insurance Fund. Different regulatory body, but same sort of idea – up to $250,000.
Then, the next question is, ‘Okay, what if I’m not sure? What if I have more than $250,000?’ Well, there are a number of different things you can do. Maybe you’re someone who’s a small business owner, or maybe, just because of your personal situation, you have to hold more in cash. One of the things you can do is you can open up an account at a different institution. So, let’s say that you need to hold $500,000 in cash for some reason. There’s nothing that says you can’t hold $250,000 at an Ally (not an endorsement, just a name) and another $250,000 at Capital One (not an endorsement, just a name – an example). You can open accounts at different institutions to stay under the FDIC limits. The second thing that you can do is you can add a joint owner. Because the way that the law is written, FDIC insurance covers you up to $250,000 for a single depositor. But if you’re a joint owner, like a spouse or a significant other, then you can actually have up to $500,000 of insurance coverage. Well, now you start thinking about, ‘Okay, if I have a joint account at this institution and a joint account at this institution, where’s a million dollars of coverage that I can have?’ It’s not incredibly difficult to get large cash balances to make sure you stay under the FDIC limits. The third thing you can do is you can open an account that’s a different registration type. So, instead of, like, an individual account or a joint account, you can open, like, a trust account – a separate entity that also has FDIC coverage. And then the fourth thing you can do is you can join a credit union. Again, they also have a similar thing like FDIC insurance, but it covers the same limits, but it’s just a different program that will protect those deposits. So, if you’re someone who has to hold – I would say, probably even up to a million and a half to two million dollars of cash – it’s not incredibly difficult to make sure that you keep your cash insured.
If you had a good financial plan, and it’s still good, you know, like you gotta trust it’s still gonna serve you, and just keep going. Don’t make a crazy decision that’s going to affect you down the road just because of the fear and panic that’s being spewed right now. And then also, what I’ve learned is that if you’re over the cash limit of $250,000 or $500,000 in a joint account, consider taking the four action items you mentioned, which are: open a different bank account, add a joint owner, get an account that’s a different registration type, or join a credit union. Things like that just make sure you’re covered. Use this as a spot check. Make sure you’re good to go. And that’s really it. Like all of these headlines, that’s really what it boils down to. You have to make sure that you are appropriately and accurately accounting for risk, and most people don’t think about this, but that even includes our cash holdings. Make sure you understand what you are doing with your money, what protections are in place. I don’t like it, Rebie, when things like this happen. It’s unsettling and it’s unnerving, and there have certainly been some people that have probably been damaged and hurt because we talked a lot about SVB, you know, there’s another bank, Signature Bank, that had a very similar thing go on. These sorts of things happen, but what it can do for us as investors, what it can do for us as everyday people just trying to build towards financial independence, is remind us that the little small decisions that we make matter, the little small things that we pay attention to matter. And over the long term, if we can stack those things up, it can make a really big difference in our financial life. My hope for you guys is that you won’t be freaking out, is that you won’t be scared, that you won’t be nervous, but you’ll recognize, hey, this is part of the system in which we operate, this is part of the financial world in which we live, and so long as I do the things I know that I’m supposed to be doing, odds are things are going to turn out pretty good, and I’m going to keep myself in a pretty solid place. That’s great. Hopefully, that helps clear things up.
Want to know what to do with your next dollar, you need this free download: the Financial Order of Operations. It’s our nine tried-and-true steps that will help you secure your financial future.