“Gosh, I’m so glad I have no savings and a lot of debt!”
It was a dark autumn evening in 2007 and I had just spent a couple of hours in a lecture theatre full of people frantically worried about their savings, pensions and investments.
Most had worked hard for decades to put aside some money.
Most had listened to personal finance ‘experts’ telling them to start saving early; telling them that compound interest and not the pyramids of Giza is the miracle.
All craved security and wanted to know that their savings are safe and their lives secure.
All had their savings in a bank account.
Was I right to feel relieved that we had no money stashed away in a bank account?
You may think that I was wrong.
I may even agree with you.
I’m still glad.
Why I was glad we had debt and not savings?
Because, having so much debt at the beginning of the greatest financial and economic crisis after the Great Depression forced me to learn, reflect and act.
Having debts and no savings taught me many things.
One of them is that safety in matters of personal finance are like absolute truth: you can get closer to it but you can never attain it.
Your savings in the bank are far from safe; having savings doesn’t make you trouble proof either.
It is still better to pay off your debt. Here is how to calculate whether you can become debt free.
My parents had savings in the early 1990s; enough to buy a couple of apartments. By 1993, within a couple of years, my parents’ savings were enough to buy an ice-cream on a family outing. My education is the only one of my Dad’s investments that paid off.
I still feel the after-taste of margaritas and the resigned confession of a colleague in Mexico City. It was 2010 and we were sampling the best margaritas in the world. And she was telling me how all her pension savings were lost because the bank she put them in went bust.
This is why I was not too keen on savings.
Our personal financial crisis taught me to crave security. In five years, we flipped our finances: from £100,000 worth of consumer debt to £100,000 in new savings and investments.
Through the breathless, hazy lust for financial security, I still remind myself that my savings are not safe.
Neither are yours.
Your savings are not safe because:
- Banks do get in trouble. I don’t need to work hard to convince you in this one. Just read the news and pay attention to what is happening in Greece. Or, if you wish to keep closer to home, I could remind you the story of Northern Rock: the first bank in the UK to suffer a bank run in 150 years. This was in 2007.
- National economies do get in trouble. This is nothing new. What you may not remember is that when a national economy gets in trouble – and the big guys get involved – a process known as ‘devaluation’ takes place. There is a sequence of ‘hyperinflation’ (this is when the currency is so weakened that a loaf of bread costs two kilos of paper money) and devaluation (this is when an authority decides to reduce the value of the currency and you find that the £8000 you have in the bank has become £8). Fiat currencies are particularly exposed to this kind of monetary manipulations.
- There is always inflation. Yes, inflation is part of normal economic life. When inflation is higher than the interest rate at which your savings are kept these get eroded: you can buy less for the money you keep on the side.
- You can be denied access. Completely unfair, I know. After all, this is your money. Still, you can be denied access to your money ‘in the name of the greater good’. This has been happening often over the last couple of decades or so (usually in countries with troubled economies). The latest example is in Greece where people couldn’t take out of the bank more than 60 euro per day.
So, our savings are not safe; so much is clear.
And we shouldn’t see this as a defeat; we should see it as a challenge.
What can we do to make our savings safer?
Let me ask you first: did you notice anything in common between the four ways in which your savings can turn into ash?
Think about it.
Yes, there is one thing they share: in all four cases, you have little control over events.
And this is the key: the way to make your savings safer is to increase your control.
Here are some ways to do this:
- #1. Research well where you put your savings. All banks are vulnerable but some are more so than others.
- #2. Learn who owns who. If you thought that Game of Thrones is the measure of incest, you obviously haven’t looked at banks (and other organisations in the financial sector) recently. Have a look: and you’ll find a tight clique with Barclays in the middle. Seriously, learn who owns who – this way you could react to news in good time.
- #3. Learn what proportion of your savings is guaranteed. In the UK, the Financial Services Compensation Scheme (FSCS) guarantees savings of up to £85,000 per person, per financial institution (pay attention; the financial institution is not necessarily one bank – read #2). This amount will be going down to £75,000 in January 2016.
- #4. Check the status of the bank. Read #3 again. Yes, this is correct; except that the guarantee applies only to providers authorised by the Financial Conduct Authority (FCA)
- #5. Keep abreast of the news. The news usually offers an early warning of economic and financial trouble to come. Don’t believe me? Catch up with the current news and see what happens in autumn (a hint: if you don’t make money by the volatility of markets, brace yourself for a hard time). You see, I knew that my Dad’s money will disappear, and I told him what will happen five years before the events. He didn’t listen; he didn’t buy these apartments.
- #6. Rebalance your knowledge. Money, particularly fiat money, is no good in times of social, economic and financial crisis. Either accept there will be a loss or rebalance on side of caution and stability.
- #7. Don’t keep all your savings in the bank. Yes, you heard this right.
- #8. Don’t keep all your savings liquid. Put a proportion of your wealth in ‘brick and mortar investments. You can’t cash them in fast but you won’t lose it all either.
- #9. Keep some wealth on you. When I was growing up with the gipsies (this is a story for another day) their women were covered in chunky gold. Men had gold teeth. This was their security in a life of change. I’m not saying you should go and get five carats in your tooth. Still, there is something in this we can all use (I, for instance, have my jewellery – it’s not much but it can feed us long enough to decide what to do).
- #10. Develop skills for survival. These are the skills that people value and will pay you for. You know, thinking about it, this is my Achilles heel: I am not sure I have any skills for survival.
- #11. Develop survival skills. These are the skills that will allow you to survive even if something happens to your savings.
Finally…
Having savings is commendable.
Striving for financial security is natural.
Remembering that your savings are never entirely safe is wise.
You need to increase the level of control over your savings (and investments) to make them safer.
Developing skills for survival and survival skills are at the top of ‘safety’.
Jean Chatzky once said that she is not worried about money; not because she has so much but because she can always work and survive.
I agree.
Do you think your savings are safe? What are you doing to make your savings safer?
photo credit: Winter Circus Martin Hanson, Holland 2010 via photopin (license)