“Financial experts” are out there telling you to max out your 401k, get a 30 year mortgage or pay off those high interest credit cards. Then, magically you will be set. Wrong! When you look around, who is actually making money? Who does maxing out your 401k, paying 30 years on a mortgage or paying off your credit cards (on someone else’s terms) benefit? It’s a bank or some other “bank like” institution. Why can’t you make money like a bank? You can and I will share some of my tips with you.
Disclaimer – this article is not intended to provide financial advice. Spend time understanding your financial situation before employing any of these tactics. Money involves risks and I don’t have them all figured out. This article covers more advanced financial topics. Struggling to balance your budget? Check out our article on paycheck shifting to stop living paycheck to paycheck.
How do banks make money?
The first subject we need to tackle is how banks make money. The biggest lesson you can take away is to “manage the float.” Banks and companies alike are considered effective in managing their business when they manage cash flow. Banks accomplish this by managing what is called the float. The float is simply difference between when you have to pay something (cash out) and when you are paid (cash in).
The float is most likely where the old adage came from “it takes money to make money.” Literally, banks make money by having money…usually yours.
You’ve experienced this when you make a payment and your “balance available” immediately drops. Ever notice when checking the bill over the next couple of days that you still owe a balance? The float. Are you able to see your pay stub 1-3 days before you see money in your account? The float. Banks use this time to make money off of your money. While your balance is pending, banks lend this money out to other parties to earn a little off the top.
The banks say this is to reduce instances of fraud and there is a federal process of clearing that takes time. Some of this is true, but ask yourself, why is it necessary to “prevent fraud” on a paycheck received every two weeks? Some new institutions are capitalizing on this and providing access to your money (they already have) before paydays.
Other ways banks make money include:
- charging fees (banking, servicing, overdrafts, etc.) – basically for you allowing them the pleasure of holding your money, they charge for that
- interest on loans which is the primary way banks are funded (mortgages, personal lines of credit, etc.)
- commissions on selling you stuff (other banks and institutions sharing your money amongst themselves when you sign up for something)
- lending to other banks (same as lending to you, but generally lower interest rates)
The float is our primary focus and a fairly straightforward concept. It will require significant discipline and a game plan to implement on your own budget, but you can use it make money like a bank.
How to start profiting like a bank and earn more money on your money
So how do you begin taking advantage of the float and make money like a bank? First and foremost, understand your cash inflows and outflows. This involves, among other things, making sure you have a budget and you are following it. Again, while the float is a rather simple concept, putting it into practice with a busted budget can lead to serious financial pain.
Assuming you have your budget set and you have the flexibility to manage when and how you pay for things and/or receive money then here are some ideas to make money like a bank:
- Use a credit union where possible – do your research and find a local and well funded credit union. Whoa! You just said we were going to make money like the banks and the first thing you say is get a new bank account? Why? Well, I will tell you, credit unions are non-profit entities. Credit unions still make money like traditional banks, but less so on fees and commissions and more so on loans. Any “profit” the credit union makes is used to pay it members or offset the costs traditionally seen at a bank. Find one paying you to use your money with high interest checking. There are usually rules on how to earn the higher interest, but I have successfully earned more than 2% on my money just for using it.
- Take advantage of sign-up bonuses – again, if your financial house is in order, look for new account bonuses including credit cards. The biggest payday you will get from banks comes in the form of sign-up rewards. So long as your benefits exceed any fees and you are paying off credit cards monthly there is money to be made. Use rewards with high yield checking and amp up your earnings. Personal float can be managed by paying everything with a cash back credit card (delay cash out). At the same time earn money on your checking account until you have to make a payment on the credit card. Doing this can take a 1-2% cash back or interest rate and double it. Add-in rotating bonus categories and you should bring home no less than 2% of your take home pay in extra cash.
- Become a lender and/or a property owner – It is impossible to generate wealth if you are always working for your money. You are working for your money everyday you are paying interest to someone else. Counter to nearly every other financial article you will read while you owe money (even mortgages), you are not building wealth. Look for ways to earn money through real estate and crowdfunding. Some ways I have found to be successful include: vacation homes, long-term rental properties, REITs, social platforms raising money for commercial and residential real-estate, and even renting out swimming pools. Your goal is to offset any expenses (including maintenance, debt, property taxes, cleaning etc.). Cover your expenses, generate cash flow and you are on your way to making money like a bank.
Other Considerations
Note about mortgages: nearly every financial advisor considers mortgages good debt. They say, “you get a tax break,” “your property will appreciate” and “you earn more investing.” In all cases, those benefits are accruing to other parties.
Tax breaks arise because you paid interest to a bank, the property appreciation is usually eaten up by the interest you paid (side note: never think of your primary home as an investment) and earning more on investments accrues higher fees to your advisor. The people telling you investments can earn more money all have disclaimers stating they will not and cannot guarantee “better” returns.
Everyone needs a place to live and most (including me) have to do it with a mortgage. However, it doesn’t take much to realize it is not always a financial benefit. Banks are creating money by holding yours. They lend out your savings to someone else who pays them 3-25% interest. If you are lucky, they pay you a miniscule portion of interest back while pocketing the difference.
Summary
The best way to make money like a bank is to delay paying what you owe (without missing payment deadlines or incurring interest) while getting people to pay you faster. Managing the float is next level financial mastery.
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