You will either be a customer of a bank or you will learn to be the bank. It is easy to live a lifetime doing business with a bank and never learning how banks make money. This video will give you some insights into how banks make money and, more importantly, discuss things you can do to help you “be the bank.”

Transcript

How Banks Make Money

When you think about the most powerful bank in the world, you probably think about a global banking institution, but that’s not the most powerful bank in the world. Neither is a local bank like the one in your neighborhood. No.

The most powerful bank in the world is actually your bank. Your bank refers more into a financial position than the brick and mortar building where you do your conventional banking. In fact, your bank is simply an account that you set up where you have liquidity, use and control of the resources deposited by the end of this video.

How you look at banking and your money will take on a new meaning. Most people consider banking and investing to be similar. They are very different. However, the primary objective of each is to make money. Consider for a moment how a traditional bank makes money. They must first attract customers and persuade them to deposit their money in their bank.

They do this by offering services like free checking, longer teller hours, online banking, and direct deposits for paychecks. They also pay interest on the money deposited in their bank.

They encourage customers to leave their money in for long periods of time by paying higher interest on money’s left in the bank over longer time periods, offering additional benefits and services for longtime customers and imposing early withdrawal penalties for taking out money after a short period of time in order to cover the cost of their operations and hopefully make a profit.

Banks charge more interest than they pay, but how do the banks tell you to make money by putting your money in the bank, leaving it there and sitting back to watch the magic of compound interest do its thing, but that’s not what they do. They keep their money moving in order to make even more money.

Understanding how a local bank makes money will help you apply some of their wealth accumulation principles to your bank because when it comes right down to it, you will either be a customer of a bank or you will learn how to be the bank. It’s your choice. Most often when people get a loan from the bank, they already have money elsewhere like in a retirement account or in home equity. But since this money is inaccessible, they’re forced to borrow from the bank using their assets as collateral for the loan.

Here in lies the problem, the interest you pay to borrow money offsets the return you earn on your money. You have invested. That’s one of the costs of borrowing money. However, there is hidden costs to borrow it. If you pay a dollar and interest that you could have avoided, not only lose that dollar, but you also lose what the dollar could have earned for you had you not given it away.

This is called opportunity cost. Let’s take a closer look in opportunity cost. Suppose you carried a $10,000 credit card balance at 18% you would have to pay the bank $1,972 in interest over the year doing the same thing over 40 of your lifetime would result in your losing almost $78,866 in interest. That’s a lot of money, but it gets even worse because you did not just lose the interest.

You also lost the opportunity to invest $1,972 each year. If you were able to invest that $1,972 in your bank each year, you would have about $305,135 after 40 years, assuming average a 6% rate of return. If you averaged 8% you would have almost $510,767 the bank fully understands the power of this principle, which is why banking is so profitable. You either pay interest or earn interest. There is no in between. So would you like to be a customer of a bank or would you like to be the bank?

By now it should be clear that you’ll be far better off by learning to be the bank. So to get started on your bag, you’re first going to have to put away some money in a place that allows you to operate like a bank and also provides additional benefits and your search for the right account to use in getting your bank started. You will ideally want to choose an account that is safe, meaning there is no chance you will lose your money, grows tax deferred, enables you to take out the money tax free offers.

A competitive rate of return guarantees the interest you earn, protects the money from creditors, does not limit how much you can put into the account. Does not restrict your use of the money can be used as collateral, gives you liquidity, use and control of the money. Provides you access to the money in the event of disability and guarantees the value of the account will never go down.

There are many accounts that will allow you to be the bank. However, some are more efficient than others. Some provide potential for higher returns but do not function well as a bank while others offer little or no return and few benefits to help you determine which financial products will provide you with the most benefits to use as your bank, you will want to consult with the financial services professional who gave you this video. Let’s look at a very common banking problem.

Many people put money into qualified retirement accounts at work like 401ks, IRAs, SEPs, and four Oh three BS, which is not a bad thing, especially if their company matches their contributions. However, since this money is not accessible, they’re forced to finance their car. The sad truth is that many people will lose more money, financing the cars they drive to work, then they will accumulate in their lifelong savings account at work.

We’re not saying you should not have a car, you just need a better way to pay for it. It’s easy to see that you’re saving money and earning 6% interest, but you are paying 6% on borrowed money. The effect is you’re not moving at all. You’re in neutral. The interest you pay on borrowed money should demand at least as much attention, if not more than the interest you earn because the interest you pay is avoidable and avoiding losses is less risky and can prove to be more valuable than trying to pick products with higher returns.

Unfortunately, many of us focus all of our attention on saving and investing, but little effort on the money we borrowed. Let’s assume that you have $30,000 in the bank earning 4% if you bought a $30,000 car and financed it at 6% you would be losing money because you could have used your own money.

A bank could not pay out 6% while only earning 4% and neither should you. You need to look at what you’re giving away in interest. Instead of focusing on just the interest you’re earning. Now, suppose you had already started your bank, so you take out the $30,000 from your bank and pay cash for the car. Since you are now your own bank, you could pay yourself back at the 6% interest rate. The car dealer was going to charge you as you financed it at the end of the loan period. You would not only have the $30,000 but also all of the interest you would have given the lending institution as well. You see, you actually finance everything you buy. You either pay interest or earn interest. Even if you pay cash for something, you’re really financing it because you must consider what the money would have earned had you kept it, which is called opportunity cost.

Imagine being able to avoid paying interest to others and instead redirecting all of that interest into your bank. Now you’re thinking like a bank. You may be saying to yourself, well that sounds good, but where do I come up with the money to get my bank started? Great question. Like most things of value, it’ll take some time to get your bank started, but the payoff is huge.

You may be surprised to discover that the money you need to get your bank started can often be found in areas in which you’re currently losing money unknowingly and unnecessarily. In fact, you may be able to find the money without any impact on your current lifestyle at all. Some common areas where people lose money unknowingly and unnecessarily include mortgage payments, taxes, car payments, credit cards and college financing. Just to name a few,

Call the advisor who handed you this video so you can find the money you’re currently losing now you know how banks make money. Pay interest to yourself rather than others. And start building your bank, the most powerful bank in the world.