As an analyst at the bank, one of my key responsibilities was to evaluate the profitability of different types of customers. One might assume that those customers who carry a balance on a credit card or incur high fees for services would be the most profitable. However, while those customers can be profitable, the most financially beneficial to the bank are customers who keep large sums of cash in their checking or low-yielding savings/money market accounts.

To illustrate this point, let’s compare two customers. The first has a $5,000 credit card balance and pays only the minimum amount each month, while the second has $25,000 in a checking account. The credit card customer pays 19% interest on the money they owe, which is a 15% spread over the cost of money (cash is currently valued at least 4%). This amounts to a net interest income of $750 per year for the bank. On the other hand, the checking account customer earns only 1% on their money, allowing the bank to earn a 3% spread (the customer could have earned 4% on their money without taking on any risk). In effect, this customer is also “paying” the bank $750 per year.

It’s important for you to be proactive in managing your cash, especially as its value has increased to levels not seen in the last 15 years. Just as you would manage your debt, you should make sure you actively manage your cash to ensure you are maximizing its potential. Contact Premier Financial Planning today for help managing your cash or any other financial questions you have.