It’s a simple question. Do you understand how, or even if, your finances are protected? If someone were to rob you, hack you, or even lose your funds through incompetence do you have any recourse? If you can’t answer this question definitively now might be the time to check the fine print…
Safety Deposit Boxes are Not Protected
This post was inspired by a recent article on the New York Times. The article in question was a bit sensationalized, but it still made an important point. The general gist was that people placed their funds in safety deposit boxes. That money was then lost by the banks containing those boxes through alleged incompetence. The underlying point was that the safety deposit boxes themselves were only loss protected for a few hundred dollars at most, so the lessors of those boxes were out of luck.
Now, I’d guess if you have a safety deposit box the odds of its contents disappearing are pretty low. But honestly, no matter where you park your finances there are always risks. The important message here is not that the money disappeared, although it might speak to certain bank’s competencies. No, the important message here is to always read the fine print.
People Forget to Read the Fine Print
There is an underlying assumption that a safety deposit box is largely without risk. It is indeed low risk, but it still has counterparty risk and even simple risk of a natural disaster. The general public tends to forget that risk and gloss over the legalese of the fine print. If they did otherwise they’d catch that their box only covers about $500 in losses and perhaps they should purchase additional insurance. The reality is very few places today can you leave an item without insurance and expect someone else to backstop any losses, even if it is through their fault. Sadly even fewer people read the fine print.
How Are You Financially Protected?
Some other examples:
- Your homeowner’s insurance typically covers theft from your house. But for higher value items you need specific riders to cover them. The reality is general homeowners insurance has very low limits for personal property protection.
- When you give your car to an auto repair shop, parking lot, or even a valet I can almost guarantee they have a sign not responsible for lost or stolen items. Now if you can prove gross incompetence on their part you might have some legal leg to stand on. But in general, I wouldn’t count on any legal protection beyond your own car insurance for say a random act of theft. Never leave expensive items in the car, especially when others are working on it.
- Your brokerage account or bank account. Most companies, but not all, have policies that cover the hacking of your accounts. It’s very important you choose an institution that will protect you in this regard and that you understand what you must do to maintain it. Often you cannot do certain things if you expect the protections to stay in effect. Beyond specific hacking most bank accounts are protected by the Federal Government via the FDIC. Always ensure the bank you are using is protected by the FDIC. Most brokerages meanwhile re protected by SIPC which is industry-backed insurance along with some private insurance on top. Do your research on the protection levels these provide and invest accordingly with an eye towards these protections.
- Your pension and insurance companies also have some risk. Most pensions operate like an annuity where the actual payouts come from an insurance company paid by your company. An insurance company also needs to be there to pay out on things like your life insurance. Realize that insurance companies are backed by state governments. It’s probably a good idea to understand who is backing your annuity, whole life, or pension. Check up on their finances from time to time and also understand the state guarantee laws before utilizing them.
- I have been looking at treasury savings bonds as of late. One thing we found out in that recent post was that the Treasury’s own website has limited guarantees on theft from the site. Paper bonds ironically had more protection than digital… There is a lesson there. Just because it is on a computer do not assume it is guaranteed. In fact, I recommend taking offline paper screenshots of all your accounts at least once a quarter. That way you have some proof besides what you saw on a computer months ago.
- Even credit cards and debit cards come into play. One of the best reasons to use a credit card over the debit is because your liability is limited to just $50. While there are some rules to protect you from the theft of a debit, the cost could be significantly more than $50.
Day-To Day Risks We All Overlook
The above are well beyond what most people think of as a risk. I personally tend to think of risk as investing risk. The fear that a company might go bankrupt. The counterparty risk of someone we lend money too. I rarely think about the risk of theft, incompetence, or natural disaster. Now part of that is because I don’t live in an area prone to these things and take personal precautions in my everyday life. So I have limited exposure to these risks. I suspect many of my readers are in a similar situation.
Due Your Diligence to Understand Where You Are Financially Protected
This post is not intended to make you irrationally pull your money and put it under your mattress. It isn’t to make you stop sleeping at night. No, the point is to ensure you do your due diligence. Look at that fine print and discover how your finances are protected. If those protections are not sufficient you have options:
1) Move those finances somewhere with such protections
2) Purchase Insurance, you can insure almost anything under the sun for enough money. Which brings us to the next item.
3) Assess whether purchasing insurance or moving the funds is worth doing. Insurance can be expensive. Moving finances can also be expensive. Taxes might be incurred to move assets. Or if you are doing something like installing a safe then remodeling might cost funds. Not everything is worth spending a lot to protect.
4) Our last point really brings us to one other approach. That is not owning high value easily stolen items in the first place. Unless you have a hobby in a specific area I’d suspect most of us really don’t need a bunch of high-end stuff hanging around. Another reason to not try to keep up with the Jones I guess.
Honestly, we do a mix of all 4 depending on the situation. I suspect so will you. Do you know where you are financially protected and where you might be exposed?