Your bank thinks you’re a sucker
Hate to break it to you, but your bank is not your friend. In fact, chances are you’re really getting duped.
Banks are for-profit institution. This means they are in the business of making money. They make their money by using your money and giving you very little in return.
As the average consumer, you and I make banks and their owners extremely wealthy. In fact, JP Morgan Chase (largest bank in the U.S) raked in nearly $50B of profit in 2021. That is money that goes straight to the shareholders’ wallets.
As payment for making big banks handsomely rich, they pay you back with an average of $0.0009 for every dollar you deposit. Kind of a rip-off right? Right.
This tiny fraction of a dollar is called interest, and that percent of one dollar is called an interest rate. Interest is money that one party pays to another as a thank you for money borrowed.
Every bank pays interest on the money that you deposit but did you know you’re technically loaning the bank your money? Yep, they will turn right around and give your money to someone else and charge them a much higher interest rate than they are charging you.
If you are receiving the interest (i.e. a bank is paying you interest on money in your savings account) then you want a large number. If you are paying the interest (e.g. you’re paying interest on the loan you got for your house) then you want a small number.
As the famous saying goes, “… interest is the eighth wonder of the world. He who understands it earns it, he who doesn’t pays it.”
Where you should bank
Now, clearly it’s not practical to keep all your money in cash and under the mattress. So using a bank is inevitable. But there are things you can do to make sure you’re not being taken advantage of.
First, you’ll need to decide whether having a physical bank branch where you can deposit cash and talk with a loan officer is important. One reason you might want this is if you will be in the market for a mortgage sometime soon.
Banks with physical locations tend to pay laughable interest rates and sometimes have other fees that can be offsetting.
If you don’t need a physical bank, I would highly recommend researching an online bank. Why? Because online banks tend to pay higher interest rates and without all the fees.
Because they don’t have several locations or lots of staff on-hand, their costs are lower so they can pay you a higher rate.
Remember that $0.0009 that the bank gave you? Online banks will sometimes pay $0.01 or even up to $0.02 for every dollar you let them borrow. That is much, much better than the national average.
For me, it is important to have both. Eventually I am going to need a home mortgage and so it’s important to have established relationships. But it’s also important that the bank makes me rich and not the other way around.
Now, not all financial institutions are in it for the profit.
I opened up my first checking and savings account at a local credit union. A credit union is different from a bank in that credit unions are nonprofit.
This often means that they have lower fees and lower interest rates on loans. But they also have lower interest rates on savings accounts.
Whatever you choose, it’s important to do your research and follow the money. If it seems like you are getting the worse end of the deal here, it’s likely because you are.
Nerdwallet.com (not sponsored but I should be) is a great free resource to see what banks are currently offering and how they stack up against each other. I would highly recommend hopping on this site and switching to a bank that treats you like less of a sucker.
If you found this article insightful, follow me on Twitter where I share frequent money hacks for people in their 20s.
Thank you and happy banking!