It's been a tough couple of years for the economy. Yesterday's crash of Silicon Valley Bank, the second largest failure in bank history and the largest bank failure since 2008, has left many people worried about what's to come. As we navigate through these uncertain times, it's important to understand what's happening and how it could affect you and your family.
Banks typically buy lots of government bonds at very low rates, which they can then sell at a profit. However, if there is a run on the bank, banks will be forced to sell their bonds at a huge loss. The problem is that banks only keep a small fraction of the money they have lent out on hand. When there is a bank run and they have to sell bonds at a loss, the bank loses money. This is known as fractional banking, and it's one of the reasons why banks can fail.
The question on everyone's mind is whether this is the tip of the iceberg. Could this spread to other banks? It's too soon to know for sure, but we should always be prepared for something like this. If it does happen, it could affect the regular person in several ways depending on their income/wealth level.
So, what can you do to protect yourself and your family? The good news is that the FDIC insures deposits up to $250,000. So if you have less than $250,000 in the bank, theoretically you are fine as even if your bank collapses, the FDIC should cover your losses.
However, if you are one of the small percentage of Americans who has over $250,000, you should consider diversifying your investments to different banks and different types of investments. Sitting on more than $250,000 in one bank is not advisable.
With respect to immediate needs, it would be a good idea to have cash on hand. You should always keep at least enough cash to cover your household operations for about a month. I know this is easier said than done, but it's something to work towards.
So, should you be panicked about the banking situation? No, you should be prepared and cautious. If more Americans were prepared, there would be less need for panic. Panic arises for most at the thought of not being able to get money to cover daily needs. So make sure you are diversified, keep some cash on hand, and don't panic.
While the changes happening in the economy may be scary, it's important to stay positive and take action to protect yourself and your family. By being prepared and cautious, we can weather the storm and come out stronger on the other side.
Craig
**** Note: Craig Grove is not a financial advisor. Be sure to consult with a trusted financial advisor before you make any financial changes. ****
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