How to start your own Family Bank
What banks aren't telling you is costing you your family fortune.
We have been told for a very long time that “mixing money and family leads to trouble”. While not entirely wrong, this phrase has actually cost us (in case you are wondering, I’m very, very far from the 1%) a lot more than it has saved us.
Let’s take a stab at how we currently save as a family.
John and Jane are a young couple who just graduated from school with an impressive amount of debt and a little one on the way. Both of their folks aren’t Rockerfeller wealthy but have a little bit of cash & investments saved up. Their siblings and closest friends (family 2.0) are just about the same as them financially overall with some a bit better and some a bit worse.
So John and Janes family and family 2.0 members each have $2,000 to $20,000 (for the sake of us not drowning in numbers right now, a total of $100,000). The money is all spread out across a bunch of banks that pay anywhere from 0% to 2% interest on savings deposits (yea rates suck right now).
The point is though, the family and family 2.0 (hereafter just “family”) is leaving money on the table and letting the less finance nerdy folks suffer to the tune of $100’s if not $1,000s of earnings lost every year.
Then there is borrowing and lending.
Like mentioned before, the younger folks in the family are sitting on a pile of loans that will take 30 years to pay off and the older folks are sitting on cash but can’t risk putting too much into the rollercoaster that is the stock market.
So the young folks either go to the bank again to ask for another loan (refinancing their loans or to take out more debt for a house) that results in a more/higher loan payments and more fees paid to the bank. At the same time, the older folks have to look at low paying CD and bond options that pay possibly even less than available savings deposit accounts. These guys don’t need to borrow too much more but want to make sure they have an income during their golden days (and that the kids are taken care of for the long haul).
Lastly, there is investing.
Although most people don’t do this directly at banks (and rightly so, the gouge you for money wherever possible), it is still a vital component of long term wealth accumulation across generations. Younger folks may not understand the long term value of this but the older generations certainly do (or they learned the lesson of what it feels like to not have invested and regret it in their 40s).
Investing can be scary, daunting, and overwhelming for newcomers and they need advice from the family members who have already gone through the storm (and hopefully learned a thing or 2) to make great investment decisions early on. These probably look like mutual funds and ETFs.
The fact is, lasting family wealth comes from these investment decisions so this may be the most critical long term component for the family. That being said, it’s hard to get here unless the younger folks can get their saving and debt/borrowing right and avoid the mistakes of the prior generation.
Every single member of the family is involved in this game whether they like it or not. The opponent? Banks.
Banks earn profits from the family not saving well or settling for low rates, from borrowers continuing to pile on debt and pay higher interest + more fees, and by selling you investments that don’t make sense but come with crazy-sounding fees. If that family doesn’t step up, banks will continue to win this game outright, and “family money” will be a phrase you only associate with the Vanderbilts/Rockerfellers/Waltons rather than your own family.
That leads us to the need and creation of the family bank.
Creating a family bank is a little bit of effort and a lot of pay off.
The first thing you will need to figure out who exactly will join the family bank. Family can be actual blood relatives and friends + friend's families. The total “family” can be up to 99 members so you have plenty of space to let everyone benefit.
Next is setting up the actual family bank as an entity. This is typically in the form of an LLC (limited liability company). Costs will vary for this depending on your state but filing is typically less than $300. Once filed and confirmed by the state you will need to obtain an EIN. Not a hard process and completely free. I could explain but you can figure it out in about 20 seconds via Google.
Now that you have the administrative basics down, now you can open a business savings/money market deposits account at the bank of choice for your “family bank”. You can change banks at any time so no need to go too crazy out of the gate. You will open the bank account as an LLC and all family member funds will be sent to this account. Once set up, all future new bank moves will have to be approved by every member but will also be far simpler than every single family member having to do it individually.
The best part of the structure is that everyone in the family will be able to earn a high deposit rate, at all times, with only minimal effort. No one is left behind and no more hours of headaches switching to new banks. This is a massive win for everyone and moves the group one step closer to lasting wealth and a step away from banks. As of May 2020, that highest rate is 1.50% (for the personal finance nerds out there like me).
So now that your family bank has the deposits set up, that takes us to loans
. Every bank has lending and every one of them is attempting to charge you as much as possible in the form of interest rates and fees on these things.
Taking out loans is a brutal process and it is very likely that most of your family has a considerable amount of student loans with very high-interest rates.
It is also likely that some younger members of the family are looking to purchase their first home and some older members of the family are sitting on cash since bonds & CDs are paying less they can earn on the group savings account.
Fear not, the family bank can solve both of these problems and make the entire family better off financially.
As you probably have realized, family bank loans are only between members of the family bank/group savings account.
Times and the economy may change, but as of 2020 the biggest no-brainer family lending opportunity is for the loans previously mentions.
Let’s walk through an easy example.
Smith Family Bank has $250,00 in total group savings earning 1.50%. John, a recent college graduate has $50,000 in student loans (at a classic 5% interest rate), a $10,000 emergency fund, and $10,000 saved up for upcoming life events such as the wedding he is planning and the house he wants to purchase. John should never put his emergency fund at risk but he doesn’t necessarily need the extra cash he’s continuing to save for the wedding/home purchase for the next 1–2 years. As this is the case, John can use his $10,000 to pledge as collateral to obtain a “family bank loan”. By pledging the money for the loan, John is able to eliminate all risk for the family bank members. Now the members of the family bank can use the money they have saved in the group savings account to make this loan (again, it’s completely risk-free since John has provided full collateral). This loan can be made at a rate significantly below what the student loan servicers are charging (for John 5%) and still be incredibly profitable for the family bank members. For simplicity, let’s say that the family bank accepted the risk-free loan to John at 3%. That’s 2 times the amount they are making on the group savings account (amazing) and requires almost zero effort + has zero risks. By doing this, John wins, the family bank members win, and banks lose. This is the power of family banks. They allow the family to become wealthy and not the banks.
So let’s recap where we are at.
With your new family bank, everyone in the family is now earning the highest savings deposit rate possible at all times with only limited group effort. Additionally, family bank members can save a ton of money through family bank loans at rates way below market (in our example, for student loans) while other members can earn even more than the highest savings rates at zero-risk by making these loans.
Zero-risk. Minimal effort. Everyone thrives.
This is a no-brainer folks. Let’s change banking and who profits in this country together.
Here are a few other great resources discussing “family banks” — although most are geared towards helping rich people create them (which typically involves adding a Trust-entity component) which is both a good sign for you and the very reason why we average folks need to get in the game.
The Family Bank: A Strategy for Preserving Wealth What issue most worries families of means around the world? In our experience, families with significant wealth are…www.cliffordswan.com The Family Bank Mainly used to pay for education, buy a home, or start a business, (though it certainly can have other applications…abernathygroupfamilyoffice.com Creating Your Family Bank Everyone needs estate planning. Everyone. Every. One. But not everyone needs the same estate planning. There are some…www.tallgrassestateplanning.com