Have you ever wondered how banks make money? Well, stick around to the end of this blog post because we’re going to go over the velocity of banking and why it’s vital to control the finance function in your life.
When it comes to banking, there are three main characters to consider:
- The Depositors, who save their money at the bank
- The Borrowers, who need access to money and are willing to pay a premium
- The Bank, who connects the two
So the temptation is to say, okay, the depositor gets 1%, the borrower pays 4% on a loan, and the bank gets to keep the 3% in the middle. That oversimplifies and ignores velocity banking. Fortunately, there’s a company, Bauer Financial, that does financial reports on banks. Bauer financial reports will show you exactly how velocity banking, or turning the money over, makes huge profits for the bank.
So, here’s an example of a Bauer financial report from 2016 for Bank of America. Bank of America had $860 billion of deposits for which they paid the depositor $1.9 billion in interest to attract those deposits. Now, the borrowers of Bank of America paid Bank of America $44.8 billion in interest. This came from credit cards, mortgages, home equity lines, fees, and business and personal loans. So, if you look at the ratio of interest paid by the bank, 1.9 billion, versus interest paid by the borrower to the bank, 44.8 billion, that’s a 23.5 to 1 ratio.
That’s 2,350% more being earned by the bank than is being earned by the depositor. But here’s the kicker. They’re using the depositors’ money to make their money. The bank has zero skin in the game.
So, this just illustrates how powerful velocity banking is and illustrates perfectly why Nelson Nash’s fourth rule, Never Rely on Banks, Especially For Lending Money is so important.
Nelson knew the importance of pulling yourself away from the banking system because they control you. And when you control the financing function in your life, now you are in control. And more importantly, you’re no longer controlled by the banks.
The best way we know how to put this to work for us is with a specially designed, whole life insurance policy designed for cash accumulation, so that you could capitalize your own money and borrow against it and pay yourself back. Not only will you earn the interest in the policy like the depositor in the bank, but if you charge yourself more than what the insurance company is charging you, you also get to keep those profits. And again, you’re in control of the process and you get both sides of the street.
We always preach about being in control of your cash flow, and if you’re looking to get started with implementing this process in your life, be sure to visit our website at tiercapital.com to get started today. Feel free to schedule your free strategy session to get on our calendar or check out our free web course where we go through a deep dive on how we put this process to work for our clients.
And remember, it’s not how much money you make, it’s how much money you keep that really matters.