My Dear Extended Family and Friends,
This is another instalment of the “Be Prepared” Series I started publishing a couple of years ago. As you know, these are suggestions for what to consider in preparing for the future, and specifically, what to consider for emergency preparedness. The information provided are not recommendations, but merely matters to take into consideration for yourself and your loved ones in an emergency. This isn’t a “how to” article, although some “how to” will be mentioned. This is an article to help you consider whether or not to keep some cash at home, regardless of how much, or how you may choose to do it. I would urge you to keep some cash at home for an emergency. The problem with emergencies is that they are not predictable and occur without much warning, if any. This article may help you consider if keeping cash at home is the sensible plan for your family.
All the very best to you and yours,
– Jim Sinclair
BE PREPARED – Keeping Cash at Home
About 1 in 4 Americans already keep some cash at home. The natural disasters and power outages of the past decade have revealed the wisdom of having some cash for an emergency. We can’t always predict when an emergency will arise, but we can prepare for certain problems and circumstances which are likely to arise in emergency situations. The issue of keeping cash at home has been one of much debate. This article addresses keeping some cash at home, and some considerations to keep in mind in deciding the issue for yourself.
We often write a great deal about keeping precious metals, specifically gold and silver. Yet, in a short term emergency, cash would be king. The kingly status of cash would, of course, depend on the length of the emergency, and on the continued confidence in the currency itself. By cash, we mean the paper currency itself, whether it be US or Canadian Dollars, Pounds, Yen, Euros, Renminbi, etc. For examples used in this article, we will refer to the US Dollar, and you may convert suggestions and amounts relative to your own financial system’s currency, just as you must convert suggestions to your individual and specific needs.
Having cash outside of the banking system is common sense in many ways. Look at a state like New Jersey following Hurricane Sandy. Banking came to an abrupt halt. Most financial transactions in the US are not accompanied by exchange of physical currency/cash. Transactions are digital, i.e. no physical cash is exchanged for items or services. Transactions usually occur on digital ledgers – most often, debit, credit or otherwise electronic transfers for exchanges. Many people in NJ were without power for a week or more. The power grid was down. Many NJ grocers and service providers would only accept payment in cash, and those few who accepted debit or credit limited the amount of transactions because the provider could not verify electronic payments or available credit without electricity. People had little or no cash and therefore little or no buying power. The people could not obtain their needs. The events following Hurricane Sandy were eye-opening in terms of preparedness, and many were unprepared. ATM machines don’t function without electricity. Anyone who might use an ATM to obtain cash, had no access to cash regardless of how much money they had in the bank. In addition to New Jersey, many banks were closed in New York and Connecticut. People who had cash could buy groceries and water. Water treatment plants weren’t operating because the power grid was down, so potable water was in short supply. Water could not be boiled if the electric range had no power. Cash was vital to obtain goods and services in the aftermath of Hurricane Sandy in NJ and many other areas.
We can’t know when an emergency will arise, but we can plan and prepare. Not all emergencies are storms, power outages, earthquakes and other natural disasters. There are other emergency situations to consider. Recently the stock markets have been extremely volatile. In the past two weeks we saw a couple of 700+ point drops in the stock market. These are actually 1000+ point swings. The decline and the subsequent upside movement is the swing. In the USA, we have a Plunge Protection Team (PPT) whose mandate it is to prevent the crash of the stock market. The problem is that the markets are not operated by humans any more. The stock markets are operated by computers. Humans are not as fast as computers and can’t compete with high frequency trading (HFT). The stock market will crash one day even if we can’t predict when that day will come. When that day comes, investors will panic. Investors have historically panicked and the next crash will not be different. When the markets crash, trading is halted and/or the markets are closed, at least temporarily. You may think you are safe from the activity in the stock markets if you don’t have money in stocks. That is a false belief. The problem here is that when investors panic in a market situation, the first place they will go is to their banks and financial institutions to get their money. A bank run is the the result of panic, not usually a result of the insolvency of the bank. Investor panic would initially be into cash, followed by precious metals in a prolonged financial emergency. Investors would want to access whatever cash they have or can get. Most investor cash is in the bank, savings, checking, etc. Sovereign nations do not allow runs on their banks. The government of the USA will not allow runs on US banks and financial institutions, and will automatically employ the 1933 Banking Act (Glass–Steagall Act) to impose what is commonly referred to as “Bank holidays.”
A banking holiday means financial institutions will close instantly and at least, temporarily. If you do not have cash at home for supplies, groceries, medicines, gasoline, etc. you may not be able to get cash or purchase your needs. Debit and credit will not work and electronic transactions will not process or clear during a banking holiday. You may be able to get some cash from an ATM because ATMs are designed to operate when banks are closed. The problem is that when the ATM is empty, it will not be restocked with cash if the bank is still closed. Having some cash at home is the safest bet, and most importantly – it will do no harm.
The 1933 Banking Act wasn’t just a result of the Stock Market crash of 1929. There were other factors, (Dust Bowl, etc.) but the runs on the banks were ultimately the reason for the Act. The difference between 1929 and today is that what took a couple of years to occur in the early 1930’s would occur in a heartbeat today thanks to instant electronic communications. It only takes a few panicked people to create a banking problem, and the information age would accelerate runs on the banks. Having some cash at home and outside of the banking system would seem to be a common sense, conservative plan. You decide.
These days, banks aren’t paying much in the way of interest. Even worse, a bank depositor is an unsecured creditor for the bank’s obligations due to the laws promulgated as a result of the crash of 2008. In 2008, the government bailed out the banking/financial service sector among others. Bailouts for the banking system are not possible for the government now, and bail-ins of depositors money will likely occur due to the laws put into place to protect the banks. This means a depositor gets their money last in the event of a bank failure. Those banks which were bailed out by government in 2008, will be the most likely to be bailed-in with depositors money in a future banking crisis. The FDIC/FSLIC will guarantee the money (with limits) for individual bank failures, but will not and cannot protect depositors against a systemic failure. A robber may rob you with a gun, but the stock market, banks and financial institutions could rob you with a computer – in a nanosecond.
We didn’t see banking runs in the 2008 financial crisis scenario, but there were, nevertheless, runs on banks in 2008. The bank runs that occurred in 2008 are known as “Silent Bank Runs.” In a silent bank run, a depositor does not go physically to the bank and withdraw physical cash. These silent runs are electronic transactions through wire and other electronic fund transfers. During the 2008 financial crisis, the failure of Washington Mutual triggered a silent bank run on Wachovia Bank. Wachovia lost $5 billion in withdrawals due to a silent run on the bank over the weekend. Wachovia would not have been able to open for business on Monday due to the resulting liquidity problem created by the silent bank run. Through FDIC involvement, Wachovia was acquired by Wells Fargo and a bank failure which resulted from a drop in stock price was averted. Had the scale of the financial crisis in 2008 been broader, such an intervention might not have been possible. Most depositors of Wachovia were unaware of what happened. Having cash outside of the bank could have helped if a worst case scenario had occurred, still depositors were unaware until after the fact.
Questions to ask yourself should you decide to keep some cash at home:
This is the next logical question if you decide to keep cash at home. $100 is probably enough for most families for a 3 day emergency fund. Perhaps keep a minimum of $100 for three days of needs. You can aim at $100 first and build up your fund from there. If you decide to keep cash at home, try to set aside $100 in cash as soon as possible. Think of this cash as insurance. There is a psychological component to adjust to in keeping cash at home, if you haven’t in the past. Be realistic, not paranoid. To develop emergency cash at home, pay yourself and your cash emergency fund first. Put your emergency money aside first and then keep it only for an emergency…not that big screen TV you liked, or the concert tickets you want. Forget about the money until it is actually needed for an emergency. The suggested amounts are aimed at an average family without significant extraordinary expenses, like expensive medical needs, etc. Whenever you receive income, consider putting 5%-10% at home, in cash faithfully until you reach your target. It will add up and soon you will have an emergency cash reserve. Everyone’s comfort zone is different and every targeted amount for an emergency fund will vary from one family to the next. There is no average, no norm, no minimum and no maximum. What you choose, want, and need are unique to you and your family. Create your own plan and work your plan.
Where to consider hiding/storing your cash at home is the next logical concern. Assess the risks of your location. Most people don’t have a robust alarm system, but there are plenty of places in the home you could consider securing some cash. Cash can be stolen; it can burn; it can also rot. A banker would have you believe that a bank is the only safe place to keep cash. You must do your own due diligence and exercise your own judgment. Where will your banker be during a bank holiday? The average thief spends about ten(10) minutes in the burgled home. Some hiding places are safer and therefore better than others. There are internet videos and articles which can help you choose places and receptacles for your cash, papers and valuables. This article is mainly about deciding whether or not to keep cash and home, and not about the place, manner and method you may choose. Security is probably the greatest concern of most people. Security cameras which connect to your mobile phone are cheap these days. Do you have a robust alarm system: signs which say, “Smile, you’re on Camera” even if you don’t, or a large black dog? A large black dog is the most significant deterrent to burglary and home invasion. Consider how safe your home is and/or how safe you can make it.
An experienced burglar in your home most often targets the master bedroom, bathroom and home office for valuables. Kids rooms are often undisturbed by an invader. There are many tactics and receptacles for cash which may not attract the interest of a burglar. For this reason, diversion safes are popular. That said, there are certain popular containers which may be inherently unsafe. In considering a storage container, anything which can easily be picked up and removed is probably not the highest choice. Diversion safes are “hide in plain sight” receptacles and should be carefully scrutinized before deciding to use them. These are usually small safes which are designed to look like something else. Diversion safes usually appear to be something common place, and in general they are easy to open to access the contents. Their safety is in their deceptive commonplace appearance. Among these are cut outs in books, fake electric outlets, fake hollow lettuce you keep in your refrigerator, phony canned goods, etc. Consider that these items are known to experienced burglars. Also consider accidental discard of your safe by others who do not know the content. There was a man who kept a significant savings in a diversion safe soup can. Upon his hospitalization, well meaning and unknowing relatives donated all of his old canned food to a food bank. Poof! and his savings was gone. Unlike the heart warming stories we love to read, his savings was not returned by a good and honest Samaritan. When a burglar ransacks your dwelling, they are fast, and they aren’t careful or kind to your property. Burglars instantly clear all of the books off of your shelves and dump dresser and other drawers in seconds. Book diversion safes don’t normally survive this treatment and the book reveals its contents. Cash taped to the underside of a draw is similarly revealed. Pictures hanging on the wall are pushed aside so that a wall safe might be revealed. In an emergency, you may not be the target of an experienced burglar, but in such an emergency, your robber may be looking for food, drugs or alcohol, more than valuables, so forget hiding your cash in fake vegetables, or wrapped in foil in the freezer with a label which says, “scraps”. Think long term for your safe place, and if you choose a diversion safe, make sure you won’t be the victim of an accidental discard of the safe. Consider at least two locations for cash/valuables. It is fairly well known that if you have an actual safe, that it is best to have two safes. One easily found safe for burglars to raid or steal and a second, well-hidden safe where the bulk of your assets in the home are kept. Safe deposit boxes have restrictions on their use, and can only be accessed when the bank is open. A bank holiday would put your cash and assets out of your immediate reach. Your assets in the home aren’t just cash. Your assets at home are also your precious metals, jewellery and collectibles. You should also consider your passports and other important documents when choosing safe places in the home.
Home fires are tragic, and you don’t need a natural disaster or a financial system emergency to experience one. In considering your storage location, remember that heat rises. The greater the heat, the faster and more furious the draft. Places under the ground level floor, or closer to ground level may be safer than a room on an upper floor of your home. Gold and silver can survive the average home fire, but cash and documents generally don’t. The average house fire burns at a temperature of about 1,100 degrees Fahrenheit – not enough to destroy your precious metals. There are numerous receptacles available to help shield cash, jewellery, a flash drive with your banking info and important personal/business data, and important paper documents from a fire. These have varying ranges of success in protecting your home-kept cash/valuables, and a lot depends on their location and the time and exposure in a fire. Remember that most of these receptacles are not fire “proof”. Most are fire “resistant/retardant”. You can look for videos online to review the tests on such receptacles and be guided accordingly in your selection. Aviation fire containment bags might be a good choice, but most of them are larger than what would be needed for cash and they are usually swamp hollow (safety) orange in color. They are designed to be easily seen and they stand out like bright neon if seen. Read or watch some reviews. There are incidences where the paper/document storage bag or receptacle was undamaged, but the contents were destroyed. Research “fireproof bag” to examine available choices, see tests and read reviews.
Burying cash and other paper documents can make them susceptible to damage by moisture and rot. Rot could occur in a potted house plant as easily as it would in the garden. The containment bags/receptacles mentioned above usually prevent moisture and many are waterproof. Choose a place and a container in which rot would not be an issue, or mitigate the possibility with a waterproof container. In locations in a wall or under base woodwork or molding, or kick plate under your kitchen cabinets – doubled zip lock freezer bags would be sufficient to prevent moisture.
Do a risk/benefit analysis for yourself to decide if keeping cash at home is right for you. Nothing is 100% safe, and that includes the banking system. Do an analysis for your specific circumstances. Many people justly feel that keeping money in the banking system is playing financial roulette due to the potential for bank holidays from a market failure, other financial crisis or natural disaster in addition to the ominous potential for bank bail-ins of depositors money. What you believe and what you do will depend entirely on your comfort level. If you choose to keep some cash at home select a variety of bill denominations. Large denomination bills like $100 may be hard to use in an emergency and making change could be an issue. Select a wide variety of currency denominations $1, $5, $10, $20, etc. There is also a possibility that in a financial crisis, in order to slow the velocity of money (the rate at which money changes hands for goods and services) that a government will remove or recall large denomination notes. This was done in India in the past year and a half.
As the preparedness expression goes, “it is better to be a months too early than a second too late”.
Imagine, what you would do right now, if your buying power was limited to the cash you had right at this moment. How would you do?