Tag: Bank Fees

If you only do one thing in 2023…

Those of you who’ve been around here for a little while know how much I hate paying bank fees. However, if you’re new around here, then welcome! Here’s my free advice to you – use it as you see fit. If you only do one thing in 2023 to make your financial life better, consider moving to online banking.

Paying a bank to use your own money makes little, if any, sense to me. It’s a great move for shareholders since it’s a continuous revenue stream which boost bank profits. Most people don’t hold shares in banks, so they’re not reaping those particular rewards. As a consumer, bank fees are an easily avoidable financial nuisance. They’ll run you atleast $100 per year. Ask yourself if there’s anything else in the entire world that you would rather pay for than bank fees. And if bank fees are still at the top of your list, then please continue to pay them and come back next week for more of my bon mots.

The Expensive Banks are plucking you.

I don’t much like being the bearer of bad news, but here I go. You are the golden goose. The Expensive Banks are plucking your money feathers, every single month. Money goes into your chequing account and they reach in, with your permission & consent, to take some out every single month. These were the terms when you opened the account. Good for the Expensive Banks, not so good for you.

At the time of this blog post, the major banks in Canada all offer unlimited banking for various monthly fees:

I’m forced to acknowledge that some of these banks will waive their monthly fee if you’re willing to leave $4000 sitting in your chequing account, earning no interest. In short, you have to leave several thousand dollars in your chequing account in order to avoid paying the monthly fee. I’ve always hated this requirement. In my personal opinion, I don’t think you should have to ransom several thousand dollars in order to keep your money.

Also, the monthly fees go down so long as you don’t go over a pre-determined numbers of transactions per month. For most of these banks, that number is 25 transactions per month. If you do more than 25 transactions, then you’ll pay a fee for each additional transaction.

To recap, the Expensive Banks allow you to pay them a couple of hundred dollars per year. For the low price of a couple of tanks of gas, you can have 25 debits, utility payments, e-transfers and/or ATM withdrawals. Should you need more than 25 transactions per month, you can pay for a more expensive bank account or you can get dinged atleast $1.25 for each transaction over the limit.

What if I were to tell you that there is a way for you to have unlimited debits, utility payments, e-transfer and ATM withdrawals without depriving yourself of access to several thousand dollars?

You have options, and you should choose to use them.

If you only do one thing in 2023 to make your personal finances better, please let it be doing some investigation into the following online bank accounts.

At the time of this post, two banks offer chequing accounts with unlimited transactions with no minimum balances required to have monthly fees waived. You can set up direct deposit with these accounts, just like you can with the expensive banks. These are great products! Why pay fees if you don’t need to? Unless it is your dream to pay bank fees, why not put that money towards making your actual dreams come true?

I’ll admit that online banks don’t have great interest rates. So what? None of the banks offer great rates on their chequing accounts! Besides, the truth of the matter is that your emergency funds should be in EQ Bank, where they will earn atleast 2.5%. Money for your retirement should be invested in well-diversified equity exchange traded funds (ETFs) so that they can benefit from the stock market’s long-term average growth, which is well above whatever rate your bank is giving you.

In case no one has ever told you this, you should not be keeping your emergency funds or your retirement money in your chequing account. Your chequing account is for daily transactions: debit payments, utility payments, debt payments and rent/mortgage payments. Money that is not needed for daily living should be in your emergency fund and in your retirement accounts, never in your chequing account.

Cease paying bank fees, unless you really enjoy doing so.

There’s no getting around the fact that you probably need a bank account. However, I’ve yet to hear a good, persuasive reason for why you should be paying several hundred dollars each year for the privilege of having one. There are equally good options available to you and they are free. Why do you want to pay for something when you can get the same thing for free?

Setting up a new online bank account is not hard. It doesn’t take an exceedingly long time either. You can probably do it on your phone. There are 365 days in 2023. If you only do one thing in 2023 to save money, find some time to save yourself a couple of hundred dollars.

And if you’re absolutely 100% committed to paying bank fees, then atleast buy yourself some shares in the banks so that you can recoup some of your fees in the form of dividends!

Full disclosure: I bank with both Simplii Financial and Tangerine. My accounts have been open for years, and they’ve served me well. If you open an account at Simplii Financial, please use my referral code: https://mbsy.co/6qqBSr We will both get paid money if you do.

HAPPY NEW YEAR!!!

Banks are not evil – they’re simply a tool.

Truth be told, it took me a very long time to realize that banks are a tool that will help me achieve my personal finance goals. Every three months, the Big Banks release their earnings. More often than not, those earnings are in the billions, if not the hundreds of millions. And people start frothing with anger at the size of those quarterly earnings. Ink is spilled all over the Internet about how banks are evil and their earnings are obscene.

Two days later, the angry mob has moved on to some other topic upon which to unleash their rage. The banks go back to the business of earning more money so they can hit their next quarterly target.

And I wonder to myself if any one person in the mob realized that banks are a tool?

How banks make money

First off, I want to be very clear that I’m not an expert on the banking industry. I’m just an online citizen who has watched banks operate for the past 35+ years. I even used to work as a bank teller, which was an incredibly educational experience. However, being a bank teller and being a banking expert are two wildly different things.

I’ll share with you what I know.

Banks take money from depositors then lend it to borrowers to earn money. This is the heart of banking. Everything else is a detail.

Depositors have bank accounts and they expect to earn interest on their deposits. As we all know, most bank accounts pay less than 1% interest. Every so often, an online account has a higher rate but it’s usually not anything to get overly excited about.

Banks lend money to people at rates that are higher than what they pay to their depositors. See, from the bank’s perspective, the 1% interest rate is a liability because the bank owes money to someone. Money that’s lent out to borrowers is an asset because it’s going to earn money for the bank.

If the bank owes Depositor 1% per year on a $10,000 bank account, then the bank has a $100 liability since it has to find a way to pay $100 to Depositor in a year’s time. How does the bank do that?

Easy. The bank takes the Depositor’s money – $10,000 – and loans it to Borrower at a rate of 5%. Borrower has promised to repay the bank $500 in a year’s time, because 5% of $10,000 is $500. The Borrower’s $500 debt is the bank’s asset.

The bank collects $500 from Borrower, and pays $100 to Depositor. The bank keeps the $400 spread for itself. Now, I’m sure there are expenses that go along with running a bank, procuring loans, administration of bank accounts, and staffing costs. Whatever is left after paying those expenses is the bank’s profit.

Banks are good at making profits.

Understanding the spread between what is owed to depositors and what is earned from borrowers is what keeps banks profitable.

So how do you turn this to your advantage?

It’s very simple, Gentle Reader. Banks are a tool for you as soon as you buy your first bank share.

Remember how I said that bank earnings are reported quarterly? One of the best features of banks is that they pay dividends to their shareholders. The more bank shares you own, the more dividends you’ll receive.

I used to get irate over bank fees. How dare the bank charge me for using my money? The little vein in my temple would visibly throb if ever I saw so much as a $1 taken from my account to cover an ATM withdrawal, or for anything else.

Eventually, this financial annoyance was removed from my life through 2 actions that I took. First, I opened bank accounts with institutions that did not charge bank fees for daily banking. I was no longer paying bank fees every month. Secondly, I started earning money from everyone else who chose to continue paying bank fees. I bought shares in banks and cashed the dividend cheques every quarter.

I can confidently say that the idea of bank fees no longer enrages me. Even if I do mess up and bounce a cheque, I might have to pay the $35 NSF fee. However, I know that I’ll be getting my money back in a few weeks’ time via my next dividend payment. That fee is a nuisance, but hardly a reason for me to get upset.

Banks are necessary.

I firmly believe that everyone needs atleast two bank accounts – a chequing account and a savings account. The chequing account is for your day to day money. It’s for receiving your paycheque, buying your groceries, paying utilities bills, and the expenses of day-to-day life. Your savings account is for your emergency fund. It’s meant to be a liquid pool of funds that can cover 6-12 months of your monthly expenses. Some people argue that an emergency fund can be 3 months of expenses. I’m a big believer in the idea that more money is better when an emergency strikes so it can’t hurt to have more than the minimum.

Banks are not evil, in and of themselves. Used properly, they facilitate the transfer of money into your investment account. You know that I’m a huge fan of automatic transfers. I’m a proponent of paying yourself first. A portion of every paycheque should be sent to your investment account, so that it can start working to ensure the Future You has a financially comfortable lifestyle.

For my part, I have several bank accounts. And all of them are designated for a specific purpose. Some accounts hold money for my annual travel. (Even during the pandemic, I’ve socked away a few coins for the eventual day when I feel comfortable enough sharing a plane with others.) Other accounts hold money for my annual insurance premiums and property taxes. I have an account for little luxuries like my theatre subscription to Broadway Across Canada. There’s also an account for maintenance and repairs to my home.

Again, banks are a tool – they’re not evil. Learn to use them properly and you’ll find that they offer many great methods for handling your money. Better yet, become a shareholder and receive a slice of their profits every three months. I’ve no doubt you’ll enjoy the feeling of the banks paying you instead of the other way around!