Hey guys today we will discuss how banks make money off your money? In addition to that we will discuss where is the best place to park those funds. The big banks are a multi- billion dollar business and are basically too big to fail as the government has labeled them as such. Obviously you want flexibility with how you manage money so we all should consider what that means in our lives.
But if that flexibility is staying with a bank that charges you $12 dollars a month in checking account fees, maybe that is not the best route for your hard earned dollars. There are many options in the banking industry to stash your cash, for example, Big to fail banks, Credit Unions, Online Banks, and Brokerage Companies. These are the most widely used options where people maintain their money in a flexible liquid account.
Now that you understand the choices behind where you can place your money, would you care if Bank of America made $300 dollars a year off your money or if a credit union made $150 dollars a year off your money? I guess you might be thinking that it all depends if any of the money is coming from your pocket or from the imaginary money tree inside the bank? Well I hope to inform you today with the details behind how these banks operate, and then you can make a decision. See below for the 5 levels on how banks make money off your money.
THE 5 levels behind how banks make money off your money:
Level 1- The banks use about 90%-97% of your money to lend to other customers / businesses in the form of loans
Level 2 – The banks charge a percentage of all debit card transactions from Retailers when you make purchases
Level 3 – The banks charge account fees, ATM Fees, overdraft fees, and other service fees
Level 4 – The banks use surplus money to invest in stocks, bonds, derivatives, and other financial investments
Level 5 – The banks use additional capital to purchase land and properties for additional retail branches
These are the five levels banks make money in the financial services and banking industry. I’m sure banks have many other money levels, but I wanted to focus on the retail area of the banking industry. I decided to discuss about that side of the business, because that is where the majority of the people interact with the banks. The other financial services like corporate trust banking and private equity are for a select few of individuals, like the 1%. Now would having this information make you feel less likely to deal with banks?
Maybe you can switch to an online bank or a credit union if you are getting hit with frequent banking fees. Some online banks offer free ATM withdrawals for their customers. Some credit unions offer a higher than average checking / savings interest rate, because they don’t want to milk every last penny out of the consumer. Also credit unions for the most part are non –profit banking establishments. That is why you can get overall better rates on loans or higher interest on savings accounts at credit unions.
I just want all of you to be more informed by how these big to fail banks make their money off you. Obviously you want a happy banking experience that includes convenience with where and how close you bank from home. But if it is costing you hundreds of dollars a year, maybe a change is necessary. In the end if you are paying the banks unnecessary fees and ridiculous charges, then you are not getting the best banking experience. A credit union might be the answer you need to properly set you up for better optimized financial future.
I prefer to have my savings account online and a small emergency fund at a credit union. I still have a big to fail free checking account, but I am looking to simplify things in the future. Even though it is not costing me money to bank with them, I realize there is a better option to support the smaller community banks. In the long run the smaller banks will provide you with more benefits than a big bank, who constantly changes management. The moment my local credit union makes depositing funds easier through technology, I will switch the checking account to them. This way I can build a more beneficial local banking relationship, as should you.
Comment if you care how banks make money off your money?
Resources:
NPR
Rich Uncle EL
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