To illustrate two major pitfalls that many middle-class people are probably unaware of, Chan drew on his experience working on Wall Street and on some insider information about how banks typically manage their customers’ money.
He started the video with a quote from Henry Ford: “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
That’s a pretty intense statement; but, after learning about the way banks can take advantage of their patrons, you might agree.
If you have a savings account with a large, well-known national bank, there’s a good chance you’re getting a really, really low interest rate. Chan cited the 0.1% figure, but the national average is around 0.45% , according to other sources.
If you kept $10,000 in a typical savings account, you would earn between $1 and $4.50 each year. At the same time, Chan pointed out that banks lend this money out at rates that range anywhere from 6% to over 30%, depending on the borrower’s credit rating, the term of the loan and other factors.
If you’re keeping your money in a typical low-interest savings account, it’s not working for you. It’s working for the bank. Worse still, you’re actually losing money. The inflation rate is currently over 3%, which means the value of your money is eroding at a rate of 2.99% to 2.55%.
Chan offered a good solution: high-yield savings accounts . These kinds of accounts, typically offered by online-only banks, pay interest rates above 5%. Using that $10,000 example above, instead of earning something that may not even buy you a latte, you would be earning over $500 in interest every year. It can add up quickly, especially if you leverage compound interest by keeping your savings intact or adding to it every year.
Money Trap No. 2: Not Understanding How To Leverage Debt
Most people have a pretty straightforward relationship with debt. They might have a basic grasp of the concepts of good debt, such as student loans, and bad debt, like high-interest rate credit card balances you carry from month to month. The truth is a bit more complex than that.
While there can be both good and bad debt, Chan pointed out that it’s important to really understand what these terms mean and how to distinguish between them. Not all student loan debt is good debt, for instance.
If you go into debt to earn a degree in a profession that won’t pay enough to easily cover your student loans, that’s not good debt, Chan said. If you’re so cash strapped that you can’t save for emergencies or have no money left to invest, you’re both exposed to risks and missing out on opportunities.
At the same time, not all credit card debt is bad, Chan said. Using credit cards for benefits such as purchase protection, cash back or frequent flyer miles can be an excellent way to leverage this kind of debt to your advantage.
How To Beat This Money Trap
The key here is understanding how you can make different kinds of debt work for you and choosing wisely when borrowing. Taking on considerable student loan debt might be wise if you’re striving for a degree in a lucrative field, Chan said.
On the other hand, taking out debt to pursue something you’re passionate about but in which you’re unlikely to find gainful employment or earn enough to pay down your student loans is a bad move, he pointed out. Be careful, thoughtful and realistic before borrowing for education.
The same rules apply to credit card use. If you have a cash-back card or your credit card offers some other reward program, it makes good sense to purchase the necessities with a credit card and pay them off every month, Chan explained. Anything you would ordinarily use cash for should go on a reward card, but the money you would have used should stay in your account until your monthly credit card statement arrives.
By leveraging your debt this way, you can potentially earn as much as you would through a high-yield savings account and receive enough perks to pay for travel and other benefits you would miss out on if you paid for everything in cash.
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