ABC's of Money with Alan Akina - Lesson 12: Banking

Hey kids, welcome back to lesson number 12 of the ABCs of Money. I am Uncle Alan. Thanks for being here with me. This has been, gosh, about a month and a half that most of you've been, uh, been tuning in. So congratulations, you are well on your way. I would say Over this last month and a half, you're probably ahead of 80% of the adults out there. So good job, kids. I gave you a financial project. We have a very, very special lucky winner that is all the way from Indianapolis, Indiana. This is Holly's daughter, and here's her— Yay! Here's her post. So her first house is gonna be on the Big Island in a town called Hilo. And she priced it out and she did a fantastic job. Her monthly payment is going to be about $2,900. And her mom Holly says, is this your first house? And this is kind of big. And she said, yep, that is. So she's in that growth mindset, Holly. And that's where we want the kids to be thinking big. So congratulations. Now let's dive into lesson number 12, banking. Here's why this is so important, okay? Because every single one of you will use a bank if you're not already. All of your parents use it. It's just one of those things that we need to use. So if we're going to use it and it's going to control part of our money, it's best to understand it. Okay, that's why we have today's lesson is I want you to help, help you to understand banks so you can use it to benefit you and not get taken advantage of. Okay, and I'm not saying that all banks are bad, but they're, they're not the best either. And so I have some things to teach you about that. Now, first off, question is, what is a bank? A financial institution. They have a license from the federal government to set up shop, and they can take people's money in. We call that deposit. When people bring money to a bank, it's called a deposit. And they can lend money out. And then there's some other things like they can do investments now and other other things. Now there's four different types of banks that you should be aware of. Number one is what we call a retail bank. So a retail bank is what you're probably most familiar with. Those are the banks in your in your local neighborhood. So if you're in Hawaii, you might see Bank of Hawaii or. Or First Hawaiian Bank, or if you're on the mainland, you might see Chase or Wells Fargo or U.S. Bank. Those are retail banks. Okay. Those are in communities to help. And what they do is they serve working families. They serve working families and they offer things like checking accounts, savings, mortgages, auto loans, credit cards, basic banking tools. The second type of bank is what we call commercial banks. So commercial banks serve small to large businesses, corporations, and they offer basically the same thing that they do for a retail, like a family or an individual, but for business needs, business banking needs. Third bank, what most people don't know about, is called an investment bank. An investment bank would be like a Goldman Sachs. And these investment banks, what they do is they work with large corporations and even some governments. And a lot of these investment banks help to take companies public so, so they can sell stock on this, on the stock exchanges. So they'll help a company like Apple or, or Microsoft get all their financials together so they can offer stocks. And they also do like What they call M&As. These are mergers and acquisitions. So these are big banks. Not many people know about them, but they're they're very important in our financial ecosystem. And then finally, we have what we call credit unions—not typically a bank, but it is a bank. So credit unions are different because all of these other banks are for profit. Credit unions are not for profit. Credit unions are owned by the members. And so because they're owned by the members, they typically don't need to have higher margins like all these other banks. They're publicly traded, so you can buy stock, so they have shareholders to answer to. Credit unions have their members to answer to, so very similar to a retail bank. And credit unions typically can give you a little better deal than a bank because they don't Because they're nonprofit, not-for-profit, they don't have to pay taxes. And so they're under a different tax status and they can lower their rates and lower their fees. So the ones that you need to worry about and really understand for now are credit unions and retail banks. Okay. These other 2, when you start your businesses, and I know a lot of you will start a business like Holly's daughter already has a business plan, you'll need a commercial bank. And then if you grow it big enough and you take it public where Uncle Alan might be able to buy some stock in your company, Then you'll need an investment bank to help you get there. Okay, so those are the 4 types of banks. Now, why do we need banks? Number 3. So I have a few things that I listed for you. Why do we need banks? Number 1, they make it convenient for us to be able to move money. So they make it convenient for us to be able to get money from our employer or our business into our personal pockets so we can spend it and purchase things for our household and invest it. They also make it easy for us to, to pay bills and to transact things across, across, across the globe. You can buy things all over the world. My son buys stuff from eBay all the time. The other thing is the banks provide a safe place for us to store money. Right, because you don't want to keep all your cash under your mattress. That's not going to be a good thing. So banks provide a very safe place to store our money. And third, they offer loans to people like you and I to buy certain things that we may not be able to have enough money to buy right away. For example, a house, right? Houses cost hundreds of thousands of dollars. And most people don't have that saved up, and so they they will loan us money for that or for cars, or they'll give us credit cards and things of that sort. And then lastly, some banks offer investment opportunities, so you can buy stock through them. There's like CDs or other types of lower paying. Lower dividend-paying, interest-paying accounts that you can actually earn money on your on your money. Okay, so those are simple things that you understand why we need banks. Now number four, I want to point this out. This is huge. Okay, I call banks stores. Banks are literally literally stores. They are money stores. That is why they call them. Retail banks, right? You ever heard of a retail outlet center where you you buy something at retail, right? That that means they're selling things to the public. Well, if you call it retail banks, you know that the bank is a store. So if you understand this as a kid early on, knowing that banks are stores, what are stores doing? They're selling the product. What is their product? Their product is money, and they're making. Money, and they make a lot of money selling money. How do they do that? In the form of deposits and in the form of loans and other things. And I'm going to cover that on how they make money. But I really wanted to point out to you that banks are stores. Now I want to go into number five. Okay, how do banks make money? There's really three ways that they make money. This is going to be a little complex, but I'm going to try to make it as simple as I possibly can. Okay, the first way they make money. Is what we call a net interest margin. Margin. Okay. So let me explain what that is. Okay. So you want to zoom up here? The net is going to be the— I'll explain it to you in a story. Okay. So let's say this is you and you have $100 and the bank says, hey, put your $100 in my bank into my savings account. Okay. So you put it into the bank savings and we will pay you 1% a year. Okay. 1%. And you say, well, that's better than me leaving it in my house under my pillow or my mattress. It's safe, it's protected, and I earn 1%. Okay. Here's what they do. They now take this $100 that you gave them and they'll loan it out to some random person. I didn't have a name, so I just put random person to buy a car. And they'll say, okay, you can take this money out in a loan and you pay us 6%. For that $100, so that so you put your $100 in, the bank takes it, loans it back to some random person at six percent. They pay you one percent. The net now is five percent. So that's their profit. So they're going to make they're going to make money on what they bring in by lending it out. Okay, that is why they will always pay us less. In interest than we pay them for loans. Okay, so this is called the net interest margin. Very simple. Okay. The second way they make money is through fees, and they have all kinds of fees. I just listed a few to save me some room on the board. Okay, so they have fees to use the ATM, right? It's like $2, $4 to get money out of the ATM. Late payment fees are up to like $20-something for late payment fees. Overdraft fees. So if you use more than what's in your account, they're going to charge you another so much money, right? $10, $20, $30 or more. There's, there's fees just to have an account open with them. There's fees for going under your, your minimum on your checking account. There's fees to get a loan, like lots of fees, right? When you get a mortgage, you're talking about You're talking about $5,000, $10,000 or more in fees just to get— just to borrow money from them. The average family will pay over $200 a year in fees, and that's not including any mortgage fees that they charge. This is just basic banking fees. So this can suck up a lot of money if you don't watch, you don't understand. What's happening, how they charge fees. So it's crucial to know how they make money so you can minimize that, okay, by being aware. Now the third way they make money is what we call interchange. Let me explain what interchange is, okay? Very simple. This is you and you have a credit card and you go to the store and you swipe your credit card to buy a pair of shoes. Okay, so let's say you bought it, you went to the store, you used your credit card at the store, you bought some shoes. Okay, what's gonna happen now is when you use that credit card or a debit card, they're gonna charge you a processing fee. And then the stores pass on a percentage of that to the bank that issued this card. Okay, so if this is this bank's card, They're going to earn a percentage. Here's the percentage. Okay, so for a credit card, it's usually around 1.7% of the transaction. If it's a debit card, debit cards are about 1.1% or so, and they vary a little bit, but this is a good general rule of thumb. So Every time you swipe, that is why they—that is why these banks have like, hey, open up your checking account, and if you use your debit card three times in the first month, then you don't have to do this, or you get this bonus. Why? Because they want you to get used—they're trying to train you to use your card. That's why they have these programs set up when you first start. Boom! Use it. You get all these bonuses, and you got to use it like three to six times in the first month, or you got to use it so many times every month, and you get your your checking account free or the debit card free. Why? Because they're adding up all these fees. Adds up to a lot, a lot, a lot of money. Now, the one thing I want to point out is what we call the Federal Reserve requirement. So banks typically have to maintain 10% in their vaults. Okay. So, so whatever people deposit— this is a deposit. We're depositing money into our savings. We're depositing money into our checking. And let's say, let's say the banks got like $1 million in deposits. So this is from a deposit from all of us, from our work, from our business. We put all this $1 million right into this bank. Okay. The banks have a reserve requirement typically around 10%, but they can get around it. So they'll have to keep— they'll have to keep $100,000 on average inside of their vault, but they can take $900,000 and loan it out. And that's where we get this net interest spread. So now imagine making money on money that's not even yours. And then in some cases, some cases, the banks can go below that if they loan out all of their money. They loaned out the entire $1 million. They, to cover this, this reserve here, they borrow money from other banks. So So it's like an interbank loaning system. It's called federal funds. So they can borrow money from other banks and pay that little bit of interest to the banks, which usually makes sense for them because they're charging way more on their loans. So they can loan out almost all of the money they bring in. And that is why banks create so much wealth for themselves. That is why when you travel, notice— and I noticed this at all the major cities. I've been to almost all the major cities in America. And in those major cities, the biggest buildings are owned by banks because they they're they're very smart. So I think it's crucial for you to understand banks at an early age, and I I wanted to keep it simple because there's more advanced things that I teach a lot of your parents advanced banking techniques. But you really need an income, steady income from a job or business, and and good credit, and and a and a discipline to really follow a system to be able to minimize your, your interest costs to these banks. Right. So that's one of the big things where they make money, right, is their net interest and fees. It's probably 50/50 now. Now I want to talk about some key products. Let's scroll down here. Some key products that, that you'll need to know about. Okay. That will be very simple for kids that you should all start to set up. The first is a checking account. Okay, so a checking account basically lets you put money in there. They protect it in their banks, and for kids, they typically offer free accounts. And then you can write checks to get money out. They give you a debit card tied to it, or you can move money out online. This is a good place to be able to put your checks. Okay, if you have checks from work. Or you sell stuff, all that money can go right into a checking account. Then I would also set up a savings account. Okay. And again, you want these accounts to be free. You don't want to pay a monthly charge to have it. So ask if you have any free accounts for me as a kid or as a teenager. Okay, so you're gonna get your money into your checking account, then you're gonna move it to your savings account. Okay, and the savings account is used to store it until we can find an investment, whether it's stocks or real estate or something that would earn a much higher rate of return than our savings. So it's this holding place till we find a better place to make it work for us. The next thing I would suggest is either a credit card or a secured credit card if you are a You know, 18 years old or so. And this is going to be used— and we've talked about this before— to help you to build credit. Now, it might be hard to get a credit card unless you get on your parents and they can add you on as an authorized user, and you can piggyback off of their credit and you can get access to the credit. Now, this is not free money, okay? Because if you are pre-approved for $500, that doesn't mean you have a free $500 to use. It's the banks, and they're going to always charge you what? Interest. Interest. Credit cards, typically the higher interest rates on any type of loan that you get. Okay, now if you can't get a, a regular credit card, then go for a secured credit card, and this will help you to build credit. Secured means you put the $500 into the bank and they give you a credit card that you can use up to $500. You can pay a little bit of interest on it, but it'll help you to build up your credit. Now there's, there's hundreds of more products at the bank that I could cover. It's, you know, it's a little more tricky, but I just say keep it simple. Keep it very, very simple, especially at the beginning. One checking, one savings, and one credit card or one secured card. And that's really all you need. Now you could use the online banking for sure. Most banks have that free and maybe some overdraft protection. If they don't really charge much for it or any fees at all. But to get you started, this is the basics. Okay. Again, I, I covered a lot. And banking is very, very important because every single one of us will use banks. And it's sort of a mystery for most adults. They don't understand how banks work. And so the earlier you learn about banking, the less you'll pay in interest and the better products you'll choose over your lifetime, because it does matter. You know, if your credit score is good, you can get a better product here, or you choose this product over this product. I mean, we're talking as an adult, when you're, when you're doing bigger dollar amounts in loans, in these types of loans, we're talking tens of thousands or hundreds of thousands of dollars in interest. And you could save some of that by being wise. Okay, so Uncle wants to help prepare you to understand banks, and the financial project is this: research banks in your area and find the following: if they offer free kids checking or savings accounts, okay, or for teenagers, high school, or if you're older than that, you're in college, for college-age students. We want Free. Okay. Second, what interest rates will they pay you? What interest will they pay you on your money in a checking or a savings? Ask them if it's if it's interest bearing. Interest bearing is is what they pay you to have your money in that savings or checking account. Okay. And next. Is if you can get a credit card, what will it take to get a credit card or as a backup a secured card? Once you do your research, okay, we need to find at least call at least three banks to kind of research the area, and then you can you can do a lot of research online. You can look it up, and if there's questions, do go on the chat with them or. Call them to get these questions answered for banks in your area. And then lastly, if you haven't done this yet, I want you to open up a checking and a savings or one, one of the two. Okay. And it really depends if you have money coming in. If you have a lot of money coming in, you're working a job and you have money coming in every week, then you need a checking. If not, if you're younger, you might be 10, 12 years old. You just get allowance money or a little bit of money here and there, then you can just get a savings account and open one up. Start your banking process now. Okay, so get one of these bank accounts, and the credit cards are just for the older teenagers, 18 and up. Okay, that's probably a good time to start that. Okay, so that's your financial project, and then I want you to take that information Put the logo of the bank that you found and the interest that they pay on your checking or savings, and if it was free or not, and then tag me. And that way you'll be entered into the drawing for our last Stockpile gift card giveaway. Okay, that'll happen on Thursday.

What happens to your money if a bank goes belly up?

So most banks are what we call FDIC insured. So they're insured by the federal government and each account is insured up to $250,000. So if the banks go belly up and you have less than $250,000 in there, it'll be insured by the federal government. So it'd be protected.

What is the difference between a secured credit card and a debit card?

So a secured card is backed by money that the bank holds. Okay, so the bank has that money and they usually put it in like a CD. That's, that's earning money. A debit card is tied to your checking account. So it's, it's, it's the money that you give to the bank for a secured card is not accessible by you. The money that's in your checking account is obviously accessible by you and it's tied. So debit card pulls from the checking and the secured card is its own money, but it's backed up just in case you default or don't pay it back. The bank has your money sitting there. Good question.

Is it good to always look for the credit cards that give you rewards back?

You know, there's a lot of cards and, and the rewards is a marketing scheme. So you have to remember that rewards— the banks aren't just giving stuff away for free. They're not that nice. It's a way to, to— I don't want to say trick you, but it's an ad, an advertising campaign to To get you to use their card more. Why? Because the more you use that card, the, the more fees they get. And they also know that because they are very, very smart people and they hire the best people, they know that there's a chance that you might not pay it back on time, so they'll get interest. And so all of those fees and the interest is going to cover what they give you away in free points. But if you're savvy like myself and all my one-on-one financial students, we use those cards, we pay it off in full so we don't pay any interest or fees, and we get all the points for free, all the rewards for free. That's how you do it.

Justin Pitaki asks if it's bad to have a black card.

There's a bunch of fake black cards right now, but the real black card you're probably talking about is the American Express Centurion card. That's by invitation only, very hard to get and very expensive. But if you're a baller and you're up at that level, then you can get it.

Um, Felipe asked, how do you sell your stocks?

Um, I just— I, when I make trades, I just do it on the same platform that I use to buy it. So if it's on Stockpile or Robinhood or other accounts that I use, I, I just trade it. And I look for opportunities when they're up, but typically I don't sell my stocks. I buy good companies, I just hold on to them as long as I can.

Vahine asks what a good age is for her to get a credit card.

Probably 18. 18, and start small. $200, maybe $500 at the most. Something very small to build into.

Kavika says many local banks pay very low interest. Would you recommend that we patron banks online that can sometimes pay 1 to 2% interest?

Yeah, so yes, you're right. Very, very few of the local banks pay much in interest at all. And so because they have to pay for their, their presence, right, their store, their— the location and the employees. That is why you can probably find better, higher-paying, higher-paying savings accounts with online banks, because online banks can offer you maybe a percent or more on your savings. So that is a very, very good option to look at.

Should I only have one savings account?

Yeah, just keep it simple. One savings, one checking, one credit card. As you start to build up your financial life, then you can add more. Okay, kids, I look forward to seeing you on Thursday. Take care, everybody. Allah.