I have gotten a lot of messages today—far more than I expected, from both friends and co-workers—regarding today’s breaking news of Silicon Valley Bank’s insolvency. If you’re not familiar with what happened, an oversimplified summary is that Silicon Valley Bank overleveraged their assets and were unable to fulfill customer withdrawals, creating a feedback loop of panic and further withdrawals, resulting in the California Department of Financial Protection and Innovation shutting down the bank and the Federal Deposit Insurance Corporation taking over operations.
Before I get into things, I want to point out that neither I nor any of my companies were affected by Silicon Valley Bank’s collapse. Neither I nor any entity over which I have financial oversight had a Silicon Valley Bank account, and no funds were lost or locked as a result. However, it is devastating to hear that many tech startups had their entire treasuries in Silicon Valley Bank and lost everything. What is even more concerning is that Silicon Valley Bank had an extremely high percentage of customer deposits—allegedly over 95%—that were not covered under FDIC insurance.
In short, FDIC insurance protects up to US$250,000.00 in deposits per insured bank, per owner, per account category. As you can imagine, tech startups with venture capital funding likely have far more than $250k in funds that they hold in their bank, which means everything over $250k was not insured.
With that being said, there are a lot of well-written resources available online that can explain FDIC insurance, as well as the similarly-purposed Securities Investor Protection Corporation (SIPC) insurance. I recommend conducting your own research before continuing so you can have a background basis upon which to analyze my post. The purpose of my blog post is to provide an example and explanation of how I apply this information to my personal financial situation.
As a disclaimer, I am not a registered financial advisor, and even if I was, I would not be your advisor. This information is being provided strictly as an anecdote to provide insight into my life, and it does not imply that you should blindly copy my strategy. If you have any questions or need guidance with your own financial situation, make sure you consult a certified professional.
This is less of an actionable step and more of a way of thinking, but I believe that stuff is better than money. Money is nothing more than some fancy cotton paper, metal coins, or a number on a digital screen. “Stuff” is everything else—things you can use to live your day-to-day life. You can’t eat money, but you can eat food. You can’t ride money, but you can ride a bike. You can’t live in money, but you can live in a house.
Obviously, I do not waste my money recklessly, and I am careful to ensure I do not overspend on depreciating assets (like cars). However, because I have enough of a savings buffer, if I ever encounter a situation where I can either (1) purchase an item that will be very useful in my life in many circumstances and will generally retain its value, or (2) save even more money, then I will usually err on the side of making the purchase.
The best example of this is real estate. Although I personally do not own a physical property at this time, I always keep an eye out for good deals and closely monitor real estate trends. If the biggest banks unexpectedly fail or the value of the dollar goes to zero, there isn’t much that can give you more peace of mind than owning your own house and having guaranteed shelter.
Just make sure you appropriately consider property insurance coverage from a private carrier, if applicable.
I keep most of my assets in… well, assets. As long as you are not just holding your money at your brokerage in cash, and are instead actually purchasing stocks, securities, and funds, then your SIPC insurance coverage is US$500,000.00 per owner, per account category. For the sake of not needlessly compromising financial structural information about my companies, I am going to just focus on my individual self in this blog post, but keep in mind that if you own companies, each duly-formed company counts as its own separate “customer.”
I personally hold brokerage accounts on Fidelity and Vanguard. On Fidelity, I have an individual brokerage account and Health Savings Account. On Vanguard, I have two individual brokerage accounts, a Roth IRA, a SEP-IRA, and a Traditional IRA. On Vanguard, my two individual brokerage accounts count as one single account type, but all the retirement accounts count as separate account categories. As a result, with $500k in SIPC insurance coverage for each account type at each brokerage, if I spread out my money optimally, I can get $3 million in potential coverage.
I have checking and savings accounts with both Discover Bank and U.S. Bank. Although checking and savings count as one account category, the fact that I have my money spread between two separate banks means I have separate FDIC insurance coverage for both, totaling $500k across the two. I can further increase coverage by creating revocable or irrevocable trusts, as well as by creating joint accounts with other people, but for now, I only have the two basic accounts.
I have brokered certificates of deposit through Vanguard. Certificates of deposit (CDs) usually aren’t the most attractive investment vehicle, but with interest rates soaring lately and the stock market’s near future still uncertain, CDs have recently become a much more reasonable option. Brokered CDs are CDs that are owned by a different financial institution but purchased through your brokerage firm.
As you saw above, the fact that I have distributed cash between two banks increased my FDIC insurance coverage. In theory, I can open even more bank accounts for even more coverage, but at some point, it becomes a hassle to keep track of all your different bank accounts. Instead, you can purchase brokered CDs through a single account and keep everything organized on one screen with one single log-in, thus taking advantage of the offering bank’s FDIC insurance coverage without having to have a direct customer account with them.
You can get a wide range of CDs—as short as 1 month for funds you may need soon, and usually all the way up to 5 years if you want to take advantage of the high interest rates and don’t need the money for a while. Vanguard has brokered CD options from reputable institutions like JP Morgan, Charles Schwab, Morgan Stanley, and Wells Fargo, just to name a few. In theory, you could use this trick to get as much FDIC insurance coverage as there is banks offering CDs on your brokerage’s platform.
I have been annually purchasing the maximum-allowed Series I Bonds to take advantage of their high interest rates as a result of recently-spiking inflation. Although these don’t have FDIC or SIPC insurance, they are fully backed by the United States government.
There are a few things to note here. First, don’t panic if you have more than the SIPC insurance limit in assets in a particular account at a particular brokerage. Your assets are still your assets, and they are probably still out there somewhere. SIPC insurance only needs to kick in if your assets are actually gone due to misappropriation or other misconduct by the brokerage and cannot be recovered.
Next, at some point, solely optimizing for insurance coverage will quickly give you diminishing returns in terms of priority. For example, if you are using highly stable and reputable financial institutions and they all become insolvent with several millions of your dollars, then at that point, you probably have bigger worldly problems than worrying about the extra amount of your money that wasn’t FDIC- or SIPC-insured.
Finally, the intensity to which I have prepared for doom is a definitely on the high end. I don’t think I’ve gone so far as to reach the point of insanity by optimizing it to this degree, but you usually don’t have to worry this much about your money potentially disappearing into thin air. Make sure you don’t enter a state of paranoia by overestimating the gravity of this situation.