Most Americans have their money in "bank accounts", but what people don't know is that those bank accounts are actually investment accounts, that in the investment world, are called "Cash Equivalents". Two such accounts that most people are familiar with are checking accounts and savings accounts. Other Cash Equivalents are Certificates of Deposits (CDs), Savings Bonds, Money Market Accounts, and Treasury Bills. Cash Equivalents are low risk, low return and the generally offer liquid assets, meaning you have pretty much immediate access to your money. I decided to jump into Bank of America's web site to see what Cash Equivalent Accounts they had to offer. Under "Savings" on their site I found that customers have a choice between three different accounts. In order to qualify for an account with a return of .03%, a Bank of America customer would have to deposit a minimum of $2,500. Another option has no minimum and only provides a .01% return. Under CDs, they also offer 3 choices. The largest return of .07% would require a deposit of $10,000 invested for a minimum of 12 months. The last thing that I wanted to look at was IRAs. A IRA in and of itself is NOT an investment, but rather how the IRS classifies a particular investment. Bank of America offers several IRAs. The most lucrative is a standard term IRA that pays between .03% and .15%. To qualify for the .15% a person would have to invest a minimum of $1,000 for 48 to 59 months. As I explored the Bank of America investment options, I found that if a client had $1,000,000 to invest, they could earn .2% in something that they call an Analyzed Business Account (honestly, I have no idea what that is).
The question then becomes, what does all of it mean? Why is it relevant? Well, to determine how long it would take to double your money at a particular rate, we use something called the Rule of 72. With the Rule of 72, you divide the number 72 by the interest rate that you will receive (or are receiving), and the answer will be the amount of years it will take to double your initial investment. At .02% it would take 3600 years to double the investment! Upon further digging on Bank of America's site, I found that they charge between 10.99% and 22.9% on their top 3 credit cards. Their best current rate for mortgages are 3.85%. Their car loans START at 2.49%. So, how do bank's fare in their "investments"? On a car loan, at 2.49%, using the Rule of 72, they double their investment in 28 years. Home mortgages take about 17 years to double their investment, which means that banks double their investment twice during the term of most mortgages. People with good credit double the bank's investment every 6 years and people with not so good credit double the bank's investment every 3 years with the rates that are charged on credit cards!
What it all means, is it would take GENERATIONS to double your money in a "bank account", but the bank gets double their money on a credit card every 3 years! By now you should be understanding why the wealthy do not use banks to hold their money. A bank is good for keeping working capital, the money you need to use to pay the bills and other immediate expenses, but there are better options for everything else (including your emergency fund). A good financial adviser, accountant, or debt reduction specialist will be able to help advise you on what the best use of your extra funds are, and how to make the most back on them. The bank is making money by lending the funds that you are keeping in the bank to other people, and charging a hundred times the interest than what they offer you in return. It is time that us little guys (and gals) start "bucking the system" and making smart financial decisions with our money!