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Leaving cash at the bank is not as safe as you might think

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In today’s blog post I wanted you to think deeper about something that you take for granted everyday – leaving cash in your bank account.  Do you really understand what is happening with your money?  You may have heard about the situation in Cyprus where people were panicing because their bank was having financial difficulties and thus stopped withdrawals from being made.  Can you imagine if you could not have access to your own money?  Or have a portion of your money confiscated?  Well that can very well happen here in Canada.  In Canada’s  2013 Economic Action Plan on page 145 there is a section that talks about a “bail in” regime.  I quote the section here:  “This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the rapid conversion of certain bank liabilities into regulatory capital”. 

Well the “certain bank liabilities” refers to your money at the bank!  Why?  When you deposit money into the bank you are “lending” money to the bank.  The money is not “yours” anymore.  You are in fact an unsecured creditor.  This means that if the bank goes bankrupt you are at the bottom of the list to get your money back.  But wait don’t we have depositor insurance up to $100,000.  Yes but did you know that the bank can restrict how much of the $100,000 you can withdraw at one time?  There is a possiblity for banks to limit you to just $500 per day for example.

How can you protect yourself?

1. Diversify your money into other financial institutions and have several accounts

2. Put some money in to investment and saving products at insurance companies.  The difference here is that your money is held in “trust” so the financial insitution cannot access your money for their operations.

3. Buy real estate or gold/silver bullion where you have direct title to the underlying asset.

4. Learn how to invest your money to get a higher rate of return – at least to protect against the erosive effects of inflation.  Inflation can be viewed as another tax as it is a “confiscation of your savings”  without you realizing it.