Are You Smarter Than a Banker?

Jeff Matevish  0:12  
Welcome to Bank Chats, 2 Cents. This is a shorter version of Bank Chats, where Drew and I find interesting things in the news that are financial related, and we just kind of talk about them. On today's episode, I found a financial literacy test, and we're kind of just gonna go through it.

Drew Thomas  0:28  
Oh, okay, okay, another quiz that I can fail. Excellent.

Jeff Matevish  0:31  
Well, no, you've been in the banking biz for a lot longer, so you'll do good.

Drew Thomas  0:37  
I'd like to hope so. The Gen Z thing really did not go well for me, oh, you did fine. I'm definitely not Gen Z though, either. So, so what do you got?

Jeff Matevish  0:45  
Ok, we'll start out with high yield savings accounts tend to offer significantly higher interest rates than traditional savings accounts. How much higher are those rates typically? And I'll give you some, yeah, I'm gonna need multiple choice, yeah. So, A two times as high, B 5 times as high, C 10 times as high, or D 20 times as high.

Drew Thomas  1:07  
Okay, so they always say, if you're not sure, to pick C, so I'm gonna pick C, 10 times as high.

Jeff Matevish  1:15  
Not quite double that and you're, you're good.

Drew Thomas  1:17  
Not quite, double?

Jeff Matevish  1:19  
20 times as high, not that at all. Yes, yeah, yeah. Try to make you feel better. Thanks. Thanks. So, yeah. So, as of June 2019, the average annual percentage yield, or APY, for traditional savings accounts at larger banks was 0.1%. Many high yield savings accounts, however, were offering APY's that exceeded 2%, or 20 times as high.

Drew Thomas  1:43  
Wow. Yeah, well, I can kind of see that because I have a savings account at a credit union that I keep open. I've had it since I was a kid, and I just kind of keep it open just so that it doesn't close. I don't know why I care, but I guess it's because it's one of my longer-term accounts, or whatever, sure, but it's like that, it has like a 0.1% interest rate. And considering that, I have, I think, something like $100 in it, I get paid like two cents a year on interest or something, yeah, I guess it is if you're trying to earn, if you're trying to put money into a vehicle like that, you probably want to make sure that you're getting something significant back, if you can, oh, sure.

Jeff Matevish  2:20  
And maybe, maybe even try looking at a different account, at your, your financial institution. Maybe a CD works better than a savings account. True.

Drew Thomas  2:28  
Yeah, yeah. I mean a CD. I mean, I think we've talked about this a number of times, but obviously, the longer you're willing to put your money away and have it set there where you can't really touch it, the generally speaking, the higher the interest rates going to be. Now, that's not always exactly, it's not like a one-to-one ratio where, if, if I put something in a 5-year CD and then I put it into a 10-year CD, the 10-year CD pays double. That's not really the case, yeah. But that would be nice, yeah. That would be great, yeah. So, check with your financial institution. But you know, as a as a rule of thumb, the longer you put it away, the better your interest rate is probably going to be.

Jeff Matevish  3:04  
Yeah, cool. Okay, how about this one? Your bank just notified you that your 12-month CD is maturing. What factors are important to consider before deciding to let it automatically renew?

Drew Thomas  3:15  
Whether it should have a driver's license or not, because you got to make sure that it's mature enough to be able to do that on its own.

Jeff Matevish  3:20  
It's only a 12-months, only a 12 month. A, there is a good chance you might need the funds in a shorter time frame. B, interest rates have gone up since you opened the CD. C, you want to do a comparison check of competitive offerings, looking for better rates, lower fees, or lower minimum deposits. Or D, all of the above.

Drew Thomas  3:40  
Oh D, all of the above. That's easy.

Jeff Matevish  3:42  
Ding, ding, ding, yeah, yeah.

Drew Thomas  3:44  
Yeah, I don't know that you really have to elaborate on that. I mean, just now all of those things, is what you are, what you should do, yep, yep. There's probably a little 10 second rewind button on your phone if you want to go back and listen to what the answers are. All right, what do we got next?

Jeff Matevish  3:58  
Which saving strategy will get you to $1 million in the bank by age 65 assuming 8% annual returns. A, save $200 a month starting at age 20. B, save $400 a month starting at age 30. C, save $800 a month starting at age 40. Or D, save $1,500 a month starting at the age of 50.

Drew Thomas  4:20  
So, I'm gonna go with A because I kind of understand the whole compounding interest idea.

Jeff Matevish  4:25  
Ding, ding, ding, yeah. And that's actually in the explanation, that's the first sentence. Behold the magic of compounding. A, 20-year-old who saves $200 a month until retirement would have $1,055,000 at the age of 65. That's not bad for less than a monthly cost of several takeout meals. If you wait until the age of 30 and kick in $400 a month, that number drops to about $918,000, a 50-year-old, contributing $1,500 a month would accumulate only $519,000 by retirement. Wow. Yeah.

Drew Thomas  4:56  
So, basically, half, yeah, yeah, yeah. And I know, I know we've brought this up on the show before, and you're tired of hearing it, but I always bring up the whole example of the penny a day and doubling it. That's a good example, yeah, in terms of compounding. And if you're, if those of you that are listening are not familiar with that, here's how it goes. If someone offers you a penny a day to do a chore like, say, wash the dishes, I'll pay you a penny a day and I'll double it every day for 30 days. Would you rather have whatever money you earn in that scenario, or would you rather have a million dollars now? Yeah, and if you actually do the math, you'll find that you're literally 10-times better off to take the penny a day doubled for 30 days than you are to take the million dollars today. Yeah, because you end up with over ten million but the, the thing of it is, though, and this, this applies to retirement accounts, especially because you kind of have a goal with retirement. You're probably trying to retire between the ages 62 and 67 and so you kind of have an end date in mind. But you know, it's the last couple of years that make the difference. Because if you figure if, if, on day 30 in that scenario, you're getting ten million that means on day 29 you only had five, and on day 28 you only had two and a half million. Yeah, true. So, in the last two or three days, you're going from like 2 million to $10 million but you had to spend 27 days of lower returns to get there. So, that's a very simplified way of looking at compounding interest. The longer you keep it in there, the more that interest compounds, and then you, you, but you have to stick it out. You can't take your money out at 58 and go buy a Winnebago out of your retirement savings. That's a bad idea, yeah, because you're going to lose all that momentum that you built.

Jeff Matevish  6:34  
Yeah, you're going backwards.

Drew Thomas  6:36  
You know, from the time you were 30 or whatever it is that you started saving for retirement, yeah, so don't do that, yeah, yeah, and start early, yeah, yeah. All right, cool. What do we got next?

Jeff Matevish  6:47  
Okay, so which statement about fixed versus variable interest loans is false? A, interest on fixed-rate loans stays the same for the life of the loan. B, interest on variable-rate loans can fluctuate, which could affect the payments you must make. C, interest rates on fixed-rate loans are usually lower than starting rates on variable-rate loans.

Drew Thomas  7:09  
Okay, so wait, let's go back. So, let's go back through those so, because so the first one, what was the first, what was the first option?

Jeff Matevish  7:16  
First one was interest on fixed-rate loan stays the same for the life of the loan.

Drew Thomas  7:20  
Okay? And we're asking which one of these is false, right? So, interest on fixed-rate loans stays the same for the life of the loan. So, so that's true, right. Okay, right. So, what's the next option?

Jeff Matevish  7:31  
Interest on variable-rate loans can fluctuate, which could affect the payments you must make?

Drew Thomas  7:36  
Okay, that's also true. Yep, that could happen. All right. So, and what was, so that makes C the right answer.

Jeff Matevish  7:42  
By yeah, yeah, by, by default, yeah, interest rates on fixed-rate loans are usually lower than starting rates on variable-rate loans. Okay, okay. Are contributions to a traditional 401 k plan deducted from your salary before or after taxes?

Drew Thomas  7:59  
Oh, before.

Jeff Matevish  7:59  
Yes, yeah, didn't I need to give you the, the A or B, before or after.

Drew Thomas  8:04  
So, let's talk the difference a little bit since we're on this topic, let's talk about, like, the difference between, uh, let's, let's use IRAs to make things easy. Because it's still the retirement vehicle and it's still the same basic idea. But right, I think a lot of people are more familiar with IRAs. So, there's a traditional IRA and a Roth IRA. So, what's the difference?

Jeff Matevish  8:21  
So, in a Roth, you would pay the taxes up front, as opposed to when you take it out of your retirement account, right?

Drew Thomas  8:27  
Right. So, I guess the thing that you want to talk to your financial advisor about or the thing you want to think about yourself, if you're making this decision on your own, and there's, there's advantages and disadvantages to both solutions, so you're, you have to decide for yourself what you think is best. But the line of thinking behind a Roth IRA, when they first brought these ideas out, right, was that taxes today are statistically more likely to be lower than taxes will be 30 years from now, sure, right. So, theoretically, even though you're paying more now to pay the taxes now to put that money into your Roth IRA, you should theoretically still be saving yourself money in the long run, because you won't be paying the higher tax rate that is likely to be in existence 30 years from now, when you go to take that money out. Yeah, right. You paid the taxes early. Now you get to take it out tax free, right. You know, on the other side you can put more in, you know, say, I'm putting in $100 and $30 of that is taxes right now, I'm really only putting $70 into my, so I could put a whole $100 in today and then worry about the taxes later. Yeah. And it's possible the taxes are lower later, but I've been alive for 45 years, and I don't think anybody that I could talk to, including my grandparents, will tell you that their taxes are lower now than they were 30 years ago. Yeah, probably not, yeah. So, there's that, yeah. So, cool. All right, got anything else?

Jeff Matevish  9:50  
Definitely, okay, um, how high must your FICO score be for you to qualify for the best interest rates? A, 600, B, 650, C, 700, D, 750, or E, 800.

Drew Thomas  9:55  
It feels like 800 is a little bit of a, little bit of a stretch. I'm gonna go with 750.

Jeff Matevish  10:18  
You are right, yeah.

Drew Thomas  10:22  
I thought it could actually have been 700 too, but I wasn't sure.

Jeff Matevish  10:23  
I mean, 700 is still a good score. Yeah. Credit scores in the mid seven hundreds usually will allow you to qualify for better rates. 20% of adults have scores from 750 to 799.

Drew Thomas  10:34  
So, how many percent?

Jeff Matevish  10:36  
20% of adults have a score from 750 to 799.

Drew Thomas  10:39  
That's, that's not bad, actually. That's probably higher than I honestly expected there to be maybe.

Jeff Matevish  10:43  
Well, it's only 20%.

Drew Thomas  10:43  
Yeah, yeah. I guess that's true. So, so 20% of people out there can get that 0% interest that they advertise with a car, advertising around the holidays all the time, right. 0% interest for qualified buyers. Yeah, right. 20% of you, right.

Jeff Matevish  10:58  
So you're maxed out. Yeah.

Drew Thomas  11:01  
Everybody else is paying 20% Yeah, no, that's not gonna be that high, but yeah, but

Jeff Matevish  11:06  
Not now, at least.

Drew Thomas  11:07  
Yeah. And I guess it's important to make the distinction that, that is when you're dealing with the interest rate on the lending product, so it has no bearing on what you get on a deposit product. Like if you're putting money into a CD, your credit score has no bearing on what interest rate you get. No, it's, it's only when you're dealing with lending products, which I think most people probably know, but just in case you don't that, that makes it, you know, that makes a difference.

Jeff Matevish  11:30  
That's a good point, yeah, yeah. Okay. How much do financial experts generally recommend that you keep in an emergency fund? 3-6 months of your gross pay, 3-6 months of your essential living expenses, or 3-6 months of your monthly household or rental costs.

Drew Thomas  11:48  
Well, you got to keep a roof over your head, but you also have to eat. So, I'm not going to go with C. It could be A, they might be recommending gross pay, but I'll say A.

Jeff Matevish  11:58  
No, B, 3-6 months of your essential living expenses. And for some, that's, that's the same as your monthly growth pay.

Drew Thomas  12:07  
All of it. When payday is exchange day, that's all of it. Those two answers are the same. Yeah, I just said A, mostly because I think sometimes these experts have, I don't want to say unrealistic, but maybe, maybe, some would say unrealistic expectations for what you should be able to put away in terms of savings. I mean, so. But 3-6 months of your essential living expenses, that seems reasonable.

Jeff Matevish  12:29  
Yeah, like if you lost your job or something like that, yeah, you know, six months of your basic living expenses covered.

Drew Thomas  12:35  
So, that's going to be things like your, your rent or your mortgage payment, because you got to keep that roof over your head. You got to be able to eat, yep, your utility utilities, utilities, clothes, yeah, anything the lights on, and things like that. And then I would probably also, some people would argue with me on this, and I guess it depends on where you live. If you live in a larger metropolitan area and there's a lot of public transportation, you probably don't have to, you know, maybe a car payment or something wouldn't be included in that essential living expenses. But if you live in the suburbs, or you live in a rural area, you got to also maybe consider your car payment if you have one to be it to be in there, because you got to get to work. Yeah, right, you know, you can't, you can't, not have a way to travel, to get groceries or to get to work. So, so, you know, some of those things get a little gray, yeah, when you start thinking about what, what's an essential living expense, that's true.

Jeff Matevish  13:25  
Yeah. So, yeah. So, we've covered the 50/30/20 rule before, but we have not covered the rule of 72. What is the rule of 72? Is that a method for calculating how much money you'll save in 72 months, a guideline for budgeting and saving money, a rule for estimating how long it takes an investment to double, or a formula for calculating compound interest?

Drew Thomas  13:50  
Yeah, I know it's not the compound interest one, and I know it's not a rule for saving money, because that is the 50/30/20 rule that you just mentioned. There are multiple ideas on how you can save money, but so what are the other two options that the ones I didn't eliminate?

Jeff Matevish  14:03  
So, a method for calculating how much money you'd have saved in 72 months, or a rule for estimating how long it takes an investment to double.

Drew Thomas  14:11  
Yeah, I'm gonna go with C.

Jeff Matevish  14:12  
Okay, yep, you're right. So, this is a really nifty little one.

Drew Thomas  14:16  
Tell us about it. 

Jeff Matevish  14:17  
So, an example, if your account earns 7% interest per year, divide 72 by 7 to estimate the number of years it would take for your money to double. So, in this case, it would take approximately 10 years to double your money.

Drew Thomas  14:34  
That's kind of handy. Yeah, you know, I think it's sort of the reverse of what you always get, sort of sold. Whenever people say, like, oh, come in and buy a mattress, it's only 84 you know, get 84 months no interest or something like that. And you're like, oh, man, 84 months no interest, I have no interest for like, you know, what is that seven years ever, or something like that. But what you're not thinking about when you hear that, that sales pitch is, I'm going to be making payments for seven years, yeah, right, yeah, yeah. So, yeah, they're no interest, but you're still going to be on a payment plan for a long time, right? And so, it takes longer to pay off that, whatever it is, than you might necessarily think when you're thinking, oh, 0% for however long. Yeah? So, this is kind of the same thing as, like, your savings aren't necessarily going to double overnight, right. And you have to be willing to be patient, yeah, you know. And I guess maybe that goes back a little bit to what we talked about earlier, about the compounding interest and things like that. Like you have to be patient with your money when you want it to grow on its own like that, and let it work for itself. Yeah, yeah.

Jeff Matevish  15:32  
I mean, you may have dozens of months of payments, and your monthly due is fairly low, but yeah, you know, most people don't think of, you know, hey, I'm going to be doing this for seven years. That's why, when I buy a car, I hate taking a car loan out for like six years, because I like, I'm the guy that wants to own that thing. Oh, yeah, yeah, yeah, totally, yeah, yeah, yeah. If I could do it in a lot, you know, shorter amount of time, I will.

Drew Thomas  15:56  
Yeah, particularly cars, because cars depreciate so fast.

Jeff Matevish  15:59  
Yeah, by the time you have it paid off, I mean, it's worth half of what you paid for it, or less, right?

Drew Thomas  16:04  
Yeah, you know. I mean, it's not like a house or land or something, I mean, and I guess I could be wrong, but I can't imagine anybody 50 years from now going into an old barn and taking a tarp off and going a 2008 Kia.

Jeff Matevish  16:16  
This is what my father drove!

Drew Thomas  16:18  
Right, I mean, you know, it's not going to happen.

Jeff Matevish  16:20  
Yeah, okay, what is the largest contributing factor to your credit score? Is it debt to income ratio, payment history, credit mix, or salary?

Drew Thomas  16:33  
Okay, so it's definitely not your salary, because your credit ratio can, it doesn't matter what you make. I mean, it makes, you have to have a salary or some sort of income, but it doesn't really matter how large it is, per se, as long as you're making your payments on time. So, oh, payment history!

Jeff Matevish  16:46  
Ding, ding, ding, yes. 35% of your credit score is determined by your payment history, so it's crucial to make those payments, don't miss them, yeah.

Drew Thomas  16:54  
yeah, yeah. That is a big deal. I mean, just pay your bills. Yeah. That's really what it comes down to, I mean, your grandfather told you, you know, if you owe something pay it off. Yep, you know it is true. You know, just, just be, be a good doobie, pay your bills.

Jeff Matevish  17:07  
Yep. What is the recommended amount that wealth management firms say you should have saved for retirement by the age of 30? Is it your salary, two times your salary, three times your salary, or four times your salary?

Drew Thomas  17:21  
I probably have four times my salary when I was, whatever I was making when I was 20. Does that count? My $10,000 working at Ponderosa Steakhouse good. I'm good, yeah, yeah, by the time, by what age?

Jeff Matevish  17:35  
By 30.

Drew Thomas  17:35  
By 30, yeah, I'm gonna say two, was two times your salary an option? it was, yeah, I'll go with that.

Jeff Matevish  17:42  
Okay, yeah, that would be nice, but it's recommended you have your salary saved up for retirement by the age of 30. Okay, so in addition, experts recommend that you have three times your salary saved by 40, six times your salary saved by 50, and eight times your salary saved by 60.

Drew Thomas  17:58  
I'm in trouble. I'm in trouble. You know, I know I made a joke about it, but that is something to actually consider, though, that your salary, hopefully as you get older, is going to rise. Hopefully, yeah, hopefully, right, so I guess that, but, but then hopefully you're also taking more, more of a percentage of that salary toward your retirement and saving so, yeah, I kind of get that, but maybe that, maybe that question would have been better phrased, not, not, not that you, you didn't write it, but I'm just saying that, what percentage of your salary should you have saved? Oh, okay, yeah, because your salary is going to vary, right, you know, right? Yeah, that's true. But I know that I got some, I got some work to do. There's no way I have that by the time I'm 50. I'm closing in on 50.

Jeff Matevish  18:38  
You got to let that compounding interest happen, you know.

Drew Thomas  18:41  
Yeah, yeah. I still gotta put more in there, though.

Jeff Matevish  18:43  
Oh, okay, well, Drew you did pretty good.

Drew Thomas  18:46  
Yeah, thanks. I appreciate that. I like the quizzes. These are fun.

Jeff Matevish  18:49  
Yeah, yeah.

Drew Thomas  18:50  
I think we all learned a little something.

Jeff Matevish  18:52  
I definitely did.

Drew Thomas  18:53  
Happy Thanksgiving, Jeff.

Jeff Matevish  18:54  
Happy Thanksgiving, thanks Drew.

Drew Thomas  19:05  
This podcast focuses on having valuable conversations on various topics related to banking and financial health. The podcast is grounded in having open conversations with professionals and experts with the goal of helping to take some of the mystery out of financial and related topics, as learning about financial products and services can help you make more informed financial decisions. Please keep in mind that the information contained within this podcast and any resources available for download from our website or other resources relating to Bank Chats is not intended and should not be understood or interpreted to be financial advice. The host, guests, and production staff of Bank Chats expressly recommend that you seek advice from a trusted financial professional before making financial decisions. The host of Bank Chats is not an attorney, accountant or financial advisor, and the program is simply intended as one source of information. The podcast is not a substitute for a financial professional who is aware of the facts and circumstances of your individual situation.

Drew Thomas  20:12  
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