3 Reasons Why Goldman Sachs Wants To Pay You More Interest

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I saw a brand new Mercedes truck that has been customized into an ice cream truck. A real ice cream truck- driving down my street playing music to attract people.

What’s the breakeven on the cost of a Mercedes ice cream truck? Seems that you’d have to sell a ton of ice cream…

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Like the new and (really) different ice cream truck, businesses shift their focus to find new customers. As an example, Goldman Sachs is aggressively going after plain old vanilla (another ice cream reference) customer deposits by paying high rates on checking and savings accounts.

Savings balances: A steady business

If you’re not checking savings rates at the online banks, you should be. Because these banks have lower fixed costs (no brick and mortar locations), they can be very aggressive about the savings rates they offer.

Since online banks operate online, the cost to open a new customer account and maintain it is really low. Once they get a customer and keep them, it can be very steady and profitable business- so offering an attractive savings rate can pay off. If you’re carrying a savings balance, check out the online banking sites.

A shift in focus

Traditionally, Goldman Sachs has generated huge profits from its investment banking division. Investment bankers earn fees by helping corporations issues stocks and bonds. Goldman has also generated profits by investing firm capital to profit from trading in the markets.

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Several factors have impacted the profits generated by the investment banking division. Tighter regulations make it more expensive to put together stock and bond issues. In addition, volatile markets make it harder to sell new issues of stocks and bonds- and make generating trading profits more difficult and risky. These new market realities have resulted in Goldman Sachs generating its lowest return on equity in the last four years.

A new subsidiary

Goldman Sachs recently bought a $16 billion book of deposits from GE Capital- and they’re using that base of 145,000 depositors to launch GSBank.com. This online bank offers savings account rates that are much better than traditional brick and mortar banks. As one of the analysts mentioned- this is a strategy to go after retailer depositors looking for higher savings rates.

The magic of compounding interest

My recent Investopedia article explains some other ways to earn more interest, including “the granddaddy of them all”- compounding interest. Compounding interest refers to reinvesting your interest, so that you end up earning interest on both your principal (original investment) and your interest.

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Here’s a simple example: Assume that you earn 5% on a $1,000 investment in year one, and you decide to reinvest the $50 in earnings. In year two, you earn interest on $1,050- not just the $1,000. At the end of year two, you’re earn $52.50 for the year, or $2.50 more. As you might expect, you then invest ($1,000 + $50 interest year one + $52.50 interest year two) = $1,102.50. The “magic” of compounding means that you can dramatically increase your total earnings over time.

Use your retirement plan at work

Compounding works best when you can invest without the need to pay taxes on your earnings each year. Most retirement plans offer this type of tax deferral. Using the example above, you can invest the entire $50 in interest at the end of year one and defer paying taxes until you take withdrawals at retirement. A CPA can help you determine which interest payments are taxable, and review your exemptions and deductions- all of which can help lower your tax liability.

Take a hard look at your retirement plan at work. In addition to the tax deferral, your employer may match a percentage of the dollars you contribute to the plan. For example, an employer might match up to 2% of your personal contributions with employer contributions from your company. The combination of tax deferral and employer contributions can make a massive difference in the total amount of money you accumulate in your retirement plan.

As always, these posts are for informational purposes only. Consult a financial or tax advisor as needed.

Ken Boyd

Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies

Co-Founder: accountinged.com

(email) ken@stltest.net

(website and blog) http://www.accountingaccidentally.com/

(you tube channel) kenboydstl

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