Final Two Terms

Before we begin, if you’re reading this in your email and see “Anonymous” as the author, that’s due to a system issue I’m still working to resolve. Or, maybe it’s just a cool pseudonym and I’ll keep it…

This week we’re closing out our review of financial terms with savings account and credit union, two terms that just about everybody should understand. But interestingly, about a quarter of those Americans polled by YouGov are unsure of what a credit union is and 12% say they’re unfamiliar or “not confident” about what savings accounts are. I wonder if these folks really don’t know about savings accounts, or if they’re just uncomfortable about what they have saved. Could be both, I guess.

Hopefully you know what a savings account is, so I’m going to “define” the term a little differently.

Savings Account – We have the Europeans to thank for coming up with the concept of savings banks back in the 1700’s, in countries such as France, Britain and Germany. According to Wikipedia, the first chartered savings bank in the US was in Boston, right at the turn of the 19th century. These banks were intended to bring the concept of saving money to the masses. One could deposit money into an account and the bank was responsible for keeping that money safe and would pay a small amount of interest on the deposits while doing so. This basic idea hasn’t changed.

But there are still many for whom this concept is foreign. Bankrate publishes a monthly survey of consumers and about 1 in 5 Americans say they’re not saving any money for retirement or for general purposes either. The main reason, apparently, is that their expenses are too high. Many also say they just haven’t gotten around to it yet. Bankrate determined that the average American spends almost $3,000 per year on stuff like takeout food, lattes and lottery tickets. This same consumer is probably spending close to half of their pay on housing, so that soaks up cash as well. But couldn’t some of that money be saved instead? I guess if someone is pinning their hopes on the lottery, a blasé savings account makes it tough to get interested.

Whatever one’s reasons for not saving, the bottom line is that there is no good excuse for not depositing at least something into some sort of savings account on a regular basis. You want to create muscle memory for saving, so the amount matters less than the repetition. And it should start young. Research shows that our relationship with money is often formed at a young age so getting used to saving early can only lead to good things down the road.

Credit Union – Maybe something keeping more folks from saving is a hatred for the “big banks”. Maybe people don’t like the fees, sales pitches and general hassle that goes along with the BofA’s and Wells Fargo’s of the world. If so, there’s an easy fix: join a credit union for a kinder, simpler approach to banking.

Like banks, credit unions hail from Europe, with the first being set up in Germany in the mid-1800’s. While they may look like banks, credit unions are quite different. They’re owned by depositors (not stockholders and Wall Street) who hold shares of the institution and each member gets an equal vote on credit union business. This, plus the generally “local” mission of the organization, often leads savers to be more satisfied with their credit union than they ever were with their bank.

Credit unions are also not-for-profit, which is different from a charity (a non-profit) and is a huge departure from the big publicly traded banks. The credit union’s mission is not to drive profits for investors but to reinvest into the organization for the benefit of members and the broader community.

Which is better, banks or credit unions? Both offer federal insurance on deposits. Both offer savings accounts, checking, personal and business loans, and so forth. Both offer online banking to varying degrees. Credit unions typically offer higher yields on savings accounts and lower interest rates on loans, but that hasn’t necessarily been the case lately. Credit unions are also a lot simpler than the big banks, meaning they mostly just do “banking” and don’t also own a brokerage firm, investment bank, real estate companies, etc, etc. I often think about this question as a “buy local” issue. Beyond that, it depends on personal preference and how you plan to “use” the organization.

Take my relationship with Redwood Credit Union as an example. I’ve done my personal and business banking with them for years, but my interactions are primarily online. I rarely call and almost never go into a branch. Could I switch to a national bank and get something better? Perhaps, but I prefer working with a local organization that offers services (online banking, bill pay, mobile app) like the big boys. I also like knowing the call center reps are down the street instead of states away or perhaps in a foreign country.

Here’s a link to the YouGov information if you’re interested:

Have questions? Ask me. I can help.

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