E69: 3 Big Myths Banks Make You Believe About Money

Nate: In this episode, we discuss the three biggest myths that many people believe about banks and how these myths are dictating your behavior and your ability to build wealth. She’s Holly, and she helps people find financial freedom.

Holly: He’s Nate, he makes sense out of money. This is Dollars and Nonsense. If you follow the herd, you will be slaughtered.

Nate: Hello, everyone. Welcome back to Dollars and Nonsense. As always, we love to have you here. We look forward to this episode. Just another encouragement to you all, if you are really enjoying this, if you wouldn’t mind giving us a review, or rating the podcast, or sharing it on social media, or things like that, it really helps get the word out of the podcast and the things we’re trying to help people accomplish with their money. Would love to have that.

But today, yeah, we’re going to dive right into banking myths. You probably hear us talk a lot about banking, whether it’s the personal banking, becoming your own banker concept, or just how you can probably tell we don’t really care much for banks in general, and that’s probably more in line with what this is. Not only do we feel that banks can be a little deceptive in how they operate, but also, what we believe about them can impact how we think and what we do with our money, and that can cause problems. So today we’re going to nail down three myths that a lot of us do believe about banks, or don’t understand about them, that causes confusion, but also it dictates our behavior at times.

Holly, let’s just jump right in. What is one big myth that a lot of people have when they think about the banks?

Holly: I think one of the biggest myths they have is that banks only make money when I borrow from the bank. I think you just have to realize that banks are making money every single day whether you borrow from it or not. Money doesn’t really sit in the bank. Would you agree, Nate?

Nate: Yeah, absolutely. Sometimes we think that if we don’t have any loans, we’re really kicking it to the banks, like the banks are only interested in lending you money and that’s the only way they make money. Well, to some extent, yes, but to be able to lend money, they have to have money. And where do they get that money? They get it from you and me. There’s a myth out there that people think that the banks only make money if I’m borrowing, when instead they’re actually making probably even more money when we deposit it than just when we borrow from it. That’s why they can offer things like a free checking account. Have you guys ever wondered why, when you deposit money into the bank, they don’t charge you to keep it safe? They got to pay staff to go in and help you withdraw cash, and deposit checks, and there’s expenses, obviously, and if you don’t borrow, they’re happy just to do all that stuff for free? Man, that does sound a bit too good to be true.

Holly: It kind of goes along with the saying that nothing’s really free in life, Nate. Banks aren’t in run-down buildings, either. They’re pretty nice, and they got comfy chairs and all that. You think you did well, it’s free, it didn’t cost me anything to open it, but yet how much of your money is really available for you to use, and how much of those deposits can the bank use?

Nate: It’s odd for a business to service you without charging you. If that was the case across the board, they would all go out of business, so it makes sense, if we’ve got a loan with them, that they’re happy to service because we’re paying them interest and they’re happy about that. But whenever you don’t have loans with them, why are they so willing to serve you without charging you? It sounds like it’s free, but in reality, it’s costing you something that I like to call opportunity cost, if you would. They’re not charging you any money, they’re just simply taking your money, and they’re lending it to other people, and they’re paying you maybe a half a percent, maybe one percent today, maybe even less, maybe zero percent on that deposit, and they’re lending it out at five to ten percent, depending on the type of loan, and it’s actually your money at work, they’re just not giving you any of the money back. So it’s not that you have a free checking account, no, they’re not serving you for free. They’re making a ton of money off of your money.

To us, to Holly and me, when we see this, we think that’s actually rightfully your money, or at least it should be. When my money earns money elsewhere, I should get a decent clip of that, but at the bank it’s pretty obvious that we are getting screwed there, and we are thinking they’re so kind to offer us these free accounts. Cash is probably the most expensive thing. We think it’s free, it doesn’t cost us anything to put it in. That’s fine, but it’s costing you in, if you look at how much money that money could have earned if we did something else with it, huge amounts of money in these “free accounts.” It’s certainly costing us quite a bit.

Holly: Even yesterday, Nate, I was talking to a mortgage broker, and he was like, “You don’t have too much money in that bank account, more than one bank account.” I’m like, “Yeah, all my money’s in cash value and life insurance.” It’s really in my life insurance because I don’t want to keep so much money in the bank that I can’t use it. And even banks, they don’t have much money in their own bank when you go in to withdraw money and stuff, they only have a set amount of money for the day. That’s because the dollar that’s sitting in that teller’s drawer is what they are most liable for. It’s the most expensive thing because they can’t keep that money in circulation, in loaning out and making money off of it.

Nate: The obvious questions are, “Well, if my money is working, what’s it working in?” And like, “Oh, we got loans,” and okay, and how much are you lending it out for? And they’d say, “Oh, five and ten percent,” and you’re thinking, you’re sitting here, “Man, you’re paying me a half a percent and you’ve got it loaned out at five percent? That seems like a pretty hefty profit when it’s my money.” But that’s how it works. That’s absolutely …

So there’s a myth out there that bank accounts don’t cost anything, and especially when we talk about life insurance policies, which is a little bit different, if we wanted to branch into that, we could, Holly, but life insurance policies have a cost to join, you could say, however, they don’t actually keep any of the profit. Your account, the profit it generates all goes back to you as opposed to a bank. The banks are the reverse. They don’t charge you to put it in, they just don’t give you any of the profits that it earns.

It has to be done one of the two ways. Either the bank could start charging its depositors to deposit money there, but then they could promise that all the money the money makes, they’ll give back to them in profits, or they could do this weird deceptive thing where they don’t charge you anything to put it there, they just keep all the money, practically all the money that it makes. To us, it actually is way more expensive to let them keep all that money. They’re making huge amounts of money off of us. So there’s a myth out there that bank accounts are free, or they can be free, when in reality, the banks make money whether you borrow from them or not, and they don’t care whether you borrow from them or not, they just want your money one way or the other.

Holly: Which kind of leads us into the next one, the myth that your money in the bank is safe. You shared a pretty interesting statistic with me today. I’m just blown away thinking about how many people really believe that their money is safe because it’s protected up to 250,000 or this or that. So many of us believe that, Nate. We put our money in the bank and we don’t think anything of it, and we think that’s our money, it’s safe, they’re going to give it back to me.

Nate: I think most of us would agree that money in the bank is not actually safe, but what they’re really talking about is the fact that the federal government, through the FDIC, is insuring the deposit. I think all of us would agree that when banks actually take our money to lend it out, and they’re lending out, by the way, for those of you who didn’t know, more money than is in deposits, so for every dollar you deposit, they’re actually legally allowed to lend at 10 times that, which is ridiculous. But regardless of that, it’s a pretty leveraged, risky business, that if the government then come in and says through the FDIC that, “We’re going to insure it,” I think most of us would agree that the money’s actually not that safe.

Banks go under at a decent clip, especially go back to the financial crisis when those big banks had to be bailed out. If they hadn’t been bailed out, people would have lost a ton of money. Disappeared, gone. So I think all of us can agree the banks are not really safe. The FDIC is what we’re counting on, and as Holly said, a statistic out there right now, there is currently in excess, on an average day, about nine trillion dollars in deposits at the banks across the country. About nine trillion in deposits. How much does the FDIC have on cash at any given time to insure those nine trillion deposits that they’re promising? They have 25 billion dollars. We’re talking nine trillion, compared to 25 billion. The discrepancy between those two, what the FDIC actually has and what they claim to be insuring, is so immense, my mind is not even smart enough to fathom nine trillion dollars and compare that to 25 billion. It’s like a drop in the pond.

Holly: It’s not even comparable.

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Holly: Listen to what he said. Your money’s insured by the FDIC, supposedly, yet they only have 25 billion and you’re one of all the millions of people that are making deposits of nine trillion dollars.

Nate: The chances that the FDIC, in a real run on the bank, in a real financial crisis where banks are going under and filing bankruptcy, and they’re having to send money to depositors, the chance that the FDIC runs out of money very quick is extremely large, which then, I don’t know what’s going to happen. I guess the federal government’s going to start printing money to send it back out, I guess. I don’t know. But that’s a concern to me, regardless, and honestly, I don’t even want to be a part of that system. If the banks go under because their crazy business practices caused them to, they go under, the FDIC starts sending money, they run out of money really fast, the next thing they’re going to do is essentially ratchet up inflation, print money to send, I guess, or something.

Either way, I guess what I’m trying to get at is, I don’t even want to be a part of the problem. That’s one of the reasons why we’re trying to create this becoming your own banker movement, is to say that the way banks run a business, where they can leverage 10 times their deposits and lend it out, is insanity, and is extremely risky, and the only reason it makes any sense is that you’ve got the FDIC and government backing. But if something actually happens, the brunt of it’s going to fall on all of the taxpayers, I guess, to help cover it, and when that happens, I would much rather have the whole country be doing this privatized banking strategy where it can’t happen. Then we won’t have to deal with devaluation of our dollar and all these other things that come to play.

Holly: When you said it’s ten times, that’s 90 trillion dollars on nine trillion that’s deposited they could loan out. Okay? It’s not actual money they have, so, yes, they have nine trillion deposited, but they’re loaning out 90 trillion dollars. Just fanthom that and the protection of it. The one thing that makes me feel safe about life insurance is the life insurance company is mutual, but it also has to have a dollar to protect my dollar I give them. They can’t loan out money they don’t have, either. It literally is dollar-for-dollar. We’re not talking about mythical money out there that doesn’t really exist, like we’re talking about that, and to me, that’s more safe. I get asked a lot, Nate, “Well, are insurance companies backed by the FDIC?” No, they’re not, but they also don’t practice the same business practices-

Nate: They don’t need-

Holly: … because they have to have the money when they take your money. The bank doesn’t have to have money to take my money. Do you think our banks have nine trillion dollars? Especially when they’re loaning 90 trillion out, if we just think about that.

Nate: It is true that the insurance companies have the state guaranty associations, which act similarly, but they don’t need to be insured like this because the business itself is not as risky as the banking business is. That’s why you see many more banks fail than insurance companies fail over time, because their leverage, so out of this world. And myth number two, the myth that the money in the bank is safe, it’s insured. I don’t know what’s going to happen. There’s a tiny amount, 25 billion dollars, at the FDIC right now, guys. When that runs out in the next crisis, I don’t know what to tell you. I can’t tell you your money’s going to be safe because I don’t know what’s going to happen when they got no money. We’ll find out.

Holly: Even when we had to bail out the banks, it wasn’t the FDIC bailing them out. It was us, the people, basically bailing out the banks. Even in the Depression, the same thing happened. Banks went under and people lost all their money.

Nate: There was a freeze on bank accounts, which is very likely in the event of a true crisis like you’ve seen across the world at various times, where you can’t go in and take money out of your accounts because of the run on the banks, because of the lack of trust there. There’s a lot of spooky things that can happen, but for some reason, we’re taught to believe that the money in the bank is very safe, the safest it can be. I would beg to differ on that, essentially.

Holly: That leads kind of into our myth number three, Nate, that we really believe when we’re depositing that money in the bank, that it belongs to me. “They can’t freeze my account, that’s my money. It belongs to me, it’s not the bank’s money, it’s my money.” Yet we don’t realize, we have absolutely no control over it, because actually, as a depositor, legally the bank now has the money and they owe it to me.

Nate: Yeah, so the myth is that the money that you put into the bank, that you deposited, legally belongs to you. It does not. As you said, Holly, the money no longer legally belongs to you. You do not own the money. When we make a deposit, we actually legally give ownership of the money to the bank. The bank owes you money now, but it’s not your money anymore. Every deposit you make in the bank is just a little loan to the bank. Legally, it’s their money now. They can do with it whatever they want to. Now, there’s different depositor contracts that can dictate their relationship with you, but still, the money legally belongs to the bank now. We’ve given ownership of the money to the bank.

Holly: And the bank now owes you that money. Think about that. If they owe it to you, and we’ve had to bail out the banks in the past, what’s the likelihood you’re going to get that money?

Nate: Yeah, you’re just a creditor of the bank. You just fall in line there. You’ve lent money to the bank. They file bankruptcy, they’re trying to pay off their creditors, you just hope to get some of the money back, and hope that the FDIC has enough money to send you your share of whatever they can’t give you, hoping that you’re early on in the crisis, that your bank … That’s kind of funny, by the way, that honestly, if it was me, I hope that my bank fails really early on in the financial crisis, so I can get a piece of the FDIC pie. I don’t want my bank to survive till near the end and then finally have to shut its doors when the FDIC’s ran out of money. Let’s go ahead and hope they fail quick, that way I can file a claim to the FDIC, get my money back, and probably just sit on cash in a safe then, or something, I don’t know.

Holly: I don’t got much help. I’m like, “Oh, how much money do I still have in my bank? Maybe I need to move it again. Get it out there, put it in the safe.”

Nate: Yeah, put it in the safe, put it in the policy. That’s one of the big differences between becoming your own banker and that strategy, is that you actually own the policy. The insurance company does not own the life insurance policy, that it’s kind of like a trust agreement where they’re just somebody, the trustee of it. You own it, you’re the grantor, and you can determine the beneficiary. They are just the trustee. You’re in total control of it.

In the bank, the money legally changes hands. It just dawned on me, and I looked it up and everything, that the money that’s accounted for in my bank account is actually not my money. It’s just a claim to money that I’ve actually lent to the bank. That’s why, as Holly was mentioning, they can decide the rules for you. They can change rules, how much you can take out at any given time, depending on what the government allows them to do. In the time of a financial crisis, where there could be a run on the bank, people trying to pull their money out, and they just freeze bank accounts. That’s because the money’s not yours.

Holly: It’s also just like the fact that when you do a deposit, whether it be large or small, there’s always a period of time they hold that money. It is your money, you went and deposited it, whether it be in a check, even a direct deposit, but like, “Oh, we got to make sure. Then you can have that money.” I even did a cashier’s check because the bank didn’t have money, they didn’t have the cash, so they gave me a cashier’s check. You take it to the other bank, and you know what they said? I know it’s a cashier’s check, but it’s a check. Guess what? “It’s Friday afternoon and it’s a Memorial Day weekend, so guess what? You can have that money on Tuesday or Wednesday, then it’s available to you.” How exciting is that? You took money from one account, you put it in the other so you could use it, and one bank didn’t have the cash, and the other bank says, “No, it’s a check.”Nate: Well, it’s funny, as I like to always say, if you were to walk into a bank, you got yourself a $100 bill and you want to make a deposit, you write your name on that $100 bill, you say, “This is my money. It says Nate on it.” You deposit it, you come back the next day, “I’m here to pick up my money.” They hand you another $100 bill and it doesn’t have your name on it.

Holly: Nate, even that same day, it’s going to be given to somebody else. You’re never going to get that 100 dollar bill back.

Nate: They just owe the money to you, and it’s not actually yours. They give you back somebody else’s 100, and they just moving money around.

Anyway, guys, these three myths of banking, the myth that the bank only makes money when you borrow, that’s not true. They make money when you deposit. They make probably more money when you deposit. The myth of the bank is safe. That’s only good to the FDIC. I think all of us would agree that the bank and business practice is unsustainable. Without the FDIC, they got nothing, and the FDIC’s pretty broke, so that’s a pretty big myth. And the myth that the money’s actually your money legally. It’s not yours.

These three myths, if we believe them, it can dictate how we operate, and it can dictate how we think and how we compare other things. We have to understand what’s actually going on so that we can know what to do. That’s one of the things we wanted to teach you today, was that there is another way to do banking. As much as possible, we encourage you to look into it. It’s called becoming your own banker. We call it private family financing, bringing the money back to the family where it should be controlled. I think you’ll really like the difference between being your own bank and using somebody else’s.

Nate: This has been Dollars and Nonsense. If you follow the herd, you will get slaughtered.

Holly: For free transcripts and resources, please visit livingwealth.com/e69.