Lessons From Cyprus

If you have been following the financial news this week you have seen more mentions of the tiny country of Cyprus than ever before. This is a tale of debt, bailouts, bank deposits and rich Russians looking for a tax haven. I won’t bore you with the details (feel free to read here and here if you are interested) but the short version is that the European Union has proposed a tax or haircut on Cyprus bank deposits (10% on over €100,000 and a smaller percentage over €20,000) in return for billions in bailout funds for the small, highly indebted nation. The Cyprus government must decide whether to take the terms of the bailout or possibly be forced to leave the EU.

Unfortunately, many of the people that will be most hurt in this instance are the everyday citizens of Cyprus that have large sums of money in the bank. Once this dies down we won’t hear much about Cyprus again but we can still learn some lessons to apply to our own financial situation from this mess.

Diversification of our financial assets is the key takeaway here. If you are a citizen of Cyprus and have all of your life savings in a bank account you could be feeling some pain. That is why it makes sense to have your assets diversified across not only different investments, but different accounts.

This is similar to having your entire retirement savings invested your company’s stock.  It doesn’t make sense to keep all of your hard-earned savings in one place.  It just adds incremental risk to your funds that you can avoid.  Spread your wealth.

Plus, with short-term interest rates basically set between 0 and 1% across the globe right now, if you have all of you savings in a bank account, you are not making a return on your investment. You are losing purchasing power to inflation over time. You need a good balance of short, intermediate and long-term investments if you plan on reaching your different goals.

Now onto your reads for the week: