PhilMur's thoughts on biz/tech/money/life

Last week, someone emailed me an article about an Irvine, California woman who recently bought a box of Aunt Annie’s crackers from the store, only to arrive home and find $10,000 of cash stashed in the box!  Thankfully the shopper turned out to be honest, and she returned the box to the store.  Upon returning the box to the store, she learned that an elderly woman had lost faith in her bank had put her life savings in the box, and then returned the box of crackers to the store by accident.  The funniest line in the article of all, of course, was as follows: “In a mix-up the store restocked the box rather than composting it.”  Thank goodness for the mix-up!

This story was particularly significant to me, because I had just conversed with an older person a few days earlier who, like the elderly woman described in the article, also had lost trust in banks, and had withdrawn a large sum of cash from savings for safekeeping.

On one hand, it’s hard to blame them for the fears they have over the security of the banks, given the Great Depression years that they remember themselves, or at least heard stories of from their parents.  And yet, at least in the case of the individual I spoke to directly, at least as much of their behavior could be chalked up to a lack of understanding of FDIC insurance.  The FDIC insures all deposits up to $100,000 per person per FDIC-backed institution (and has recently increased it to $250,000 per person, effective at least through the end of 2009).  The member banks pay insurance premiums to the FDIC, who in turn insure their account holders’ deposits.

By not trusting the nation’s system of banking, and depositor insurance provided by the FDIC, those who cash in their savings accounts, certificates of deposits, etc. are exposing themselves to an even greater risk: interest rate risk.  Because when they pull their money out of sources even generating modest returns of 3%, let’s say, they are forfeiting that increase and causing their money to actually LOSE purchasing power as a result of the affect of inflation.

It’s one thing to move your money into more conservative investments; it’s a whole other thing altogether to take it completely out of an interest-earning environment and put it into a very risk, paper cash format that could be lost, burned up, or misplaced.