Teach clients and prospects why "money in the bank" doesn’t mean what it used to
By Dave Scranton
Banks and money markets aren’t much better today than the only other investment choice that offers both complete safety and liquidity: your mattress.
Chances are you’ve used this old saying yourself: “It’s like money in the bank!”
Of course, the expression is used to describe something reliable: a thing you can depend on. Though the metaphor is still used, I make sure clients and prospects understand that it isn’t nearly as appropriate as it used to be.
I couldn’t help thinking that very thing when I saw the results of a recent survey of more than 100 banks showing that checking account fees, pretty much across the board, have increased steadily in the first half of 2012.
It’s no secret that banks are already a poor choice right now for any money you’re interested in growing. In fact, banks and money markets aren’t much better today than the only other investment choice that offers both complete safety and liquidity: your mattress. With most accounts earning near-zero in interest, safety and liquidity are really the only attributes banks can boast about. Your money’s not really working for you in a bank, but you can get to it if you need it, and you know you’re not going to lose it.
On the other hand, are you, in fact, actually losing money when you’ve got it in a bank today — essentially paying the bank to hold it for you? Maybe not on purpose, but when you consider not only bank fees but some other realities about today’s economy, under the right conditions, it might actually be happening.
I tell clients and prospects to think of it this way: Would you pay $125 a month for a checking account fee? Of course not; no one would — and, in fact, according to that recent report, monthly service fees are averaging about $12.08 per month. While that’s up almost a dollar since the end of 2011, it’s nowhere near $125. So where do I get that figure?
Well, let’s say you have $100,000 sitting in an account and earning (if you’re lucky) $2,000 in interest over the course of a year. Odds are, the bank will tell you you’re not being charged any fee on that account because it’s well over the minimum requirement to avoid service fees. Uncle Sam, on the other hand, will charge you something on that earned interest, probably taking it down to about $1,500 or less, depending on your tax bracket.
That may not sound too bad, but here’s the thing many people forget about: inflation. Most estimates of inflation over time are at least 3 percent. So your $100,000 balance is actually losing $3,000 per year of buying power. The net result is an economic annual loss of $1,500 — or a monthly loss of $125. So, I tell clients, even if you don’t think rising bank fees will impact you directly, be aware that the dichotomy between low interest rates and inflation already does. You may not think of it as a “fee,” but it boils down to the same thing. And while it’s logical to assume interest rates are going to have to go back up again eventually, I always tell people to remember Japan: they’ve been in a near-zero interest rate environment for some 20 years now, and still their recession lumbers on.
Most people understand that keeping interest rates near zero is the government’s primary strategy to encourage borrowing and stimulate the economy. While it seems logical, when overused it can amount to little more than a “caffeine fix” — an artificial jolt that becomes increasingly less effective. We’ve been in a low-interest rate environment in the U.S. now since 2008, and so far the tactic has done little to stimulate anything — nor have two quantitative easing packages (QE1 and 2), or so-called “Operation Twist.” Meanwhile, inflation has remained consistent. The result is that, in many ways, we’ve actually been moving backwards economically — just like that bank account that’s losing buying power more quickly than it’s gaining interest.
So are the days of actually growing your money in a bank gone for good? Who knows, but they may not be coming back any time soon, and the recent news about rising bank fees is just one more indication that the old saying “like money in the bank” doesn’t mean quite what it used to.
At the very least, I make sure clients and prospects understand that anyone interested in protecting and growing their money these days needs to look at other options. Fortunately, I assure them, those options do exist.