> TEOTWAWKI Blog: Building a Financial Safety Net, Part Deux: Storing the Wealth

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9/4/13

Building a Financial Safety Net, Part Deux: Storing the Wealth

In Part 1, we discussed a fairly simple methodology for figuring out how much money to set aside for a financial safety net/tough times fund. We also talked about how building up such a safety net can be a difficult, long term thing, but that it is vastly important.

Remember - it's not just about the apocalypse. Losing a job or having large, unexpected expenses are far more likely events and something that we need to be prepared for, too.

This time around, we're going to talk through what form to keep that safety net in. Stocks? Bonds? Bananas? Pennies? Cash under the mattress?

Since we're talking about a fund of money for uncertain and potentially disastrous times, we want to avoid investing it--no stocks, no bonds. They can and will lose value. Just your luck that you lose your job, crash your car and your safety net stock portfolio goes belly up on the same day. And in the wake of a major event, you'll likely have a hard time moving your shares of Apple or Netflix. Not a lot of demand for those in Bartertown, raggedy man.

Nope, we want most of our safety net in cash or close-to-cash forms. And, like usual, we want some diversity. Here are to options that I consider for the ol' financial reserve:



Cold Hard Cash - Local Currency
Cash--actual physical currency--is king. It's accepted everywhere, anytime, with no need for a middle man. No need for any kind of grid - a briefcase of cash works just as well in the middle of the Mojave as it does in Manhattan. If someone wants your cash, they're going to have to come and take it.

Physical currency has a two big downsides to be aware of.

First up, it doesn't appreciate in value and its buying power will slowly be ravaged by inflation. Put a $100 in a can, shake it up and wait 50 years and you'll still have $100, and it'll be able to buy a whole lot less.

Second up, it has no intrinsic value - it's just paper. Currencies fail regularly. The average life of a fiat currency over the past few hundred years is apparently 27 years. On a long enough timeline, the U.S. dollar (for example) will eventually fail or take a new form of some kind.

Of course, currencies don't typically fail over night - there's a window of opportunity for getting out of your failing currency and into something else, so this is not the deal breaker it's made out to be. Even in a wide scale apocalyptic event, there should be a period before everyone realizes that cash is worthless.

Savings Account
This is where financial adviser types typically recommend keeping your safety net.

Upsides: If you get a good money market savings type account, these days you can actually earn somewhere around 1% in interest, too...not great, but it'll do a bit to offset the damage caused by inflation. In addition, you have the other benefits of a bank account - FDIC insured, ready to transfer to another account or pay bills, and you can typically pull your money out easily, as needed.

Downside of savings account is that your moola is held by a bank. If you want physical currency, most banks only have so much on hand (less than $500k)...and if everyone else wants their money out at the same time, they can quickly run out. The bank also needs to be functional and operational for them to give your money--if they power is out, they'll all be closed.

As we've seen, a financial crisis can entirely wipe out a bank overnight or cause the government to put a freeze on cash withdrawals, which can make it difficult/impossible to pull money out of your savings account in a timely fashion.

You've still got all the currency risk of cash, too - if the USD goes the way of the drachma, it won't matter if your money is in a savings account or not.

Finally, bank accounts get screwed up all the time--whether the bank screws something up and puts a hold on your account or some hacker/scammer gets a hold of your account number and starts fraudulently withdrawing money or charging stuff. Things will eventually get sorted out but it could take days or weeks.

Foreign Currency
Holding foreign currency can do two things for you.

One, it diversifies away some of your currency risk - if the USD collapses or looses a significant amount of value, that doesn't mean the same will happen to the Swiss Franc or Canadian dollar. When the U.S. dollar is getting hammered, people with large cash holdings routinely move into more stable, so-called safe haven currencies. Same idea here.

Second, if one of your contingency plans involves fleeing to a foreign country, having a stash of their currency would help with that. Most Americans probably aren't planning on becoming refugees and heading to Canada or Mexico, but people all over the world and all through history have fled their homelands for safety elsewhere.

For many, it won't make sense to hold foreign currency in your safety net, but for some, it might. Wanted to call it out as an option.

Precious Metals
Precious metals are often seen as the greatest safety net and hedge against economic troubles. As we've seen in recent years, their value is not especially stable - when markets are down, risk averse investors flee into gold and drive up the value. As markets creep back up, demand for gold decreases and the price goes on back down.

This year, gold has gone from $1684, down to $1201 and then back up to the $1400 range it is in this past week. Depending on when you bought in, the USD value of your metals could have gone up or down substantially.

That said, precious metals have some features that continue to make them attractive for a safe haven. I've written about them in the past - here's a good overview on my POV on the subject if you're interested.

Unlike currency, the value of precious metals is not going to erode through inflation and not going to collapse. If the USD collapses and is worth nothing, an ounce of gold will still get you a whole big stack of whatever replaces it.

Because they offset the downsides of cold hard cash, precious metals offer some good diversification for the ol' safety net, while still staying relatively liquid.

Since you're holding them long term as a hedge against an unknown event, the fluctuations in price don't so much matter.

One other thing that I like about PMs - they aren't cash, and you have to sell them to extract value, which makes it harder to dip into that value on a whim. They're still very easy to sell when needed, but you can't crack open the safe and then run to the store to spend on an impulse buy.

Other Tangibles

Cash in various forms and precious metals are very liquid and universally accepted, two keys for the safety net.

Most tangibles are typically not as liquid and universally valued.

For example, you could buy up, say a $5,000 comic book and plan on selling that when times got tight. But, the comic book is not very liquid or universal--it's going to take time to sell it and the value is going to vary wildly based on the circumstances and buyer--it'll be pretty worthless to the majority. Bad choice.

Same goes for lots of cool tangibles like custom knives, fancy watches and high end guns. That Les Baer 1911 is only worth $3300 to the right buyer at the right time. Head on down to the pawn shop or gun show and you'll likely see a heck of a lot less than that.

If you want to go down the tangibles path, go for things that are useful beforehand, in steady demand or heightened demand in an emergency, and, if needs be, can be sold for break even or better prices in a hurry. A case of PMAGs comes up as a good example. Stuff that carries a premium for collectors value is not.

Divide Up Your Loot
Based on your personal concerns and preferences, you'll need to decide how to divvy up your safety net. If you're worried about financial system collapse, you'll go heavier on currency, precious metals and tangibles and maybe have nothing in your savings. If you're concerned about theft, house fires or enjoy the convenience of a bank account, maybe more in the savings account is better for you.

I don't have a magical mirror the future or into your point of view and concerns, nor am I a financial adviser, so you're on your own on how exactly to allocate your safety net.

But, here's a example of what one might look like. This is for a six month, $3k per month in expenses safety net - $18k in total.

Cash: 1 month worth of cash on hand: $3000
Savings Account: 2 months worth: $6000
Precious Metals: 3 months worth: $9000

Someone else might go for more cash and less PMs, or more in the savings account. 

Adding to your Safety Net Monthly:
In Part 1, we talked about setting a time frame for building your safety net. In the example above, let's say you wanted to take two years to get to your six month reserve.

When you've figured out how you want to allocate your reserve, we can figure out what we need to save on a monthly basis. Divide the target amount by your time frame for the answer.

Continuing the example above, the monthly amounts saved would be:

Cash: $3000/24 = $125
Savings Account: $6000/24 = $250
Precious Metals: $9000/24 = $375

You can set up automated transfers into a savings account easily, and some PM sellers will put you on a subscription plan where they send you a selected dollar amount of gold or silver every month. Keep the cash in a specific, dedicated place - don't mix it in with your wallet and hope it doesn't get spent.

Make a plan and stay consistent with it, as finances allow.

Got a comment? Let me know!

9 comments :

  1. i think you can maintain currency liquidity with nickels, and maintain the same level of hard-money protection that silver and gold offer, all while making it quite difficult to haul off hundreds of pounds of copper.

    i'm buying nickels, folks. it's something to consider.

    ReplyDelete
    Replies
    1. Yes, but 500 pounds of nickels is not especially liquid. Not a ton of folks looking to buy them for melt value, and not especially easy to use for anything more than a vending machine.

      Delete
  2. Thank you - its a good topic. I certainly need advice here, I am not a financial astute person.

    A good point was made by Fernando Aguirre (FerFal blog) about what occurred with Argentinian bankers during their financial crisis about 10 years ago. A lot of people had switched their Argentinian currency with American dollar in safe deposit boxes, figuring the collapse of their currency would soon occur. It did - but when the money was withdrawn from their accounts, it was paid in Argentinian money - the bank kept the American currency. LESSON LEARNED - MONEY HOLDERS (BANKS) WILL TAKE ADVANTAGE ANY WAY THEY CAN WHILE THEY HOLD THE MONEY.

    One of his recommendations was small gold pieces, chains which could be cut into small pieces, as well as child gold rings. Light pieces which could be used for everyday transactions.

    I used to make a point of saving 15% of my paycheck EVERY TIME, but admit its getting difficult to do that, the dollar doesn't buy as much as it used to. Tangibles, especially every day consumables, are a worthwhile investment to me.

    Thanks again.

    ReplyDelete
    Replies
    1. A bank typically does not know or care what you hold in a safe deposit box, and there's no withdrawing from an account. You go in with your key, they take you to your box and then you are able to put stuff into it or take stuff out in a private room or cubicle. The first Bourne movie shows how it works.

      That said, physical currency should be kept under your control, unless for some reason it does not make sense for security/lifestyle reasons.

      Delete
  3. I think that writing off stocks entirely is a bad idea. As you mentioned, the possibility of a dramatic event is much smaller than personal crisis.

    While I would never say put all of your savings into them, putting a small part of what you hold in your savings account would be a good idea. Their availability will be the same, huge crash, no power, both are gone, lose a job, car breaks, both are still there.

    As far as stability, there are many companies that are steady performers, thus earning you more value.

    ReplyDelete
    Replies
    1. For a safety net, I steer away from stocks and bonds. Other money, sure - invest away.

      If you wanted some more market exposure, there are plenty of good mutual funds out there that I would look at.

      Delete
  4. If you dig a little more into the way money works (fiat currency which is what we have now) you'll quickly realize that a savings account and cash or any other form of non-precious metal currency is just as unsafe as stocks and funds. Within the next decade there will be a massive wealth transfer. Cash is anything but king. I would adjust your 6 month reserve to:
    $3k cash
    $15k Gold/Silver

    The only reason you should have cash is because its highly liquid at the moment. Cash is not money. Precious metals are the only real money. With a little research in history you'll discover the brightest people in the world have realized it and acted accordingly. This is my advice from one prepper to another. Do some research. Learn the history of money. History is always repeating itself.

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  5. Keep your stock of precious in small spendable lots. If the defecation meets the oscillation, people will have trouble making change when you buy a dozen tomatoes with a silver eagle. I keep a bunch of dimes, quarters and Morgans for spending money. Another readily available source would be tangibles and consumables.

    Batteries never lose value, sustainable energy never loses value and can cut your costs after initial investment. If you live a sustainable life, the need to pay someone for things you need is diminished. Invest in yourself. Learning a skill can lead to extra cash and a solid future.

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  6. It Vietnam, when the commies took over Saigon, they set up a bunch of loud speakers around town and one morning their was an announcement. Essentially it said: "Starting today all of the old Viet currency will be worth 1/10,000 of the new currency. You can trade in your old dollars at certain government locations. Using or accepting the old currency is now illegal." This was strictly enforced by law. So basically any savings that anyone had before hand were decimated. A million dollars turned into a hundred dollars in an instant.

    ReplyDelete