Banks 101: Personal Banking Made Simple

Stashing away a chunk of your money in bank accounts is a sound idea. However, this should not be your only means of financial management. Banks don’t offer competitive interest growth rates when considering investing your money into a basic savings account or money market. In fact, the only reason I would consider storing money in a bank account is for the federally insured protection. Trusting the bank with your entire nest egg is NOT necessarily a sound financial decision, with all things considered.

Banker Training June 2018 – Warren, MI (Michael 2nd from left)

Category #1: Cash Accounts

Checking – A convenient account to swipe your debit card with for daily purchases, however this account will not generate competitive interest yield and your money is potentially ‘at risk’. Try to stick to accounts with no maintenance fees or minimum balances, so you can swipe for daily purchases at ease. Secure your account and routing numbers to prevent fraud and or identity theft, or general theft of funds.

Savings – A safe, federally insured, but still potentially ‘at risk’ account that may be used for short-term savings. Short-term savings are important when expenses and non-expected emergencies arise. The downfall is the interest rates vs. inflation moving forward with your financial future. The inflation rates are outpacing the low interest rates offered by most traditional banking institutions.

Money Market – An ‘advanced’ savings accounts usually offered to bank clients who have at least a $30,000 balance in a savings account. This is the best option for large balances, as it maximizes what little interest the bank rates present. Money markets contain investments into highly liquid accounts such as cash and short-term debt instruments, with short maturity periods. Money markets have a relatively low level of risk.

CD – A fixed period investment with an annual percentage yield, typically used for balances over $50,000. The rates for CDs were supreme in the mid to late 1900s when savings bonds were a popular choice to purchase from the federal reserve. Unfortunately, in modern times the CD rates are typically below .05% APY, not to mention those funds are locked up and early withdrawals are penalized.

Category #2: Investments

Summary – Basic investing principles are directed by the large financial institutions such as government sectors, banks, private equity firms, and others. These are great options for a certain percentage of your nest egg, however, to place all your funds in these investments will not yield a viable long-term return anymore.

Private Bank Clients – The bank’s financial advisers will place your investment funds in long-term equity holdings. Typically, the larger funds with long-term S&P Benchmark methods are chosen. This includes Vanguard size companies, and the only difference is the bank fees that the advisers take for maintenance, commission, etc. This will reduce total return in your portfolio compared to investing in these funds without an adviser.

As with any bank account for both consumer and business, it is important to diversify your savings therefore opening an investment account that is federally insured is a safe diversification strategy. The previous paragraph regarding the investment account fees that advisers and the institution will allocate among themselves is to illustrate the different options for diversification in full transparency. It is up to you on which diversification options you choose to disperse your funds throughout, I simply display the available options.

Category #3: Consumer lending

Consumer lending products are ones that are almost unavoidable in one’s lifetime. The economy is set up to entertain loan options for vehicles, education, business, and much more. The personal lending products that we will be reviewing are ones that I have had personal experience with in the banking industry along with my own personal life. Term loans, debt consolidation loans, and home equity lines of credit.

Term loans also known as personal loans, should only be used for absolute necessity projects. Defaulting on a loan payment will damage your credit score significantly and this will effect your ability to participate in lending products. It is important to review the loan amortization period with your bank to ensure that you are able to make each payment on-time.

Home equity lines of credit are excellent lending options for consumers who own a home and need to leverage the equity. The same principle applies to term loans as do HELOC’s, only utilize this option for absolute necessity payments. Debt consolidation loans are a last resort for those who have unfortunately incurred debt through multiple accounts with multiple interest rates. This debt manager loan will consolidate your balance in to one payment attached to a single interest rate.

Thanks For Reading,

Michael Moran, IHG Management

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