Feb 142012
 

My bank’s checking account has a $3.95 monthly fee. However this fee is dropped if I have at least $1,500 in that account for the entire month. Typical right? Just about every bank does this. Keep a minimum balance in your account, and the account fee is waived! I used to maintain the minimum balance to avoid paying fees. But I wasn’t too happy about it because I was essentially lending the bank my money, interest free.

But recently I have removed the minimum balance out of my account and started to actually pay $3.95 every month. But why would I choose to pay more fees when I don’t have to?  Answer: *Opportunity Cost (^_^)
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It’s true that by keeping a minimum balance of $1,500, I save $47.40 a year on checking account fees. But if I can make more than $47.40 a year by investing $1,500 then I would be better off investing that money instead of keeping it tied up in the bank right? So that’s why I transferred the money from my checking account into my brokerage account, and used all that money to buy my bank’s own common shares.  In other words, I purchased $1,500 worth of TD Bank stocks. That’s because the stock’s dividend was more than enough to cover my checking account fees. Even today, according to google finance, TD Bank currently has a dividend yield of 3.46%. This means if you invest $1,500 into TD shares today, TD will pay you $51.90 every year in dividends. If you live in BC and make between $43K and $74K of income per year like me, then you will only have to pay a *few dollars of tax on that amount and pocket $48.38. Not too shabby (^o^)
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To review, I am now paying the bank $47.40 in fees every year. Meanwhile the bank pays me $48.38 (after tax) for being a shareholder. Basically this means I get to use the bank’s chequing account service for free, AND make a tiny profit to boot. But it gets better! TD has grown it’s dividends 11 times in the last 12 years ( ゚д゚)So this year I may receive $48.38 like we’ve calculated, but next year, I wouldn’t be surprised if TD pays me $50 or more because those dividends keep going up. But it gets even better! The *payout ratio for TD is under 50%!  This strategy also protects me from higher banking fees in the future because once I became a shareholder, every dollar of profit the bank makes from charging their customers higher fees will only add value to my stocks.

 

Of course not everyone banks with TD. But this strategy is transferable. Here’s some basic information on a few other banks below.

BMO Practical Plan Chq Acct: Fee = $4.00/month. Waived with $1,000. BMO’s stock dividend yields 4.80% 
CIBC Everday Chq Acct: Fee = $3.90/month. Waived with $1,000. CIBC yields 4.69%
Scotiabank Powerchequing Acct: Fee = $3.95/month. Waived with $1,000. Bank of Nova Scotia yields 3.96%

But I can see why this may not be a good idea for some people. This strategy does come with risks after all. You risk the banks cutting their dividends in the future, even though they all have a solid history of growing them. You also risk losing some of your initial investment if their share prices drop and never recover, even though banks are the oldest and largest companies in Canada and the backbone to our whole economy. For short term investors and those who want to play it safe, keep your balance in the bank to save yourself some money. But if you want to live on the edge like me, then don’t let your bank hold your money to only benefit their own interests. Buy a piece of your bank instead and profit with them, and by the time you retire maybe you’ll be a little wealthier than if you hadn’t. (^_~)

*Opportunity Cost – Losing the opportunity to profit from a choice, because another choice was taken. Go ask an economist for a better explanation (>_<)
*few dollars of taxThe dividend tax credit makes dividend income very tax friendly. Depending on your location and other income, you may not have to pay any taxes on dividends at all.
*payout ratioTo be explained in a future post.

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16 Comments on "Gotta Spend Money to Make Money"

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V
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V

Enjoy your blog after coming across your article in G&M! Great stuff and hope you achieve and surpass all your goals 🙂
I am 23 and just getting my feet wet in investing.
Could you please share how you have increased your knowledge in investing? Any books or seminars you recommend? I find the technical analysis and quantitative analysis can be a little overwhelming!

Thanks!
V

Liquid
Admin

Great to hear you are interested in investing too V (^_^). I enjoy reading financial articles on sites like G&M, Google finance, yahoo finance, morningstar, etc. as well as watch business news like BNN, or msnbc if I have time. I sometimes go to free seminars hosted by banks too. If you go to their websites you can usually find a seminar schedule, TD and BMO do this pretty often across the country. Of course I get a lot of inspiration from other bloggers as well. I’m not an expert in tech analysis either, but I can usually get a rough idea of something after spending some time Googling it.

Neil
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Neil

Your other option is to get free accounts… both PC Financial and ING Direct offer accounts with no monthly fees.

I have 2 chequing and 1 savings account with PC and they’re fantastic. The bank is indirectly run by CIBC, so when I do need to take cash out I can use CIBC machines for free.

I’ve heard ING is pretty solid too, although I’ve heard it can be a pain to find a cash machine nearby when you need to take money out.

Liquid
Admin

Great point Neil. Some institutions offer free alternatives to traditional banking! I’ve heard good things about PC Financial from others as well (ʘ‿ʘ) Their MasterCard apparently has a pretty rewarding points system with no annual fee.

Patrick
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Patrick

Great post and nice example of an opportunity cost.

And I agree, PC Financial is awesome!

thewealthyicelander
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thewealthyicelander

Just remember that some of the banks that collapsed or nearly so where once thought to be the strongest Citigroup, BAC, Lehman etc…

Your post does a very good on tackling opportunity cost, something that the masses find very hard to understand.

Liquid
Admin

I couldn’t agree more. You touched on a subject that should get more attention. Understanding “risk” is essential to proper financial management. Even though all 5 of our major banks here have outperformed the market index in the last decade, are well capitalized, and appear relatively safe, they are not immune to volatility, gov’t bailouts, or even nationalization. It’s unlikely we’ll see a banking collapse in Canada any time soon, but we can’t rule out the possibility that one day in the future it might happen.

Vicky
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That is a pretty cool way of seeing things! I kind of gave up on the main banks and am huge advocates of both ING and PC Financial (if you couldn’t tell from my blog 🙂 ) but I like the way you approach the offset in costs. I’ll have to remember that!

Liquid
Admin

Sweet, online banking seems to be a popular trend. The best part about them for me is you don’t need to have a minimum balance, so your cash isn’t tied up doing nothing. I’ll have to get on board some day (^_~)

The Loonie Bin
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The Loonie Bin

I did the exact same thing, Liquid! But instead of investing in the banks I invested in Enbridge because of their amazing dividend increases. Love the drawings!

Liquid
Admin

Thanks Steve. Pipelines are practically recession proof and ENB has been an awesome investment for shareholders, certainly outperforming TD. Great choice!

Phil
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Phil
I know this ia an old post but I’ve only had time to get to it now… I choose to keep the minimum in my BMO chequing account, which appears to go against the grain here, but in doing so I also have no bank plan payments… So if i keep my $1500 minimum in my account all other fees are waived for that month – that means unlimited chequing, ATM withdrawls, online payments, etc.. NO fees of any knid. Now a few months ago I dipped below $1480 or something like that. At the end of that month they charged me in excess of $14.50 in “banking fees”. A simple call to the bank and because I normally keep the minimum they credited me for the fees 😀 – always nice to have a healthy relationship with the branch manager. So it is not as simple for me as you and the others appear to have it… So to summarize I have zero banking plan fees or other fees by keeping the minimum… I think everyone should be aware of their own situation to know their own cheapest method and be sure what works for 1 might not works… Read more »
Liquid
Admin

Great tips Phil, I didn’t realize BMO has this interesting fee structure. It wouldn’t make sense to pay the fees in some situations like yours. Glad they credited you back. CIBC has a chequing account with a monthly fee of $3.90, unless the minimum balance stays above $1000. It might be better to keep the minimum balance for that as well, depending on people’s investment outlook.

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Mariposa
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Mariposa

Impressive! Love your blog

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