How Do Banks Make Money?

Do you wonder how exactly banks make money? Banks always seem to have pretty nice buildings and many of the skyscrapers in larger cities have the name of a bank prominently displayed on the side. Even better, the employees are always well-dressed. It’s one of the few places left where you can find a man wearing a suit that isn’t attending a funeral.

The primary source of income for a bank is lending money. They lend money at an interest rate that’s higher than the cost of the funds they are lending to consumers. Banks pay for money through interest-bearing accounts, CDs, and other short-term instruments. The difference between the interest they are paying and receiving is known as the ‘spread.’

Check out these sources of funds for most commercial banks:

  1. Deposits are the largest source of money for lending. This is the money that you have in your local bank in the form of a checking, savings, or other similar account. These are frequently referred to ‘core deposits.’
    • These are considered to be very short-term deposits. Though most accounts are several years old, banking customers are free to withdraw their deposits at any time.
    • This convenience, plus the fact that deposits are insured to $250,000, means that banks pay little to no interest for this money.
  2. Wholesale deposits refer to monies that a bank borrows from wholesale sources. These wholesale sources are typically other banking institutions. This money is typically more expensive than money acquired through customer deposits.
    • If you’re ever investing in a bank that relies heavily on wholesale deposits, remember that the earnings are likely to be less, since the spread is less.
    • The bank would most likely have to make riskier loans at higher interest rates to make up the difference.
  3. Shareholder equity is another source of funds for lending. When a bank issues or sells shares of stock, they’ll use much of that money for lending. There are many regulations and lending ratios banks must adhere to when using shareholder equity for lending.
    • This funding source isn’t free, although it might appear to be. Most banks pay dividends to shareholders, even though they aren’t required to. Equity raised through the sale of common shares of stock is referred to as ‘common equity.’
    • In times of trouble, banks can issue preferred stock to raise the capital they desperately need. This capital is especially expensive. Usually, banks reserve the right to buy back preferred shares and do so when then their financial situation is better.
    • All equity capital is expensive, and banks will avoid using this source of funds unless absolutely necessary.
  4. As other corporations do, banks will also issue debt to raise capital. Bank bonds are like the bonds any other company issues when it needs to raise money. Debt is a small percentage of the funds banks use to make loans.
  5. Most of the commercial bank lending in the United States is consumer lending. The vast majority of consumer lending is residential mortgages. Mortgages are secured by the property being purchased. This makes these loans relatively low-risk for the lenders.
    • Automobile lending is also a significant source of income for banks. Banks face more competition with these loans. The terms are shorter with higher interest rates and these loans have higher profit per unit of time.
    • Credit cards are another form of lending. These are unsecured lines of credit. The bank makes money from all the various fees that are associated with credit cards, the most lucrative being ‘late fees.’

Banks make money primarily through a variety of loan products. The funds that are used for the loans come primarily from depositors, though there are other sources of funds that banks utilize. The next time you go into your local bank, you’ll have a better idea of what’s paying for all of those employees and fancy branch offices.

Setting Goals for Success: 5 Tips to Define Clear Goals

Whether you want to set goals for your business or your personal life, defining clear, concise goals is very important. Without clear goals you can end up confused about what you want to achieve, and you may be putting yourself on the path to stagnation. Clear goals can give you tremendous momentum and intense purpose in your life.

Here are five important tips to help you to define clear goals in your life:

  1. Understand what you want to achieve. In order to define clear goals, your first step is to determine exactly what you want to achieve. If you don’t know where you’re going, you can’t figure out a route to get there.
    Once you know where you want to be and what you want to achieve, you’ll be able to come up with the goals that will help you get there.
    • Where do you see yourself in 5 years?
    • Take the time to sit down and brainstorm your long-term dreams and desires.
  2. Determine a timeline. Setting timelines will prevent procrastination and spur you on to action to meet your goals. Having a timeline for your goals also helps to clarify them because now you know what you want and when you want it!
    • Come up with goals that you want to meet in a month, year, and even five or ten years from now.
    • Make a plan that will keep you on track; however, don’t etch your plan in stone! Allow for changes along the way, but keep your eye on the main goal.
  3. Ensure your goals are realistic. With realistic goals, you can almost guarantee that you’ll be able to achieve them, and you won’t stress yourself out trying to accomplish something that’s out of reach. A clear goal is a realistic
    • Break your long-term goals into small, achievable action steps. Reaching multiple goals along your journey will give you a feeling of accomplishment and motivate you to continue.
  4. Be specific. Clarify your goals with the details of exactly what you want. Avoid vague generalities. When you make a specific goal, you’ll be better able to accomplish it.
    • Specific goals allow you to form your timeline and define your action steps. There’s no guesswork involved when dealing with specifics.
    • For example, “make more money with your business” is a vague goal. Come up with a specific goal, such as, “I will make $1,000 more per month, three months from today.” This goal is specific, measurable, and realistic.
  5. Refine your goals. Your goals may change as your life changes. During this process, you’ll be able to make them more specific, realistic, and achievable.
    • It’s okay to refine your goals several times in your life! What’s important now, might not be important to you six months or six years from now. Be willing to accept change. Revisit your goals from time to time and make new plans if necessary.

Some people flounder through life, unsure of their purpose or what they want to achieve. Don’t let this be you! Your life will have clear meaning if you put some thought into what’s important to you, what goals you want to achieve, and what actions to take to make your dreams a reality.

5 Dirty Tricks Credit Card Companies Like to Play

While your credit card company might like to pretend they have your best interests at heart, it turns out that’s not always the case. Credit card companies, like most other businesses, have ‘loopholes’ in place to drain every cent they can from you.

Being aware of these tactics is the best defense. Otherwise, you’ll be paying astronomical interest rates and navigating through a minefield of penalties that are only mentioned in the very fine print of your credit card agreement.

Explore the following ways to monitor your interest rate and avoid those penalties:

  1. The grace periods are shrinking or don’t exist at all. Back in the good old days, you had 30 days to pay your balance without suffering the financial burden of paying any interest. Most cards now have a grace period of either 20 or 25 days.
    • Some credit cards have no grace period. This means that the interest starts accruing the moment you make your purchase and continues increasing until you pay off the balance.
    • If you want to use your card and not pay any interest, find out when your company starts charging interest. The longer the grace period, the better.
  2. Fixed interest rates aren’t really fixed. It would seem that a fixed interest rate card would actually be ‘fixed,’ but it’s not. Credit card companies can actually change rates whenever they please.
    • To change your rate, all that’s required is a 15-day notice to you as the cardholder.
    • Your credit card company is hoping you don’t pay attention to those pesky notices they send in the mail from time to time. That’s how they try to deceive you.
    • Be certain you’re actually reading the mail from your credit card companies.
  3. One late payment can result in 2 penalties. You might be all too familiar with the Late Payment Fee, which can be as high as $35. There’s also another possible fee that can be incurred: The Penalty Rate. This penalty can be charged if a payment is made 60+ days late.
    • The penalty rate is actually a new interest rate that’s imposed on your account. The rate can be as high as 29.99%, and that’s exactly what most credit card companies charge.
    • The law requires that the penalty rate be removed after six consecutive on time payments. The Card Act of 2009 has all the details.
  4. That same penalty rate can be placed on all your credit cards. That 60-day late payment can result in all your credit cards having the penalty rate. This is true even if you’ve never made a late payment to those other cards.
    • One mistake can cost you a lot of money. Having all your cards bumped up to 29.99% interest rate is significant if you carry balances on your credit cards.
    • Make your payments on time. It saves you money and preserves your credit score.
  5. Balance transfers can be expensive. Maybe you’ve seen those balance transfer checks credit card companies periodically send out. Depending on your situation, they can be great. But be careful!
    • These checks seem like a convenient way to consolidate everything into one account. But many of those checks have a 3 to 5 percent fee attached to them.
    • These fees can often cancel out any savings you would have gotten by transferring your balance to a card with a lower interest rate. Do the math before you write one of those ‘checks.’

Be aware of these dirty tricks so that you can avoid them. Avoid making late payments and always read the fine print. Remember the credit card companies are trying to separate you from your money. Don’t make it easy for them! If you always pay your balance in full and read the fine print, you’ll be in great shape with your credit.

How to Handle Life’s Most Common Frustrations

Life can feel like one frustration after another. Most of the frustrations you deal with are dealt with by everyone. Being human is largely a universal experience, so there are plenty of ideas floating around about how to deal with the frustrations that frequently appear in life.

While all frustrations can’t be completely eliminated, they can be greatly minimized.

Consider these common frustrations:

  1. The inability to control yourself. This is perhaps the most common frustration of all. Whether you want to follow a diet, get to the gym each day, clean out the garage, pay your bills, save money, or stop staying up late watching TV, it can be extremely frustrating when you can’t control yourself.
    • Be clear on why you want to take or avoid a specific action. Why do you want to go to the gym? What do you gain? What is the consequence of not going?
    • Visualize being successful. If you can clearly imagine it, you’ll be more likely to do it. Imagine yourself doing, or not doing, the action.
    • Relax. When we have the urge to do something we shouldn’t, or have resistance to doing something we should do, it creates tension. Relax your neck and shoulders and take a deep breath.
  2. The lack of financial resources. This is one of life’s most common complaints. Whether you need money to buy food or your dream car, a lack of financial resources is frustrating. There are only two ways to deal with this issue:
    • Increase your supply of money. This can be accomplished by earning more money, spending less, or saving more. Find a way to increase the amount of value you’re delivering to the world, and the money will follow.
    • Decrease your list of wants. We all want more than we need. If you can cut back on the things you think you need, you’ll have more money available for other things.
  3. The behavior of others. While there are thousands of books on how to influence others, it’s only influence, not control. There are many things you can do to get others to do what you want, but it’s never a sure thing. Avoid trying to control them, and you’ll be less frustrated.
  4. Indecisiveness. Indecisiveness is the result of either a lack of information, a lack of goals, or a lack of clarity regarding your values. If you take care of those three areas, your indecisiveness will lessen dramatically.
    • Understand that if you’re stuck, one option is probably just as good as another. Pick one and get busy.
    • As a general rule, it’s worse to fail to make a decision than to make a poor decision. When you don’t make up your mind, nothing happens.
  5. Others sabotaging your efforts. This is another common frustration. Most of the people in your life would like to see you do well, but not too well. It’s hard on their egos for a variety of reasons. Just accept it as a part of human nature and move on.
    • If someone is actively trying to sabotage you, confront them. If that doesn’t work, decide if you really need them to be part of your life.

Life will always have its frustrations, but you can minimize many of them. You’re not alone regarding most of the frustrations you face. Most frustrations are universal. Deal with the frustrations that are within your control and try to relax regarding the rest.

6 Ways to Minimize the Cost of Your Auto Loan

Let’s face it, cars are expensive. It’s not only the price of the car, but also the gas, insurance, maintenance, car washes, and more. For most of us, there are also considerable costs associated with the auto loan. With the economy as it is, every expense is worth examining.

Use these strategies to save money on your next auto loan:

  1. Improve your credit. Nothing has more impact on the terms of your loan than your credit score: the better your score, the lower the interest rate. If your credit history is sketchy, it’s going to cost you. So if you have credit problems, put off buying that new car until you’ve done some work on your credit.
  2. Avoid small loans. In many cases, interest rates tend to be higher on small loans. If the car costs less than $5,000, then it’s best to simply save up ahead of time and pay cash for the car. If you’re desperate for a vehicle, however, this may not be an option.
  3. Refinance. You can refinance an automobile at a lower interest rate if interest rates have fallen since you bought the car. This especially makes sense if you’ve also been able to improve your credit since you obtained your loan. You could easily save $100 per month by refinancing.
    • With the subsequent reduced payment schedule, you can apply the extra you’re saving toward other investments or you can pay off your car sooner.
  4. Shop around for financing. It might be easiest to get your financing at the dealership, but it’s rarely the best place. Finding a better financing offer means extra money that could be in your pocket instead of the dealer’s.
    • Check out what the dealer has to offer, but get some other financing quotes and see what makes the most sense.
  5. Consider leasing. While leasing is usually considered to be more expensive in the end than purchasing, it can make sense if you never own a car long enough to get it paid off.
    • Your monthly payment will likely be less and the taxes are less, since you usually only pay tax on your payments, not on the value of the car.
  6. Find a less expensive vehicle. Cars today are almost universally quite reliable. There’s almost no practical difference between a modern $10,000 car and a $100,000 car. All the extra cost has little to do with how reliably or safely the car will get you from point A to point B.
    • Consider purchasing a slightly used automobile to really save some money. If you can find a car that’s almost new with low mileage, you get all the advantages of a new car, including the warranty, without the new car cost.

There are several ways to save money on your next auto loan. If you have the luxury of time on your side, fix any credit challenges you may have and shop around for the best financing terms. Where there’s a will, there’s a way. Do what you can to keep as much of your money as possible.

Considerations When Lending Money to Friends or Family

It’s wonderful to be able to help a friend or family member with a financial challenge, but money has a way of creating disagreements and hurt feelings. Many financial experts recommend never lending money to loved ones. But every situation is different. It’s important to consider all the issues and then make your best decision.

If you’ve decided to make a loan, taking these steps will help ensure things go smoothly:

  1. Consider making the loan a gift. Without any expectation of being paid back, there’s less opportunity for the relationship to be harmed.
    • Be sure you can afford it. It doesn’t make sense to create financial challenges for yourself.
  2. Avoid lending additional money. It can be wise to get all of your money back before you make a second loan. Many people have financial issues as a result of poor financial habits. It’s unlikely that a loan is going to help in some cases. Be firm.
    • If they were unable to pay back the first loan, the odds for an additional loan won’t be any better.
  3. Consider creating a loan agreement. A document will make the loan feel more formal, and your friend or family member is more likely to take it seriously. In the event that you need to take action to get your money back, having some paperwork is bound to help.
  4. Be clear about your expectations. If you make it clear that you’re happy to help, but it’s also important that you’re repaid, your borrower will have a better understanding of the need to be responsible. Be honest and open about the importance of being paid back.
  5. Consider a peer-to-peer lending tool. There are websites that will administrate personal loans. The program keeps track of payments and will send reminders.
    • This does add some expense to the loan, but your borrower will be nudged if he doesn’t make a payment on time. And you don’t have to do the nudging!
  6. Keep these stats in mind. Surveys have shown that 45% of people that make personal loans aren’t paid back entirely. And 25% never get paid back at all! Understand that the likelihood of getting paid back isn’t great.
    • If you can’t afford to lose the money, consider refusing to make the loan.
  7. Charge some interest. This might seem a little unkind, but charging interest has multiple benefits. It lets the borrower know that you’re serious. It also avoids any potential gift tax by making it clear that it’s actually a loan. The IRS has interest guidelines for family loans. Be sure to check them out.
  8. Consider what you’ll do if you don’t get paid back. What will you do? How will you feel? The answers to those questions might change your mind about making the loan. Are you willing to just let it go? Are you going to take them to court?
  9. It might be best to just say “no.” In some instances, refusing to make the loan might be the wisest option for everyone involved.
    • If you really need to be paid back in full and you believe the borrower won’t honor the agreement, it might be better to disappoint them instead of putting yourself into a financial bind.

Lending money to friends and family is a kind gesture but full of potential pitfalls. Personal loans aren’t reliable. If you decide to make a loan, communication is critical. Ensure that everyone understands the details for the best experience for all involved.

Top 4 Strategies to Rebuild Your Credit

1. Get a secured credit card.

  • A secured credit card works just like a regular credit card with one major difference; you have to make a deposit. So you would make a deposit, typically $300-$2,000. You then have an available balance equal to that amount.
  • You get your money back when you cancel the card or, sometimes, after you establish a history of on-time payments with that creditor.
  • Your payment activity is reported to the credit bureaus just like a regular credit card. No one can tell that it’s a secured card. Keep the card until you can qualify for an unsecured card and then cancel the secured card.

2. Get a loan.

  • Here is a trick real estate investors have been using for years: Deposit $1,000 in a savings account. Then take out a loan against that account; the account will be frozen. Take that $1,000 loan and open up an account at a different bank. Do the same thing. Two or three loans are enough.
  • Now you have several loans and an extra $1,000. Use that money to make payments on your loans. As you pay down the balances, an equivalent amount will be freed from your savings accounts. Pay off the loans in a few months and you’ll have some great positive credit on file.
  • An alternative if you don’t have any money to start is to borrow the initial $1,000 but let them hold the money. You make the payments and get the $1,000 after the loan is paid off.

3. Pay on time.

  • Keep in mind that a significant part of your credit score is paying on time. From this point forward, never be late. Just don’t do it.

4. Pay down your balances.

  • The amount of money you owe versus the amount you can owe is called your utilization rate. So if you have a credit line on your credit card of $10,000 and you currently owe $6,000, your utilization rate is 60%. If it’s more than 30%, it hurts your score.

If you’ve had some credit challenges, then there’s no time like the present to start building some new, positive credit.

You might think that you don’t have any options available to you; after all, you need decent credit to be able to get credit, right? Not really – there are always options. 

Good credit makes life easier; it also makes life less expensive.

Bad credit not only can prevent you from being able to borrow money in the future, but it can also cause you to pay much higher interest rates when you are able to borrow money.

Start rebuilding your credit today for a healthier financial tomorrow!

7 Social Media Mistakes That Can Harm Your Career

Many courts have upheld the right of employers to see everything in your social media accounts. Employers even study the social media accounts of prospective new employees before they’re hired! You can even be forced to log in and provide full access!

Avoid making social media mistakes that could result in the loss of your employment.

Use social media platforms wisely by avoiding these mistakes:

  1. Posting about controversial topics. Public comments regarding emotionally charged topics is always risky. You might not like the idea of same-sex marriage or have strong opinions about religion, but you never know whom you might offend with your stance. Proceed at your own risk.
  2. Discussing work, interview opportunities, or job offers. Does it seem smart to post to the world that you just had a great job interview with another company? You might be excited about the opportunity down the street, but it would be prudent not to announce your enthusiasm in a public forum.
    • Until you’ve accepted an offer and submitted your resignation, be discrete.
  3. Failing to understand the concept of “zombie” content. While it may seem that you have the option of quickly deleting any inappropriate content, that’s rarely the case. Once it’s out on the web, it’s there forever. It can keep coming back to haunt your future like a zombie rising from the dead.
    • That inappropriate picture or post may show up at the most inappropriate time. Perhaps right before an important job interview or offer.
    • Avoid ever posting anything you wouldn’t want your boss or mother to see.
  4. Posting content while you claim to be sick or injured. There have been several instances of employees calling into work sick, only to post photos of themselves at ballgames, the beach, or a party.
    • All it takes is for your work nemesis to see it. You can be sure your boss will be informed quickly.
  5. Combining personal and business contacts unskillfully. It’s likely your personal contacts will be bored with your posts regarding work. It’s also likely that many of the posts your personal contacts would find interesting aren’t appropriate for a work audience.
    • Your old college buddies might be impressed that you can still stand on your head and drink from a keg. But your boss might wonder if you’re the right person to negotiate a contract with a European supplier.
  6. Adding content at the improper time. We all slow down a little at 3:00PM, but that doesn’t mean it’s a good time to post to your social media accounts. Your boss and coworkers think you should be working. At best, your boss will decide you need a little more work to do. At worst, your boss will suggest that you find another job with another company.
    • Posting too much can be nearly as bad as posting at the wrong time. What message are you sending if you post continuously on your time off? That’s not the type of person that’s given greater levels of responsibility in a professional capacity.
  7. Profanity, poor grammar, and nudity. While the use of colorful language can help to get your point across, reconsider. Poor grammar can also send the wrong message. Modesty is usually the best policy when it comes to clothing.

The various social media platforms provide an effective way to communicate others. Use these tools to your advantage! Unfortunately, social media also can also cause a lot of harm to your career. Be careful of the image you present to the world. Take control of your social media presence.