While it’s easy to rant and rave about how banks make money, I’d like to rant and rave a bit about how investors handle THEIR money. You do have choices for what to do with your “liquid” (easy to access without stock market worries) money. But I know that not everyone fully gets that. So let’s dig a little deeper.
If you’ve looked at your bank savings account lately, odds are the interest rate you’re getting is extremely low. And yet big banks are making big profits, some of which is thanks to you. At least those of you who let your money just sit passively.
Currently, some savings accounts are at rates close to zero. And yet investors just accept it without trying to do better. For banks that’s almost like free money. For hard-working folks whose accounts fund the banks’ revenue success, it’s like you’re saying “Please take advantage of my lack of financial savvy!”
How banks make money on your money
From Work To The Wise:
“Banks use your money to make money for themselves by creating all kinds of loan products. [Often at far higher interest rates.]
If you remember the film It’s a Wonderful Life, there’s a scene where Jimmy Stewart is trying to stop a run on the bank. He tells the frightened customers:
‘No, you’re thinking of this place all wrong. As if I had the money back in a safe. The money’s not here. Your money’s in Joe’s house…’
Obviously, Jimmy Stewart’s character was explaining mortgages. And they are a good example of how a bank really operates.
So where does your money go?
Your money doesn’t just sit there resting, even if you see it in your checking or savings account. And even though you can get it when you want it. But meanwhile, the bank puts it to work in all kinds of bank products, earning them money. Ideally more money than they pay you.”
How can you make money on your money?
Basically you need to go find higher rates. (I’ll get to some suggestions for that soon.) And figure out how much of your money you can move to other types of investments and / or to other places.
You also need to think about your cash flow needs — regular and possible emergency needs. This will help you decide how much money to keep in an account you can easily access. But please don’t let complacency be the reason you just let your money sit earning so little.
Although it may seem like a lot to think about, take your time. Creating a good financial needs picture for yourself is worth it — in every sense of the word.
About those higher rates – and why they matter
Although at any given time a higher rate may not seem like all that much because of compounding over time it can really add up. It’s the benefit of investing wisely.
For example, a $10,000 investment today at .01% (what my major bank is paying now) will yield you a huge extra $10 in 10 years. (NOTE: .01% is actually .0001 when being multiplied by the original amount.)
But $10,000 at just 3% interest (a conservative average CD rate now) will get you $13,439 in those same 10 years. That’s not something to take lightly. And banks use that exact same knowledge of rates and compounding to make money off your low-rate savings. So that’s what you can choose to do too.
Where to find higher rates
Your goal is to take that knowledge and make money for yourself the same way banks make money. A good place to start is BankRate.com or just do an online search for best CD rates. But be sure to only choose a reliable source.
If you check current CD rates now vs. what your bank is paying you on your savings account your eyes may pop. This is true for most brick & mortar banks (with physical locations) but not necessarily true for online banks.
My online bank Ally (article also explains cautions I took) is paying me 4.25% on my savings at the moment. That’s 4.24% higher than my major bank! And there are other legitimate, well-rated online banks you can turn to.
Also you may want to check out U.S. Government Treasury Bonds. There are times when the rates are quite good and their value is not affected by market ups and downs if you hold them full term. (There is a secondary market where you can sell them and that does depend on the current market rates.)
Just do your research (again well worth it) and remember to never keep more than $250,000 in any one bank category (savings and CDs are the same category) to make sure your money is FDIC (Federal Deposit Insurance Corporation) insured.
Safety Tip: Beware copycat sites
From the FDIC website:
“Watch out for copycat Web sites that deliberately use a name or Web address very similar to, but not the same as, that of a real financial institution. The intent is to lure you into clicking onto their Web site and giving your personal information, such as your account number and password. Always check to see that you have typed the correct Web site address for your bank before conducting a transaction.”
A few more tips
There are different kinds of CDS and different terms for how long they keep paying. There are even no-penalty bank CDs (again BankRate.com is a good source) which let you withdraw your money with NO PENALTY in case you misjudged your needs. Generally CDs do charge you something if you need your money sooner.
There are also brokered CDs that your broker can get you, often at a slightly higher rate. But they may vary in how solid the value is at any given time, depending on market conditions if you want to cash out before maturity. As rates go down, their market value usually increases. But it works both ways. I have some of each, but for brokered CDs I prefer call protected.
Also, you can “tier” your CDs so that they mature at different future time intervals to meet your particular spending needs. Again, this is where planning for your future cash flow and budgeting can help a lot. But keep in mind that rates also go down. So the high rates now may be much lower when your CDs mature. But so may be big bank savings rates.
As for non-liquid and non-semi-liquid funds … that’s where stocks and bonds and mutual funds … oh my … come in. But that’s another post. Some tips below…
More posts to help
Why Can’t I Save Money Even When I Try?
Why Is My Annual Percentage Yield Higher Than My Interest Rate?
Building a Relationship With Your Stock Broker
Beyond the Basics: Tips To Help You Understand Stocks
The Difference Between Bond Coupon and Bond Yield
Stock Market Averages & Your Retirement
A Simple Guide To Bonds & Bond Terms
Leave a Reply