I came across this add as part of a page on the internet. It is the kind of add that is cute and catchy, but again it might not tell the whole story. All financial institutions publicly say that it is a terrible thing that the majority of customers are financially illiterate. But they really don’t want Financially literate customers. That would cost them too much money. I got that statement directly from a bank VP. Banks will never tell you anything wrong or illegal. They just won’t tell you anything that is more in your favor than theirs. Do they really want you to understand Savings, or how to read a Mutual Fund prospectus, or a stock info sheet?? Of course not!! If you can figure things out for your self, they can’t charge you a fee to tell you. Or to get you to do things that are good for you, but better for the bank. As in the add.
Paying yourself first (Saving) is the key step to Wealth Accumulation. In fact, it is Step 1. On the surface this add is quite true. But what about the reality, is just Saving Winning?? Let’s look at this closely. Since the Addvert is from TD I will use their numbers. How much interest do they pay on a Savings Account? Here is a chart showing their posted rates. I got it from googling “Canadian Bank Savings Interest”.
The highest interest rate on a Savings Account from the chart is 1.05%. To get that rate you need to have a minimum balance of $5,000.00 in their High Interest Savings account. As a mater of fact you won’t get any higher rate even is you put in $5,000,000.00. If you think you can live off the interest, better think again. ($5,000,000 times 1.05% equals $52,500.00 minus the income tax payable.)
As if that isn’t bad enough the current rate of inflation is around 1.5% . That means that the buying power of your savings went down by 1.5% Yet the interest only brought your money up 1.05%. You just lost money. But the addvert says that Saving is Winning. It is only misleading advertising if people are financially literate enough to know the whole story.
If you go into the bank and ask about this, they will tell you that you will be better off if you save some money than if you don’t. Agreed, but just Saving is losing. If you push this idea they will ask you to leave, or at least hustle you aside where other customers can’t hear you. (I know this from experience) The first secret to Wealth Accumulation is Saving, (It’s not how much you make it’s how much you keep) but just Saving loses you money? How do we accumulate wealth? By following the second secret to Wealth Accumulation. It’s not about how much you Save, it’s about how hard your Saving are working for you. Saving is important, which I definitely agree with, but it is only the first step, not the end of the road. Kevin O’Leary talks about sending his soldiers (dollars) out to capture more soldiers. Mr. O’Leary has it right. Probably why he’s wealthy. You need to send your savings out to capture more money.
Is your Saving, good for the bank. Yes it is. Banks can “LEVERAGE” their saving accounts. Again from google, Canadian Banks can leverage up to 19 times. What that means is, if you have $5,000.00 in a savings account, the bank can lend that $5000.00 out 19 times. We all know the bank charges a way higher interest rate on money they lend out, than they pay as interest on Savings. That’s called the “Spread”. Lets see how “Spread” and “Leverage” benefit the bank, and not you. I’ll use simple numbers to keep the math easy. You have $5,000.00 in a Savings Account. The Bank pays you 1% interest. That amounts to $50.00 a year. Now because of Leverage, the bank can lend out your money up to 19 times. When you borrow money from the bank, they charge you 5% interest. (Spread of 4%) So on a $5,000.00 loan they make, $250.00 in interest a year. They pay you $50.00 and make $200.00. Not a bad profit. But wait!! That is only a Leverage of 1:1. They can lend out that $5000.00 up to 19 times. That means they get the $250.00 in interest charges 19 times. ($4,750.00) When was the last time you had $5000.00 make you $4750.00 in a year??? Now you know how the big banks can make BILLIONS of dollars profit every quarter. If I could take someone else’s $5,000.00 and make up to $4,750.00 ($250.00 interest times 19 times equals $4750.00) every year, I’d be wealthy in no time.
So Saving is good for you, because you need seed money to start making INVESTMENTS that work hard for you. But your Savings are nowhere near as beneficial to you as they are to the bank. As a matter of fact, if you actually start using your savings to buy investments, say stocks for instance, that is bad for the bank, because they can’t leverage your money. Too bad we can’t get the bank to pay us the 1% interst for each time they leverage OUR Savings.
Keep Learning:
Uncle E