Putting all your eggs in one basket is always a risk.
Most investors understand not to invest all their money into a single company, because there’s a chance that company might go bust.
Nor should the entirety of your income come from a single client. What would happen to your business should that client leave?
When it comes to depositing money into the bank, however, most people have a false sense of security. They expect their money will always be accessible and the risk of losing their money is nil.
In this video, I show you proof that this isn’t always the case, and explain why you shouldn’t keep all your money with one bank.
LOSING YOUR BANK ACCOUNT
In March of 2013, the Bank of Cyprus made a shocking announcement.
Any deposit over €100,000 would be converted into bank shares and 37.5% of its value would immediately be wiped off.
In other words, if you had deposited €100,000 with the bank, your balance would suddenly drop to €62,500, and you would have no way to recover the lost money.
When you deposit, you are lending your money to the bank. When you withdraw, the bank is effectively paying back a portion of that loan.
But remember that not all debts get repaid. Sometimes the borrower defaults, and while this is unlikely with a large financial institution, it is not unheard of.
Warren Buffett said, “Rule No. 1: Never Lose Money. Rule No. 2: Never Forget Rule No. 1.” When investing, your first priority should always be to protect the money you already have, before taking big risks in the hope of a big ROI.
If there’s a small chance you could lose all your money, don’t take that risk.
This is not to say that you should avoid banks altogether. Instead, you should spread your money across different banks. If those banks are in different countries, even better. Treat banks in the same way that you would treat stocks, and don’t put all your eggs in one basket.
Imagine we’re playing a game of Russian roulette. I place one million dollars into escrow, then I place one round into a revolver and hand it to you.
If you point the revolver at yourself and pull the trigger, I will release the million dollars to you.
Would you do it? There’s a small chance you’ll die, but a 7 in 8 chance that you’ll win the million dollars.
Placing all of your money into one bank is a similar risk. Of course, the chance that your bank will encounter what the Bank of Cyprus did in 2013 is a very slim chance. But is it a chance you want to take?
Spreading your money across different banks in different countries is a small price to pay to avoid playing Russian roulette with your money.