How do banks make money?
Like any business banks generate income.
Long story short, banks make money by loaning money to clients (you), manufacturing debt and collecting the interest in repayments over the lifetime of the loan.
Banks play a very long term game with the interest they collect on the loans they provide often measured in decades when it comes to home loans.
The longer the period of the loan—the more repayments you make, the more they make. Simple.
Banks also have more immediate shorter term income sources such as credit card interest rates and fees just to start with. All this adds up to the revenue they generate.
But then there is your money that you desperately try to keep in the bank so that you can collect a small amount of interest on. The more that you put into the bank account the more you can gain on the interest … right?
Technically speaking this is true, but the more money that you have in the bank, the more the banks can loan to loan seeking clients. The more they loan the more they make.
Not much is going to stop this money making formula and the scale that it’s run on.
It’s all in the Interest Rates.
So how do you collect interest? How does your money grow in a bank?
Banks generate revenue from the interest they collect on loans but they do ‘reward’ you for letting them use your money to loan to other clients.
But there is a disparity in what they give back versus what they make.
The Banks charge about 3.5-4.8% for short term (3-5 years) interest only loans.
They also charge slightly lower Interest rates for Principal and Interest loans in order to get their money back over 30 years.
But when it comes to your savings account you’ll find your interest rate at 2% or lower. Sucks right?
This difference in Interest rates is where the banks generate their billions in profits!
As mentioned earlier nothing is going to stop this money making industry. After all if you pull your money out of a bank out of spite, then you’ll collect absolutely nothing and then be left with the problem of where to keep your cash.
The problem only seems to get worse. But when it comes to manufacturing wealth and securing your future, 2% per year is barely worth it. In fact it’s worth so little that simply making another deposit is going to inflate your account more than the bank will. Hell even a small win on the crypto markets will give you more.
As long as interest rates remain low, the bank is the worst place to keep your hard earned cash that you have probably traded, countless hours, endless value and stress for.
To get real financial results there is a need for control and self-management, But …
We fear short term loss more than we fear long term failure.
When we say it like this—this seemingly makes absolutely no sense. But;
In short we prefer ‘safety’ today rather than a mistake today.
This makes perfect sense. Yet these are the same thing, albeit said differently.
But we can ‘see’ this in the infographics.
Images courtesy of; ABS Report
It’s clear that the preference is for keeping your hard earned ‘liquid’ money contained within the safety of a bank even though a bank is a poor money earner rather than risk a potential loss in the stock market even though investment in the markets can yield 20-30% per annum … 10-15x more than what a bank can offer.
The first reason is easy. Ignorance or simple lack of education. If you don’t know then how are you supposed to make a decision where you’re actually in control?
The second comes down to effort and comfort.
Right or wrong making your money work for you takes some effort, and to that end the safer the strategy the less work you need to put in. Comfort today or Comfort tomorrow because you do some work today?
Blissful comfort today wins 99.999% of the time.
This is where the first statement comes completely true. With almost no risk and no effort we keep money in the banks—the exact place your money performs the worst.
It is seen as ‘safe’ to keep money in a poor performing bank account where the result will always see some small growth rather than take control of your money and make it perform 10-15x better with just a small amount of effort on a weekly basis.
Related: Wilful Ignorance
In fact this driver is so strong that we do it in almost every aspect of life, even when the ‘safest path of least resistance’ will lead to failing outcomes later in life.
It is so powerful that most people will choose to keep trading time at a job until retirement because it is seen as safe today rather than learning how to become independent and retire years or even a decade or so earlier than ‘needed’ even when the personal benefits are so clear.
This is exactly why Investing if you have the means is so critically important today more so than any other time. If you aren’t in a position to invest now, having a valuable skill that is demand is the one thing you need to identify and leverage into your very own cash flow manufacturing machine.