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Traditional Banks - Friend or Foe?

To many people, the question in the title might seem like a no-brainer. They would say of course banks have your best interest in mind. They offer a place to deposit money for the future as well as a place to deposit your money for everyday uses. If the need arises, they will also loan you money for both minor and major purchases. This all sounds great, and I am not going to downplay the services that they provide. Whether it is a bank that has physical locations or a bank that only exists online, historically they have provided a necessary service.

Through the years though, the relationship between the bank and customer has become quite a bit more one-sided. Today customers really need to pay attention to what they are being paid for depositing their money into a bank account vs what they are expected to pay in fees and interest on credit cards or loans. Who really benefits the most from the relationship? When you consider what a bank pays you to store money in one of their accounts vs what you pay them to borrow money or to use one of their credit cards, the relationship seems very lopsided. Just a quick look at the two tables below makes it very clear, you are paid a small fraction compared to what banks expect you to pay them.

The following interest rate tables are from Bankrate.

I didn't include a table for credit card rates, but they range from about 10% to 25% so they are in the same ballpark as a personal loan.

There was a time when a person could just deposit money into a savings account and receive a decent amount of interest, enough to at least keep up with inflation. There were even times when you could collect enough interest on a savings account or CD to grow your balance over time, sadly, those times are long gone. Today, with the loss of buying power that the US dollar experiences every year it makes no sense to keep money in a savings account or CD. Many people still do it but what they do not understand is that the value of their savings is shrinking every year.

Historical CD Interest Rates 1984 to 2021

Unfortunately, a side effect of this lopsided relationship is that it is forcing anyone wanting to grow their savings into riskier investments. People who wouldn’t normally invest and many who have never invested or traded a day in their life have opened brokerage accounts and started investing or trading in the stock market. We have also seen many retail investors move into the crypto space as well, especially over the last 12 months. They are doing this because there really isn’t anywhere else that they can deposit their money and hope to at least keep up with inflation. I am speaking from experience; I have also turned to the stock market and crypto market to grow my savings. I have no interest in depositing my money into a savings account and accept being paid maybe 1% if I am lucky.

Before continuing I want to say the worst thing that you can do is just jump into investing or trading your own money without first educating yourself. Anyone who blindly jumps into investing or trading is setting themselves up for failure. The more time you invest in yourself, educating yourself, the better your experience will be and the higher the probability that you will be successful.

Okay, I admit, so far this article must sound a bit hopeless but don’t give up just yet, there is hope on the horizon with a new technology called decentralized finance, or DeFi for short.

Check out my next article where I will explain what DeFi is and how it may provide us with a valuable option to the traditional banking system.

Take care!


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