Money Management

When it comes to money, it’s important to weigh the risks. 

We should all remember the words of English philosopher and statesman Francis Bacon who famously said, “Knowledge is power.” To safely deal with shadow banking, it is crucial that you have knowledge of what it is and how to protect yourself from any less-than-desirable outcomes.

What is shadow banking?

It’s easy to believe that the company loaning money for a mortgage is a traditional mortgage lender or that the place you’re borrowing money from to remodel your basement is a bank or credit union.

As the International Monetary Fund (IMF) puts it: “If it looks like a duck, quacks like a duck, and acts like a duck, then it is a duck — or so the saying goes. But what about an institution that looks like a bank and acts like a bank?”

Spoiler alert: It may not be a bank at all.

A “shadow bank” is a financial institution that performs like a bank but is, in fact, a company with no government oversight regarding banking practices.

One of the most recognizable shadow banks is Quicken Loans, the largest mortgage lender in the U.S. As a company, Quicken Loans has done a lot of things right. It’s known for outstanding customer service, provides quick and convenient home closings, and contributes to overall economic activity.

However, it’s still a shadow bank.

The difference

To understand how shadow banking can be a risk to your bank account, it helps to understand the difference between traditional banking and shadow banking.

Traditional banking

Makes mortgage, auto, home equity, and personal loans using deposits from its customers.Required to comply with strict standards and restrictions set by the Federal Reserve.Heavily regulated by federal and state authorities.Provides protection against loss of deposit through FDIC or NCUA.

Shadow banking

Makes mortgage, auto, home equity, and personal loans using investor dollars.Not considered a banking institution and not required to comply with Federal Reserve restrictions.No banking oversight provided by federal or state authorities.No commitment to a particular community, meaning there’s no concern regarding consumer blowback if things go south.Funds channeled through a shadow bank are not insured by any organization.

Major risks and how to protect yourself

As Quicken Loans illustrates, not all shadow banking is shoddy. Your risk as a consumer is believing that you have the same protections through a shadow bank as you would receive through a traditional bank or credit union.

Here are two of the major issues stemming from shadow banks:

1. No safety net

Let’s say you want to open a money market account (MMA) to use as an emergency savings account. Your local bank is paying an APY of 2.5%, but another financial institution is paying 4.5%.

Naturally, you want a higher interest rate and deposit the funds through the other financial institution. It’s not as though you’ve never heard of the other financial institution, and you figure it must have tons of money on hand. You’re not even worried that the funds are not FDIC insured as they would be through the local bank.

Another pandemic (or some other financial crisis) hits. If you’d deposited your money at your local bank, it would have been able to borrow money from the Federal Reserve to ensure that you had access to your account when needed.

Unfortunately, shadow banks have no access to short-term, government-backed funding. To come up with extra cash, they’re forced to sell assets. If they’re unable to sell enough assets to cover deposits, you could lose some or all of the money in your MMA.

Takeaway No. 1: Don’t just look at APR when deciding where to deposit your money. Unless you’re comfortable with the risk a shadow bank represents, look for a financial institution that is FDIC or NCUA insured.

2. Potential lack of liquidity

All financial institutions need access to capital to operate. One of the reasons the 2008 financial crisis grew out of control so quickly is that there was no short-term funding available to many institutions that depended on it to keep their doors open.

Traditional banks and credit unions are required to maintain a specific level of liquidity. In fact, if they fall below that amount, they must take immediate steps to correct the issue. The same is not true for shadow banks.

In the years leading up to the 2008 collapse, shadow banks risked liquidity. When all the wheeling and dealing was done, and people began defaulting on their mortgages, those lending institutions did not have the funds required to stay afloat.

There’s plenty of blame to go around for the 2008 collapse, but part of it belongs to shadow banking.

Takeaway No. 2: Whether you’re taking out a loan or making a deposit, be aware that shadow banks represent a higher risk.

Few things are all bad or all good, and that includes shadow banks. According to the Washington Post, shadow banks controlled nearly half of all global financial assets at the end of 2020, or $225 trillion. On the other hand, traditional banks controlled $180 trillion in assets at the end of 2020.

Clearly, shadow banking is not going anywhere. And while properly-managed shadow banking can help drive the economy, it’s vital to understand the associated risks.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Dana George has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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You need to read this if you’re buying a house during the off-season. 

Buying a house is something most people do in the spring and summer. There are a lot of reasons for that. For one thing, it can be easier and more fun to look at properties when the weather is nice. If you have kids in school, you may also want to get them settled in a new place before the start of a new school year.

But, not everyone can wait — or wants to wait — until the weather warms up to move forward with a purchase. If you’re considering getting a mortgage soon and buying in the off-season, this advice from Dave Ramsey can help you ensure you’re happy with the purchase.

Be aware there may be less inventory

Ramsey has warned that you may not have as much choice when it comes to a winter home purchase.

“In winter, you’ve got a limited number of sellers on the market,” he explained. Since there are fewer properties for sale, you may not be able to find your dream home as easily.

You’ll want to be patient and avoid settling for just any property since a home purchase is a big commitment. While you don’t need the “perfect” house, you shouldn’t rush into the transaction — especially if you aren’t finding anything you like.

You may get a better deal — but you still need to stick to your budget

Ramsey explained that there are fewer buyers in the winter than during the summer. So, although there is a lower supply of houses, there is also lower demand — and this can help you to score a better price on your property.

“People who bought their homes during winter saved tens of thousands of dollars compared to those who waited to buy in the spring or summer,” Ramsey explained. He cited data showing the median sale price of existing homes was between 4% and 17% lower for properties sold from Dec. 2021 to Feb. 2022 compared with homes sold between March and June of 2022.

It’s not just supply and demand that could help you save, either. Since people usually don’t sell a house in the winter if they have their choice, you may be dealing with sellers who need to move soon. This can give you more leverage.

Be aware, though, that while you may be able to get a “deal,” you still should be careful about how much you end up spending.

“Home prices might drop a bit with the temperatures. But that doesn’t mean you should justify spending any more than 25% of your monthly take-home pay on monthly housing payments,” Ramsey warned.

You can check out the home’s durability

Finally, Ramsey explained one of the key perks of purchasing a home in the winter. You get to see how the house stands up in bad weather and how it looks under suboptimal conditions.

“House hunting in winter gives you a chance to see how your potential new home handles harsh weather,” Ramsey explained. “Suppose you fall in love with a house even with the weather at its worst. Then you can be confident that living there will only get better from here on out!”

If you’re house-hunting this winter, be sure to keep this advice in mind as it can help you make better choices that maximize the chances you’ll end up in a home you love even when spring comes along.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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These are the money moves that impressed us the most. 

Not everyone realizes it, but Reddit can be an excellent source of financial advice. There are lots of subreddits dedicated to personal finance, and the most useful comments usually get voted to the top. If you’d like to get better with money, read on for the smartest financial decisions we could find on Reddit.

You won’t find the usual tips, like saving money every month or paying off credit card debt, on this list. Those are great recommendations, but we specifically looked for financial decisions that don’t get talked about so often.

1. Avoid relationships with big spenders

The two main factors in your financial success are how much you spend and how much you earn. If you spend all or most of your earnings, you won’t be able to save much money.

Quite a few Redditors have gone over ways they live below their means. The one that really stood out was a decision to avoid relationships, including friendships and romantic relationships, with people who spend a lot of money.

To clarify, relationships between spenders and savers can work, provided the differences aren’t too extreme. But with big spenders, it’s going to be tough. When your friends or significant other always want to do something expensive, that can rub off on you. It’s much easier to stick to your spending plan when the people you’re closest to aren’t pulling you in the opposite direction.

2. Don’t have children until you can afford them

When you have children, life gets a lot more expensive. In fact, recent data shows that it now costs $300,000 to raise a child in the United States. It’s a huge financial commitment, and one that lasts for decades.

Redditors recommend you wait to have children until you’re in a good financial position. Things don’t need to be perfect, and there’s certainly more to parenting than how much money you spend. But being in a comfortable place with money will make your job as a new parent easier and cut down on financial stress.

3. Plan for hidden costs

Lots of expenses come with hidden costs. These are extra costs that aren’t part of the purchase price, so people often fail to plan for them. There have been several great examples on Reddit of hidden costs to plan for.

Homes are a big one. Some home buyers only look at how much their mortgage payments will cost to decide if they can afford a home. They don’t consider all the other expenses of home ownership, including repairs, maintenance, property taxes, and homeowners insurance.

Vacations are another example of people underestimating how much they’ll spend. Some travelers base their budgets on the cost of just their flights and hotels. But you also need to plan for other costs along the way, such as eating out and paying for rideshares or taxis to get around.

4. Invest in your health

“Invest in yourself” is popular financial advice. Normally, it refers to improving your skills and knowledge.

A good variation on this idea is to invest in your health. Medical issues can be costly, and they’re even one of the most common causes of bankruptcy. If you live a healthy lifestyle, you can reduce your risk of this.

Many Redditors invest in their health by purchasing nutritious foods and staying away from harmful products, such as cigarettes and junk food. There were also multiple Redditors who mentioned spending on high-quality shoes. Even though shoes can be expensive, it’s well worth spending enough for a comfortable pair. Your feet, and the rest of your body, wil thank you for it.

5. Spend more while buying less

Some Redditors have found that taking a minimalist approach has helped them save money. Instead of buying lots of mediocre products, they buy a smaller number of quality products that are going to last.

Take your wardrobe as an example. You’d pick out some versatile, well-made items that you can combine into different outfit combinations. These may cost more individually, but you’ll likely spend less over the long haul than you would buying cheap, poorly made clothes. You can use this same approach in other aspects of your life, as well.

Personal finance subreddits can provide lots of smart and unique ideas. Those five are the best that we found, and they’re all decisions that can be a big help for you financially.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Lyle Daly has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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