It is an unfortunate consequence of the recent financial crisis that many people have lost faith in their nation’s banks and, for some, this loss of confidence may leave them fearful for the safety of the money that they have lodged with their bank. However, having your hard-earned money in a bank account is still much more secure than the alternative option of stuffing cash into a mattress, provided that you adhere to certain banking safeguards.
The folly of keeping money in a mattress:
Despite the proliferation of bank branches, there have always been a few people who have chosen to keep money in their mattress or otherwise stashed around their home. Traditionally, such behavior has been mainly limited to those people who can’t get access to a bank account (the financially excluded) or to old people who maybe value the convenience of having their money immediately at hand.
However, every year you read sad stories of such people losing their life savings, at the hands of thieves, or because their house has caught fire or been flooded, or because their money has been eaten by pets or mice! And, because they have chosen to take the holding of their savings into their own hands, they are not covered by any compensation schemes and therefore lose all their money. It’s important to note that home insurance policies will not cover the storage of cash on your premises.
Those who keep their money at home are therefore just one spark away from a disaster that could leave them destitute. Moreover, if word spreads that someone keeps their money at home, then this will increase the risk of a break in, as professional thieves or opportunistic local youths get scent of an easy pay day.
Reasons why your money is safest in a bank account:
There are generally two risks that people may be concerned about with regards to placing money with banks. The first is the risk that the bank might go bust and the second is the risk that the money will be stolen. However, there are safety measures that significantly mitigate against either of these scenarios.
– Compensation if your bank goes bust:
Prior to 2008 it had been very unusual for any banks to go bust. All the old perceived financial certainties were thrown on their head however by the catastrophic credit crunch crisis. Suddenly, the newspapers were awash with reports of banks going bust or requiring substantial investor and/or government support to shore them up. It is only natural, therefore, that concerns over the safety of keeping money with banks soared.
Banks, however, are part of a regulated industry and consumer safeguards (in the form of compensation schemes) exist which are backed by governments. These compensation schemes guarantee that consumers will get their money back in the event that their bank goes bust, subject to agreed maximum limits.
For example, in the UK consumers are protected for 100% of the first 50,000 pounds that they hold with a financial institution. Someone with 100,000 pounds could ensure total protection by splitting their money equally between two banks, as the protection is on a “per bank” basis rather than “per consumer”.
Most other countries offer similar compensation schemes as a vital means of maintaining confidence in their banking industry, although you should check with your bank (or financial regulator) to see what provisions relate to your jurisdiction.
– Protection if your bank is robbed:
A common misconception that some people have is that they might lose their money if their bank gets robbed. This just doesn’t happen. Rather, it is the bank that takes the hit from any losses due to theft or robbery and the consumer’s money is guaranteed.
As well as the threat of money being physically stolen from a bank safe, there are also concerns about the growth of electronic theft. In particular, many of us have become all too aware of the practice of phishing, where organized crime gangs send out e-mails soliciting bank customers to give away their bank security details (typically their online banking login details). Having tricked the bank customer into giving them these details, the criminals then attempt to withdraw money, mainly through electronic remittances.
The important points to note here are that these criminals rely on tricking people into divulging their security credentials. Services such as online banking are protected by ministry of defence standard electronic encryption and it is their inability to break the banks’ defences that leaves criminals dependent upon tricking bank customers to access money.
Most bank consumers are not fooled by phishing e-mails and banks constantly warn customers about the dangers of responding to suspicious looking e-mails. Being vigilant with your bank details is all that is required to remain safe. Further to this, most banks will compensate consumers for any losses incurred, provided that they are satisfied that the consumer has not colluded with the criminals or been overly negligent in their behavior.
– No loss if your bank burns down:
I highlighted that a major risk with keeping money in a mattress is the possibility that your house might catch fire, be flooded, or destroyed by an earthquake, and that this would result in the loss of all your life savings. In stark contrast, if similar disasters were to befall a bank branch, then your money will be guaranteed by the bank, as part of the banking industry regulations.
It has always been safer to keep your money in a bank rather than hiding it away in your mattress (or elsewhere in your home). Despite the recent recession and the serious effect that it’s had on the banking industry, this is still the case and always will be.
What has changed, perhaps, is the way that consumers are arranging their savings with banks. Instead of placing all their money with one bank, consumers are showing signs of splitting their money between various bank institutions to take advantage of the savings compensation scheme protection that is on offer. Even here, however, it will only be a relatively small percentage of people who will need to do this. Taking the UK compensation scheme limit of 50,000 pounds as an example, the majority of savers will not have funds in excess of that limit.
Of course, another nice advantage of keeping your money in a bank is that you will earn interest. Indeed, when the rate of inflation is factored in, those who keep their money at home will see significant depreciation in its value over a sustained period, which could be viewed as an example of people robbing themselves.
Further reading / sources of information:
UK Financial Services Protection Scheme: http://en.wikipedia.org/wiki/Financial_Services_Compensation_Scheme
Tips for online safety: http://www.group.rbs.co.uk/News2005/november/top_tips.htm
Bank Safe Online: http://www.banksafeonline.org.uk/