By If your money is sitting in a bank account, you might want to consider other options. Here’s our take on mistakes in banking.
By now, the first week of school is completed and folks are back into a routine – and in our office, it feels like we’re drinking from a fire hose! In sitting down with three new client families this week, I’ve been reminded of how backwards this world is sometimes.
Many of you who don’t work with us probably think it’s normal to accrue somewhere between .25 percent and .75 percent on your emergency fund, and that it’s normal to have bank IRA CDs that recently rolled from 1.25 percent to .25 percent. When we ask new folks why they think this is normal, the response is usually, “That’s what the banker told us.”
Let’s forget about CD rates for a second and say you’re shopping for a new car. You’ve decided on a Toyota Prius, and you head out to find the perfect one. But, you mistakenly find yourself at a Mazda dealership instead. You’re greeted by an enthusiastic and perky young sales associate (aren’t they all?), who, after some friendly banter, asks you what you’re looking for. You say you’re shopping for a Toyota Prius. Your friendly sales associate responds that while they don’t have any Priuses on the lot, they do have this shiny Mazda 6 – and at a great deal to boot.
Next thing you know, you’re driving home in a brand new Mazda, only to have buyer’s remorse set in a few days later. That Mazda is pretty, but it isn’t really what you wanted, and doesn’t fit your environmental goals. So, you head back to dealer and say you’ve changed your mind, only to be laughed off the lot.
So, where did you go wrong? The moment you set foot on the lot that only sold cars you didn’t want, right? That perky sales guy was only doing his job by helping you find the car that appeared, at the time, to be a good fit. Now, I’m sure some of you are thinking, “Yeah Dave, that person is an idiot. How does this apply to my money?” Good question.
This leads me to the first banking mistake we see – how people buy CDs at the bank. You’re trusting the bank teller to give sound advice. But the reality is, that if that person only has one tool (CDs), that’s what they’ve been trained and told is the best thing for you. Even when they know you could come to a team like ours and most likely get higher rates on CDs just by shopping online, and most likely blow that away with a very conservative short-duration bond fund with a yield that makes .25 look like a joke.
That, my friends, is the difference between shopping in a captive environment vs. going shopping at a dealer that offers multiple makes of cars.
The majority of the world – not our clients of course, you know better by now – holds large amounts of money on deposit in the bank/savings/CDs because the bank told them they’d achieve “preferred” status for maintaining a certain minimum balance, and that they’ll earn preferred CD rates, and more importantly, they’ll save the monthly service fee.
This is the second big banking money mistake we see – trying to avoid monthly service fees by holding large amounts of money on deposit. I can’t tell you the number of people who’ve told me this.
Let’s say you have $100,000 on deposit at your bank, and you’re getting paid (a very optimistic) .2 percent. So, you’re making $200 a year on that hundred grand while avoiding the $25 monthly fee, “saving” you $300 annually. You might feel good about yourself because you’re a frugal person and you don’t want to waste your money on fees.
Now, say you moved $50,000 of that to a no-minimum, $10-per-month account because that’s the “sleep at night” number you like to have in the bank. You take the other fifty grand and put it in a short-duration bond fund that, let’s say earns you another $1,100 a year. And that’s only on half your money, with complete liquidity on that $50,000. Even with fees, that $1,100 is roughly double what you’d have been saving in your original placement.
So, what to do with that additional money? Well, $1,100 could buy you five hours of our team’s time, and we can accomplish a whole lot in your financial life in five hours, helping you get to a better place each and every year moving forward.
Now for a third mistake we see folks make in banking. Many of you are probably reading this and thinking, “That’s great, but I don’t have a hundred grand sitting around.” Well, most people don’t. Here’s the thing – the only way to get to the next level, whether in savings, investment goals, a new home, more education, education for your children, vacations or a nicer car, is by sharing those goals with a third party (read: financial planning team) that will hold you accountable to those goals.
In addition, our team will check in to make sure you’re doing okay, remind you of your goals, and do everything we can to help you stay on track. Why? Because you asked us to. Just because you don’t have $100,000 in the bank doing nothing, doesn’t mean you can’t afford to come in for an hour to at least talk at a high level about where you’re at, and how we can help improve your current situation.
The greatest part is, I know many of you may think you don’t have enough money, or that you don’t have your life together because you have debts you’re embarrassed about, or you failed to save, and you finally woke up and got real. Folks, we are financial planners. We love getting in the muck with you and talking about whether or not we can help.
If we determine that we can help you, yes, we will charge you for that. We have to feed our families too. But if we can’t, all we’ve done is spent an hour chatting (the first hour is on us). And on behalf of our entire growing team, we love helping families make better financial decisions, and we’d love the opportunity to sit down and hear your story.
If you are a client, maybe you read something here that made you think of a friend or relative who is making one of these mistakes, or could benefit from sitting down with us. If a name popped into your head, hit reply right now and tell us their name and how to get in touch. We’ll reach out and offer a cup of coffee and a subscription to this newsletter so they can get to know us better. I started this strategy about 15 years ago, and many of our best clients came to us over coffee and an email. Then, along the way, a life event or falling out with their current advisor lead them to our conference room.
We sincerely appreciate the opportunity to work with each and every one of you, and all the referrals to other people you think we may be able to help in the future.
Article by David Smyth, CLTC, Senior Partner at Family Financial Partners — a financial services firm in Lexington, Kentucky.