How banks make money

Crown Money, where we show you how to pay your home loan off in up to half the time of a normal bank loan. Welcome, everyone. I'm Jessie Edge and I'm joined by Scott Parry. How are you today?

Doing fantastic. How are you?

Yeah, good. The sun is shining, so I'm feeling pretty good today, even in lockdown.

Nice.

What are we going to talk about today?

Let's talk about how one of the most profitable businesses on the planet makes money. Banks.

Banks. I was going to say something else.

Then, but yeah, sure, casinos also make a little bit of money, but banks, I mean, these guys are making billions and billions of dollars a year in profit. The banks make $45,000aminute in profit after expenses and every minute.

Pretty good business, let's be honest.

$2.7 million an hour. So imagine running a business or a group of businesses that make 2.7 million an hour. 24. 7. They have everything clocked and dialed right in.

Yeah. That's incredible. It is so incredible. And it's interesting because a lot of people don't actually know how they make their money or haven't really stopped to think about it. And it is a good one to know because it's also something where if you know how they're making money, you can help to make yourself money as well. So start us off, Scott. Where do we begin with this?

So the bottom line here is we as kids were taught in school from our Dolomite CBA accounts to put money into a savings account. And if you put money into a savings account, you're a good little saver. Good boy, Timmy. And everything was going to work out perfectly for you. So we've been ingrained from primary school. Money in a savings account is the way to go. And you've got to think about, well, why is the banks telling us put money into a savings account? So, first and foremost, one of my mentors, a guy called Robert Kiyosaki, has always said, savers are losers. And what that really means is that money in a savings account is earning you 0.01% interest on his transactional account with any of the banks. But inflation's 3%, so you're actually losing money because your money's not working for you, sitting in a transactional bank account and not growing at all in any way, shape or form. So that's when he says savers are losers financially. It's a dumb thing to do. Keep money in the savings account. That's why we, we hate our clients having money building up in their visa debit account, it's just, it's not working for you there. So what we want is to get your income that you work so hard for, to actually start working for you. But at the moment, before we sit down with a lot of people, the money is working for the bank. And how that really unfolds is you got money going from your salary into your savings account, for example. And once that money sits or hits your savings account, I think everyone assumes that, that it's sitting there waiting for them to go to the ATM or to use their card to pay for stuff.

It's just sitting in a little bank account. It's not going to move anywhere. It's safe. It's like a little safety deposit box.

And that's doesn't sit there, it doesn't wait for you. As soon as your pay hits your savings account, the banks then re lend 90% of that to other customers for credit cards at 16%, car loans at 10%, or even back to you for your own home loan, say two and a half, 3%. So let's take a step back. You're putting money into an account, you're getting 0.01% interest on it, which is on five grand salary, that's about 50 cents a year. And then you're then having these banks re lend your money back out to make 16% on it. So you're getting 0.01%, but they're making 16%. That is how you make $2.7 million per hour. You get money for free and relent it at 16 or 10% or 3%. And so at the moment, that's what everyone's been ingrained to do. Put money into a savings account, pay the home loan every week, fortnight a month, we have to flip it, we have to reverse the flow of your money. If you keep doing what everyone is doing, you're going to get the same results. The average Australian isn't doing fantastically well financially. And that's because I think a lot of lack of financial education, school, high school, no one's teaching us about how to manage money, how to budget, how to pay off debt. It's never spoken about, which is crazy because it's the one thing we're guaranteed to have to use every single day of our life. They're teaching us about physics and chemistry, which I personally haven't used since I left school. And I don't think many occupations use that. But why wouldn't you spend all that time teaching us about everyday stuff that we're Guaranteed to have to live with and use for 80 years.

And it's fascinating that everybody did have a dollarmine account that is so ingrained. And how a big bank can kind of, I don't use the word infiltrate, but kind of get into schools at such a young age and convince young kids that this is how you to manage your money. Like put it into a savings account. And you're right, it is the wrong advice. Where, I mean, where should money, where should people's money be? If it's not in a savings account.

It should be somewhere where it's growing and where it's working for you. So there's two options. One is you can actually have your salary directed into your home loan account. That is a really good strategy because the money, the minute it hits your home loan account, it comes off your principal and that saves you interest. And so let's say your interest rate is 3%. Mathematically your income is now getting you a 3% return. It's like putting your salary into a term deposit, paying 3% net because there's no tax, because saving interest.

We always say interest saved is interest earned. And this is an important one. So you know, whatever interest you're paying, if you can save that, then you are earning that amount of interest. So everyone needs to remember that point.

So you've got two options. Put your salary into your check or savings account with your bank and earn 0.01% or put it into your home loan or offset account and earn 3%. That's 300 times more effective use of your income. And when you look at that compounding out over a 15 year term adds up tremendous amount. So yeah, if you're definitely never ever going to turn your home into an investment property when you move out, you're going to sell it and buy a bigger, better house. And putting your income directly into your home loan is going to get your income working for you. But if you are thinking you may at one stage turn your current home into an investment property and then buy another house to move into, then I would probably recommend putting the income into an offset account so that you've got the maximum deductible debt when you do turn it into an investment property.

Awesome. That's great. So that's how banks make money.

2.7 million an hour, 45,000aminute. They get your money for free and then re lend it back out. And I know you never knew that. I know you thought your money sat there waiting for you on the screen. It doesn't. And I think as soon as you realize that. Well, hang on a second. Then why am I even putting my money into that account? I want my money working for me. And the best place is to put that into basically your debt. And whether it be an offset account or directly into your home loan, that would be the smartest ways to get your income working for you rather than for the bank.

Awesome. That's great information. Thank you so much, Scott.

No, thanks, Jerry. Hopefully someone got something out of that and, yeah, plenty more where that came from.

Awesome. See you next time.

Take care.