Who would pay the bank to store their money?
That’s the thought that first crossed my mind when I heard that interest rates are actually negative in some parts of Europe. They’re paying the banks to store their money!
I was in a conversation with a friend who is evidently more on top of these things than I am. We were chatting about money management and investments, given the current super low interest rates. The conversation was prompted by last month’s drop in the prime lending rate, and the resulting drop in mortgage rates. Some predictions are that rates will drop even further in the next year.
But negative interest rates? Hard to fathom!
Until you start thinking about it. Like I, you’ve probably heard ads recently for the “great rate of 2% on your savings account (some conditions apply). Of course, if you didn’t meet the conditions the rates would be lower. Did you know that if you grabbed “a great 2% interest rate” on your savings account at the bank you were paying them to store your money?
Let’s do a little math: Let’s say you invested $1000 dollars in the bank for one year (I think that’s what the fine print said, but the minimum might have been as high as $10,000.) After one year, that $1000 would have turned into $1020. But, what about inflation? Last year’s annual average inflation rate in Canada was 1.91%. So you would have needed that $1000 to be worth $1019.10 just to break even. Your “great rate of 2%” would have actually gotten you ahead by a grand total of $0.90. I think I’d have paid the extra ninety cents at the beginning and enjoyed my new TV for a year longer.
But wait a minute! Did you pay any bank fees during that one year? Were they more than $.90 over the year? Heck yeah, you say, they were more than $.90 per month!
So why do people pay banks to store their money?
Sadly, the only answer I can think of is, “Because they don’t know any better.” Our education system has taught us almost nothing about money, money management and investments. Many have no idea that there are many other options than paying the bank to store your money.
That’s why it is becoming increasingly necessary for everyone to understand how money works and how to manage it. Long gone are the days when we could simply entrust that part of our well-being to someone else and expect to get ahead. Especially since the 2007-2008 melt-down has it become important for people to take control of their own financial management. Some say the financial world shifted forever in ’07-’08; some say it was just a prelude to the bigger one coming soon.
Happily, there are many new initiatives popping up outside of the formal education system to provide financial education. Yes, most of them cost some money, but implementing the new knowledge will presumably get your investment in the educational program back pretty quickly. And even free ones that come around quite frequently provide plenty of valuable info.
It’s RRSP season. I would think twice about giving the bank my money to get a “great rate of return,” especially if they want to lend me the money, at a non-negative interest rate, to put into that RRSP.
If I paid the banks to store my money, I should at least get a tax-deductible charitable donation receipt, don’t you think?
Rent 2 Own tip:
You can get a rough idea of the maximum value of a home you can afford by multiplying your gross annual income by 4.5 times.
Quote of the Week:
The best way to rob a bank is to own one. – William Crawford, Commissioner of California Department of Savings and Loans (as quoted in The Conspiracy of the Rich)