Banking

Banking is a huge industry and a very profitable one too. Really these two facts are so obvious I probably didn’t have to tell you! I’m sure you’ve noticed how banks are usually located in prime locations, complete with the gorgeous building etc. There must be a good reason for this. Why are banks so profitable?

R. Nelson Nash has pointed out, “Whenever a business transaction takes place, money must flow from one party to another in a relatively short time or, otherwise nothing takes place. That flow of money must come from a supply source, a reservoir. That is the essence of what the banking business is all about; someone or some organization has control of a pool of money that can (and must) flow, at a cost, to meet some need.” [i]

Banks control a pool of money that flows with this “cost” to meet the needs of business transactions worldwide. This “cost” is recognized as interest income to the bank and is what ultimately becomes the bank’s profit after subtracting expenses. Fairly simple so far; you can see how a bank makes a profit. But let’s look deeper and find out how the profits are so large.

Too many of the terms thrown around in banking jargon tend to confuse the picture so let’s just look at two terms today: 1. The Volume of Interest and 2. The Velocity of Money. These are the two main ways a bank makes money.

The Volume of Interest:
When the average person is considering a bank loan they tend to focus on the Annual Percentage Rate (APR) which actually doesn’t tell as much as the Volume of Interest would.

For example, let’s say Joe is considering a car loan of $20,000. He has found that he can get this loan at 7% APR for 48 months. Joe purchases the car and starts making monthly payments of $478.92 to the bank. Now let’s take Joe’s monthly payment and multiply it by the term of the loan to find out how much money he will pay back to the bank: 478.92 x 48 = 22,988.16. Now $20,000 of the total payments was the principal that Joe originally borrowed from the bank, so this means that Joe paid $2,988.16 to the bank as interest on this loan (22,988.16 – 20,000.00 = 2,988.16.) To find the Volume of Interest we take the total interest and divide by the total payments: 2,988.16 / 22,988.16 = 0.1299. Wow! This means that even though Joe had a 7% APR he paid nearly 13% in Volume of Interest! Put another way, for every dollar Joe paid to the bank, thirteen cents of that dollar was interest. Now let’s say Joe only keeps this car for 3 years (36 months) and then trades it in for a new car. Because of the way a loan is amortized, most of the interest is paid up front, so when Joe trades his car in at 36 months the Volume of Interest goes from just under 13% to over 16%.

Now mortgages have an even higher Volume of Interest. Hold on tight… considering a 30 year mortgage at 5% APR the Volume of Interest is over 48%! That’s right, but if you move or refinance as most American’s do within 5 years… well then the Volume of Interest goes up to over 74%! If you think I am joking please do the math. It’s amazing. But most folks only consider the APR of 5%.

Does this put Bank profits into a different perspective for you?

Now let’s look at the Velocity (or Speed) of Money:
As a bank receives the payment on a loan, it turns around and loans out that money to someone else. This is the Velocity of Money… even though the original loan was, say for 30 years on a house, the bank gets some of that money back every time a payment is made and they don’t let it sit around if they can help it, but loan it out to someone else. This compounds the results that we looked at above with the Volume of Interest. Now the bank can be making interest on multiple loans at the same time. The faster they can do this the faster the Velocity of Money.

So now you understand the main points of how a bank makes money honestly. I say honestly because there are also dishonest ways that banks make money such as practicing Fractional Reserve Lending, but we won’t focus on this now.

The two ways that we covered in detail above on how a bank makes money are perfectly legitimate because the bank is providing the needed capital in a business transaction, and of course this service comes with a cost. Now here’s the good news: The same honest banking principles can work for you so that you can start making the money that banks are making off you right now.

The solution is simply that you Become Your Own Banker and provide yourself financing for the items you’re currently financing with a bank right now. It takes time to get to the point that you can finance everything you purchase with your own banking system, but you can start the process within a few months. As you recover the money that you used to pay to a bank, your own banking system will grow and you can finance more of your needs without having to work harder that you were working to pay the conventional bank.

At Life Benefits, Inc. we specialize in designing your personal banking system for maximum performance and providing you with coaching as you use and expand your own banking system. To learn more about the concept of Becoming Your Own Banker, you can read the books Prescription for Wealth and/or Becoming Your Own Banker, available from the Life Benefits, Inc. Online Store, then call to setup your personal web meeting.

By John McFie