Last week, the markets were essentially flat, with the year off to a strong start, with the S&P 500 reaching 7,000 for the first time. Kevin Warsh was nominated as the next chairman of the Federal Reserve Bank Board of Governors and should replace Jerome Powell when his term ends in May. Warsh is known for his previous term as a bank governor, believing the Fed needs to reduce its bond holdings while holding interest rates steady.
While the Federal Reserve Bank exists to direct monetary policy, your local bank exists to turn a profit. How do they do that? A bank lends out the money you deposit, and charges interest. It may pay you interest on your deposits, depending on the type of the account. And it also charges fees for low balances, late payments, overdrafts, ATM usage, and even making too many transfers in a set period.
So how do you make sure your banking is working for you, and not the bank? First, be sure you are in the right type of account. Many banks offer free checking accounts if you meet certain requirements. If you’re being charged a monthly fee for your checking account, you can either change banks or ask your current bank if they have other options, and see if overdraft protection is available to prevent fees and non-sufficient funds charges, which can add up quickly.
The same applies to your savings account. The average savings account in the United States is currently paying about 0.6%. But switching to a high-yield savings account can increase that to 3% or more.
Credit cards are another great source of revenue for banks. With the average credit card charging over 20% interest, banks have a reason to encourage you to spend on those cards and carry a balance. Credit cards can be convenient and offer protection against fraud and theft. Depending on your card, you may also receive cash back, gift certificates, or rewards for travel. If you travel frequently, higher-end cards may offer travel perks like frequent traveler status upgrades and airport lounge access.
I’ll be the first to admit that I love my points and the travel perks I receive. But if you carry a balance, you are paying dearly for those perks and rewards. Think of it this way: you’re paying over 20% for a 1-2% reward or cash back. If you are in debt, the very first thing you should do is stop spending on your credit cards. Our brains don’t see credit cards as real money, making it easier to overspend, and we rationalize the spending, thinking of points or bonus offers. Again, you are being paid 1 to 2 percent to use the card, while paying the bank over 20% to use the card. Banks have a strong incentive to encourage you to use your card. Use your debit card or pay cash for things until you have your cards fully paid off, and then only charge what you can pay in full each month.
Your action item this week is to change the filter in your HVAC unit. Dirty filters make your system work harder, and it’s working hard enough in this weather.
Check out our website and Facebook page for more information and for our educational events, like our upcoming webinar on February 9th discussing long-term investing.
CovingtonAlsina is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.