Account Diversification
What is account diversification?
In most personal finance contexts, the word ‘diversification’ is almost entirely used to refer to diversifying one’s investment portfolio.
However, that’s not the only kind of diversification one should be thinking about, nor is it the necessarily the most important. In fact, there’s a whole other type of diversification that is rarely ever discussed – diversification of the accounts we hold money in.
Put simply, it means spreading your money across multiple accounts instead of storing all of it in one.
Why it matters
Whether it’s a typical bank account, special savings account, or an investment account, we tend to take for granted the security of the funds within our accounts.
In fact, though we all acknowledge the possibility of our funds in the accounts somehow being compromised, it doesn’t seem to be a prospect that keeps many people awake at night, nor does it seem threatening enough for most people to do something about it.
But what if we are in fact being overly complacent? What if such a disaster were to happen?
There’s quite a number of unlikely, yet entirely possible ‘disaster scenarios’ that you could be unlucky enough to be subject to.
- Your account could get hacked.
- The institution could freeze your withdrawals on some obscure terms and conditions.
- The bank could collapse. The brokerage might be over-leveraged.
- Someone might have impersonated you and logged in.
Years of hard work and sacrifice gone in an instant. Nothing left to show for it. Unlikely? Yes, Impossible? No.
A hedge against uncertainty
The harsh reality is, no matter how complex and secure your password is, or how many layers of authentication you have, there will always be some unknown risk factor, lurking in the shadows that none of us can see coming.
Take for example, someone who secures their account from hackers and impersonators thoroughly. They think they’re untouchable. But then, the bank itself collapses during a financial crisis.
Of course, with today’s knowledge, it’s easy to identify that institutional risk with hindsight. But there’s always something more that we haven’t considered. Something that, people in the future would look back and say “That risk factor was so obvious!”.
Having multiple accounts is a contingency plan for the unthinkable. If disaster were to strike, and the losses were to be unrecoverable by insurance too, then this could be the last line of financial security.
Account diversification effectively means that you aren’t screwed if any particular pillar were to crumble. It means that you still have some savings to live off while you fight the legal and administrative battles to recover the funds in the compromised account.
It’s your financial safety helmet – doesn’t prevent the pain, but it might just keep you alive.
Best practices
Account diversification requires little explanation. It’s simply the act of opening up an account under a different financial institution and spreading your funds out.
That said, there are some potential mistakes to be wary of:
- Using the same passwords or login codes across multiple accounts
- Not looking at the fee structures and T&Cs of the account before opening
- Linking multiple accounts to a single point of authorisation
There are undoubtedly some cons of account diversification. For one, it’s a bigger administrative hassle to monitor more accounts. It might also result in some opportunity costs (E.g., From not dumping all your cash into the highest-yielding savings account).
But to be honest, I’d bear those costs any day. Because to me, the prospect of getting all my financial progress erased in an instant, no matter how likely, is a truly frightening thought.
The above quote has been perhaps the most impactful sentences that has shaped my financial decisions. And though in the book, it was stated in the context of investment choices, I’d argue it’s equally as relevant here.
When it comes to the funds in our accounts, and especially what many call their “life savings”, I think it’s well justified to err on the side of caution.