Middle class Americans are trapped in expensive financial traps cleverly set by the big banks, and are trapped as the banks steal their wealth.
So says Vincent Chan, a personal finance influencer who, in a recent YouTube video, makes a compelling case that banks use two common financial vehicles – saving and borrowing – to make profits at the expense of their customers.
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Is Chan right, and if so, how can you escape these traps and start building real wealth?
Trap 1: Low-interest savings accounts
Many middle-class Americans are attracted to the safety of traditional savings accounts offered by big banks. But there’s just one problem: These accounts offer incredibly low interest rates, often just above zero. Are they safe? Yes, but they do little to grow your assets over time, and banks are using your money to take out loans with much higher yields than you could get from a near-zero Annual Percentage Yield (APY) savings account.
According to the Federal Deposit Insurance Corporation (FDIC), the national average interest rate on a savings account is just 0.46% as of August 2024. While inflation has subsided, it still exceeds this interest rate, meaning that the real value of money held in these accounts is actually declining over time.
A low interest rate environment means that the purchasing power of your money is declining every year unless you invest in a way that compensates for losses. For example, if you put $10,000 in a savings account earning 0.42% compound interest per year, you’ll only earn $42 in a year. With an inflation rate of 3%, the purchasing power of your money effectively declines by about $250. Over time, this decline in value can significantly hinder your ability to achieve long-term financial goals, like retirement or funding your children’s education.
To counter this, consider a high-yield savings account from an online bank or credit union. Many of these accounts offer interest rates several times higher than the national average. There are many high-yield accounts on the market today that offer interest rates of 4% or more. These accounts are safe and generally accessible if you need to withdraw your funds, but they can also help you grow your money and accumulate wealth at a rate that far exceeds inflation.
Another option is to invest in low-risk, high-yield vehicles like certificates of deposit (CDs), money market accounts, and Treasury bonds. These options require you to lock up your money for a period of time, but they can offer significantly higher returns than any savings account. Those looking to invest for the longer term can also earn higher returns by investing in a diversified portfolio of stocks and bonds through a robo-advisor or low-cost index funds.
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Debt gets a bad rap for good reason, but if used strategically, it can be a powerful source of wealth. Many middle-class Americans try to avoid debt altogether or try to manage it by piling up high-interest debt like credit cards.
Chan believes the key is knowing the difference between good and bad debt.
Bad debt, such as credit cards with interest rates over 20%, can quickly spiral out of control and eat into your income and savings. Good debt, such as a low-interest mortgage, can be used to build up the equity of an asset, such as real estate, which typically increases in value over time.
To beat the banks’ tricks, start by paying off your high-interest debt as quickly as possible. This will keep your cash flow flowing and reduce the amount of money you lose in interest payments over time. Consolidating or refinancing your debt can also help lower your interest rate and make your debt more manageable.
Those with good credit can accelerate wealth creation by borrowing strategically. Consider taking out low-interest loans to invest in real estate, start a business, or fund other income-generating opportunities. It’s important to understand your risk tolerance and find investments that are most likely to ensure you get returns that exceed the cost of debt.
Also, consider making an extra payment on your mortgage. By paying a little more each month, you can significantly reduce the total interest you pay over the life of your loan and pay off your property faster. This strategy can help you save money, build home equity faster, and increase your financial flexibility.
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This article is for informational purposes only, should not be construed as advice, and is provided without warranty of any kind.
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