savings account Archives - Journey To Financial Independence

Think back to when you were a child. It is likely that you had a piggy bank of sorts. But when you were leaving home, whether for post secondary education or to join the work force, how much did you have in your savings account? For most, not a lot and a lot less than what you were given over all those years. In general, it is just too easy for parents to allow the use of money in piggy banks. But what would happen if your kid’s piggy bank was a place for money to go in but not come out? How much money will your kids have when they are ready to leave home?

Are You Serious About Piggy Banks

According to the dictionary, a piggy bank is a container for saving money in, especially one shaped like a pig, with a slit in the top through which coins are dropped. This small well known pig shaped device can have a huge impact.

Most parents dabble in teaching their kids about finance, but rarely go all the way. Meaning, parents know that it is a great idea to teach their kids to save. As such, most parents will start a piggy bank. This is typically a jar of sorts or some type of decorative holder for coins. Parents will typically put in the first dollars. Over time, in a sporadic fashion only loose change or an occasional bill goes into the piggy bank. What is for sure, is that parents typically do not have a consistent plan of putting money into their kid’s piggy bank.

Even when kids grow to an age where they are receiving allowances, parents tend to not enforce actively putting money into a savings account. It is not unusual for children to raid their bank accounts for frivolous spending needs. It is also of no surprise that our children use the entirety of their allowances without saving. This leads to an unsurprising situation when our children leave home. When they leave home, it is likely that they will have very little to nothing in their savings account. What would have happen if we begin to take the piggy bank seriously?

Enforce The Piggy Bank

A piggy bank is essentially a very local savings account. It does not earn interest (similar to your local brick and mortar bank). It is a place for your kid to put extra funds or funds marked for saving. Here is the big thing, like any other savings account, money that goes into a piggy bank should not be for frivolous spending. Money in a piggy bank is for the future.

The only time money in a piggy bank should be remove is for transfer to another bank account or in specific times of needs where withdrawal is a must. For your kids, that should be it.

The Piggy Bank – Money Goes In But Does Not Come Out

How much money did you receive for your children when they were born? How much money have you received for your child’s birthday or other holidays? Now think, how much money your child would have had in a savings account if you had saved the amounts in a piggy bank and/or transfer the funds to a high yield saving account? When your child is ready to leave your home, how much money would they have had? Could that have been a valuable head start or a security blanket for them venturing into the real world? But it is not too late to change.

The fact is, if we treat our kid’s piggy bank as a place where money goes in and not come out, both we and them would be in a better place. It would teach parents and children to not only live within their means, but to also save and spend on only what is necessary.

So many times, we have kids who want unimportant things. But how often do we have the conversation with them about delayed gratification? The fad of today will past and your money in your savings account will continue to grow for the future. How often do we tell our kids about the power of having control of their future by attaining financial independence? Maybe parents should practice this more. By having/building a financial safety net, your kids can take risk and do what they want to do in life. Share with your child that financial freedom takes sacrifice. In the end, if done correctly, a piggy bank and your conversations around it can teach all this and more.

Conclusion

Think back to when you were a child. It is likely that you had a piggy bank of sorts. But when you were leaving home, whether for post secondary education or to join the work force, how much did you have in your savings account? I can bet for most, not a lot at all. In general, it is just too easy for parents to allow the use of money in piggy banks. But what would happen if the piggy bank was a place for money to go in but not come out? By teaching your children about money and using the piggy bank to do so, you can provide your children with the tools for a financially secure future.

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Falling Interest Rates

Once interest rates are reduced, banks are typically the fastest to reduce interest rates on savings and certificates of deposit accounts. The speed of interest rate change is much slower with regard to the interest rates on loans. The reason for this is quite simple. Banks are able to make more money this way. By reducing interest rates on what has to be paid out (interest on deposit accounts), banks are paying out less to customers, while keeping the interest rates on loans high. In this case, banks are obtaining funds from the central bank at a low rate, lending the money at a high rate and paying customers at a low rate. This tactic maximizes the gains of banks.

Rising Interest Rates

On the other hand, when interest rates begin to rise, banks are the fastest to raise interest rates on specific instruments. Specifically, banks quickly raise interest rates on loans but are delayed on raising interest rates for savings and certificates of deposit accounts. Again, this is the business model. Banks obtain money from the central bank at a specific rate. Banks then charge customers on loans more than the rate a which they obtain money from the central bank and pay out less to customers for certificate of deposit and savings accounts.

The Business Model

The best business you can run is one that gains a return no matter what the economic environment. Banks are in this position. Banks have found a way to gain no matter what the economic situation. Interest rates go up, banks make a profit. Interest rates go down, banks make a profit. This dynamic is not news to anyone who tracks the industry. Banks are positioned to benefit from fatter lending margins as the central bank raises rates.

What Can Consumers Do

Consumers can also play this game to their advantage. One of the many things that consumers can do as interest rates changes is to borrow or to refinance any loans they may have when interest rates are low. Know that the market operates in cycles. Interest rates typically will rise when there is a lot of easy money and/or inflation. As the central bank attempts to restrict inflation, the central bank will increase interest rates. On the other hand, interest rates are reduced if there is a recession or too little money or economic activity. Here, the central bank tries to stimulate the economy by lowering interest rates and increasing the money supply. Consumers need to pay attention to this cycle and act accordingly.

Online Banks

To take advantage of higher interest rates, consumers can also search for online banks. Online banks typically pay interest rates that are multiples of that of the typical brick and mortar banks. But also, online banks tend to increase interest rates on deposit accounts at a faster rate and to higher levels as compared to brick and mortar banks.

Consumers should be careful when locking in interest rates on certificates of deposit. When interest rates are risings, when you lock in a rate, you may miss out as interest rates further increases.

Conclusion

Rising interest rates typically result in lower stock market returns and an increase in bank lending rates. For many savers, rising interest rates typically translates to increase interest payments on savings and certificate of deposit accounts. However, one of the most interest thing to watch when interest rates increase is the speed at which banks raise interest rates on deposit accounts. The speed of raising interest rates on deposit accounts is typically inverse to the speed at which interest rates are reduced. Why? The answer is simple. This is the business model of banks.

Play the game and put your money where you will get a better return. This is often referred to as the only free lunch in finance. Increase your returns without increasing risk.

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Journey To Financial Independence

savings account

Piggy Bank, Money Goes In But Does Not Come Out

Are You Serious About Piggy Banks

Enforce The Piggy Bank

The Piggy Bank – Money Goes In But Does Not Come Out

Conclusion

Rising Interest Rates

Falling Interest Rates

Rising Interest Rates

The Business Model

What Can Consumers Do

Online Banks

Conclusion

Video Summary

Are You Serious About Piggy Banks

Enforce The Piggy Bank

The Piggy Bank – Money Goes In But Does Not Come Out

Conclusion

Share this:

Falling Interest Rates

Rising Interest Rates

The Business Model

What Can Consumers Do

Online Banks

Conclusion

Video Summary

Share this: