For most people, their banking system is not something they are actively managing. They opened a bank account years ago with a convenient bank and have added numerous other accounts with that bank over the years. Unless the bank made an egregious error, chances are high that they have just stuck with that bank ever since. Whenever you are getting a new banking product, it is always in your best interest to see what the bank across the street is willing to offer you. The likelihood is high that they will offer you a better deal than the bank you have been using for a long time. Your banking set-up includes your collection of chequing accounts, savings accounts, credit cards, lines of credits, and mortgages.
My suggestion is to regularly do a full review of your banking system to make sure they are helping you achieve your goals. Here are some important questions to ask yourself:
- How many different accounts do I have?
- Do each of these accounts serve a purpose?
- What does each of these accounts cost me?
- What interest rate am I paying on my debt?
It is important to know you are getting value for any cost. If you have 4 different savings accounts because you want to save for a new car, save for a vacation, save to pay your property taxes in June, and save for retirement and none of these accounts have a monthly fee, then this arrangement makes sense. If each of these accounts are costing you $5/month, then you are spending money for little benefit.
Traditional Banking
Most people use a traditional banking model which consists of a chequing account, a savings account, a mortgage and a line of credit (or credit card). The normal process is that your paycheque gets deposited into your chequing account. You take a small portion and move it into your savings account which pays you almost no interest. I just checked the interest rate on my “Premium” savings account at my traditional bank and they are currently paying 0.1% per year on all values over $9999. With less than $10,000 in the account and they are not paying any interest.
The money from your paycheque then gets used to pay your mortgage, your regular monthly expenses, the interest on your line of credit and hopefully a bit of principal on your line of credit. At the end of the month, you hope that the value in your chequing account and your savings account are higher then they were at the start of the month while you hope that the value of your mortgage and your line of credit are lower.
What if there was a different way of doing all of this that was much simpler and probably more cost effective for you.
Here are a few questions to ask yourself:
- Could my financial situation change in the future?
- Do I need more money in a rainy-day savings account?
- Am I spending too much time managing my banking?
- Do I have a mortgage and other debts?
- Is shopping for and negotiating a mortgage a stressful process?
- Is becoming debt-free one of my primary financial goals?
If you answered yes to any of these questions, you may benefit from breaking away from traditional banking. Here is a link to the Manulife One online calculator to see how much you could save. https://manulifebankmortgages.ca/manulife-one/calculators/
If you have questions about what this means, please get in touch.
