We count on banks to keep our money safe, but that's not really what they're best at. The financial sector has doubled as a portion of the economy in recent decades, and that's not because they're so good at putting your needs first. It's their job to put your money to work for themselves, and if you aren't careful, they will do everything short of turning you upside down to catch the change that falls out of your pockets. Here are six ways that your bank can turn your money into theirs.
Anyone who's worked in retail or fast food should be familiar with the upsell. "You shoud really get the warranty for that." "The large is only 89 cents more." "Sure, eight inches is probably enough... but with the 10-inch you know you won't be disappointed." But banks have taken that game to the next level. All you have to do is upgrade to a deluxe savings account and you can get compound interest, a the platinum credit card with a higher limit, and a free toaster. Just read this 30-page contract which lays out that the credit card interest doubles after 30 days, but as long as you always keep your account balance above $1,435, and do five PIN transactions and seven signature transactions each month, and never make a withdrawal on a Tuesday, you'll never be hit with any massive...
Do you want to use an ATM for a different bank? That different bank is going to charge you a fee, but guess what? So is your bank. Why? Because they can. Were you not ready for that? Maybe you're cutting it close before your next paycheck? Well now you've earned yourself an overdraft fee, which is to say that you ran out of money, so your bank is going to charge you $35. Unless you also use that card to buy a pack of gum. Then it's another $35. Your monthly Netflix charge comes through the same night? That's another $35. Some rich asshole actually cashes the 13-cent check that you wrote as a joke? $35. Good luck hanging onto your paycheck with all these fees racking up! With very few limits on banking fees, is it any wonder they've been shooting through the roof?
The Wells Fargo fake account scandal became huge news when it was revealed that their sales staff was being pressured to meet quotas that basically guaranteed they would be adding accounts for customers that didn't want them. But Wells Fargo was caught, they paid the fines, and they launched a tone deaf apology campaign. So, story's over, right? Not quite. Turns out that if banks can do some sneaky fraud and not get caught, they absolutely will. Wells Fargo is not the only culprit. You could have fake extra accounts feeding off your real one right now.
If you were a bank, and you didn't want to limit yourself to making loans only to customers who could afford to pay those loans back, what would you do? If you answered, "Give out predatory 'subprime' loans with surprise balloon rates," congratulations! You just triggered the 2008 Housing Crash. And if you thought that banks would have learned their lesson, you obviously don't know that they've been doing the exact same thing with car loans. And now car loans are going into default at record rates. Which is a great sign of things to come...
Bailouts and Subsidies
Well, at least if the banks set us up for another financial crisis, they'll face the consequences, right? Hahahaha! Good one. The great thing about the growth and consolidation of the banking industry is how many banks are now "too big to fail." And they have such powerful lobbies that regulation is not even on the table. The result is that banks can use your money to be as reckless and risky as they want, and if anything goes wrong, they can count on tax payer money to come to the rescue. And on top of that, they also get some annual government subsidies, just for being who they are. Cool.
If you thought it was only customers and tax payers who were getting ripped off by the banks, you thought wrong. Even the bank employees are getting their pockets picked in the form of wage theft. Banks are some of the worst culprits in terms of withholding overtime pay.
So the next time your bank is ripping you off and you call to complain, remember not to direct your rage at the employee on the other end of that call. Just take a deep breath, close your account, then pull up a floorboard to squirrel away your cash.
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When you take out a loan for a car, charge something to your credit card, or get a personal line of credit, there is going to be an interest rate that applies to your loan.
A lot of different factors go into what you will be charged, including your own personal credit score. But even those with flawless credit still see a minimum charge that they can't get around. That all goes back to the Federal Funds Rate.
One thing consumers rarely realize is that all of our banks are lending money to each other every night. Banks are legally required to maintain a certain percentage of their deposits in non-interest-bearing accounts at the Federal Reserve to ensure they have enough money to cover any withdrawals that may unexpectedly come up. However, deposits can fluctuate and it's very common for some banks to exceed the requirement on certain days while some fall short. In cases like this, banks actually lend each other money to ensure they meet the minimum balance. It's a bit hard to imagine these multibillion-dollar financial institutions needing to borrow money to tide them over for a bit, but it happens every single night at the Federal Reserve. It's also a nice deal for those with balances above the reserve balance requirement to earn a bit of money with cash that would normally just be sitting there.
The Federal Reserve
The exact interest rate the banks will charge each other is a matter of negotiation between them, but the Federal Open Market Committee (FOMC) (the arm of the Federal Reserve that sets monetary policy) meets eight times a year to set a target rate. They evaluate a multitude of economic indicators including unemployment, inflation, and consumer confidence to decide the best rate to keep the country in business. The weighted average of all interest rates across these interbank loans is the effective federal funds rate.
This rate has a huge impact on the economy overall as well as your personal finances. The federal funds rate is essentially the cheapest money available to a bank and that feeds into all of the other loans they make. Banks will add a slight upcharge to the rate set by the Fed to determine what is the lowest interest that they will announce for their most creditworthy customers, also known as the prime rate. If you have a variable interest rate loan (very common with credit cards and some student loans), it's likely that the interest rate you pay is a set percentage on top of that prime rate that your lender is paying. That's why in times of low interest rates (it was set at 0% during the Great Recession), a lot of borrowers should go for fixed interest rate loans that won't increase. However, if the federal funds rate was relatively high (it went up to 20% in the early 1980's), a variable interest rate loan may be a better decision as you would be charged less interest should the rate drop without the need to refinance.
The federal funds rate also has a major impact on your investment portfolio. The stock market reacts very strongly to any changes in interest rates from the Federal Reserve, as a lower rate makes it cheaper for companies to borrow and reinvest while a higher rate may restrict capital and slow short-term growth. If you have a significant portion of your investments in equities, a small change in the federal funds rate can have a large impact on your net worth.
Whether you're leaving a job involuntarily, departing for something new, or just want to prepare for the unknown, it is smart to understand all your options regarding your 401k.
Frugal gifting often gets a bad reputation. However, this shopping method does not make you cheap — it makes you practical. Frugal gifts often avoid waste and overspending and can be just as meaningful (if not more so) as any other present.
With the National Retail Federation predicting each consumer this holiday season to spend upwards of $1,000 on holiday gifts amidst an economic recession —this year might be the perfect time to reconsider your spending budget. We've formulated the ultimate list of frugal gift-giving ideas to get you started.