What do banks do with their cash? Well if you look at the assets on the Bank of america balance sheet you will see a summary of their assets and liabilities. You can find Bank of America’s balance sheet at Morningstar.com.
The balance sheet basically shows the assets of a company , the liabilities of that company and what’s leftover for shareholders, also known as shareholders’ or owner’s equity.
Assets are everything the company owns or controls that has economic value. Liabilities are everything a company owes or is obligated to pay, the opposite of an asset. When everything that’s owed is subtracted from what’s owned, retained earnings are left for the shareholders.
What You Can Learn From Bank of America
- Own More Assets than Liabilities
This bank is still in business because they are able to cover all of their liabilities with assets. In this instance their asset to liability coverage is about 1.12. That means they have about one dollar and twelve cents in assets for every dollar in liabilities. Your goal should be to do the same. If you drowning in debt you need to reduce your liabilities. Overall your goal should be to reduce your liabilities and increase your assets. Your net worth is a measure of assets to liabilities. Positive net worth is the first step to financial freedom.
- Don’t Put All of Your Eggs in One Basket
The assets that Bank of America owns are spread over various asset classes. There are lower risk federal funds, riskier trading account assets, bonds and debts owed to them in the form of loans & leases. Diversification is important to lower the overall risk of your financial portfolio.
- Timing is Everything
The liabilities owed by Bank of America are not all due at once. They have various maturities or due dates. Deposits are typically checking accounts that see lots of transactions each day, federal funds and trading accounts typically have maturities within the range of a few days. Commercial paper due dates will vary but are typically longer term and long term debt is, well long term. You can do the same for your own liabilities by timing the due dates of your monthly bills or long term loans. Spreading the due dates out during the month can positively affect your cash flow situation. Try out the free services at Mint.com that will help you get control of your cash flow.
Most Americans will say that the banks were the cause of our recent financial crisis, but there is plenty to be learned from them. And I’m sure if we could have a bailout to fall back on it would have been a lot easier for most Americans to bounce back from the recession.
Update 3/7/2011: This article was featured in the Wealth Builder Carnival over at MyWealthbuilder.blogspot.com!
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Anthony Thompson says:
March 21, 2012 at 12:41 pm (UTC -4 )
Manage Your Money Like a Banker – First of all, I love the title. Second, using the example of a highly recognized profit center is a powerful way to advise people on how to get control of their personal finances. All of the steps that you presented here are excellent, and are also just the things we all must exercise to ensure that we are living a financially savvy lifestyle. Great points!
krantcents says:
March 21, 2012 at 2:53 pm (UTC -4 )
Banks or a well run business is a good formula to follow. A good conservative approach to finance is always a good model.
Daisy @ Add Vodka says:
March 21, 2012 at 11:13 pm (UTC -4 )
So true. I especially agree about not putting all of your eggs in one basket. What if that basket breaks?
MoulahMono says:
March 25, 2012 at 8:41 am (UTC -4 )
This is a very good way at looking at our personal finances. Debt reduction is the big one and also a hard concept for people to receive. Most people if it were not for debt would be in a very good place. I know it is a sickness. I hope more people take a shot of finance education and implementation to cure this virus. Thanks for this post, Dr. LaTisha
Robert @ The College Investor says:
March 25, 2012 at 11:37 am (UTC -4 )
Great comparison to how budgets and finances work for both people and corporations. Remember, corporations are people too (hahaha, I had to throw that in).
Thomas - Ways to Invest Money says:
March 26, 2012 at 2:35 pm (UTC -4 )
I was going to disagree with your title until I read the post. But I would say it should be like a bank as oppose to banker. Having worked at large bank most banker are actually worse off then the people they are trying to help.
Banks on the other hand have great plans and though some fail its a good business model to plan for personal finances.
LaTisha Styles says:
April 2, 2012 at 6:19 pm (UTC -4 )
Interesting. It’s funny because most people think that just because you work with money you would know how to manage it, but as you say that’s not always the case.
moneycone says:
February 5, 2011 at 1:55 pm (UTC -4 )
Fantastic post I have to admit! I love the way you relate the business of one of the largest banks in the world with personal finance!
My recent post Never Pay Full Price
LaTishaDStyles says:
February 5, 2011 at 2:01 pm (UTC -4 )
Thanks! I decided to learn from the banks when I realized that they were some of the first ones still profitable out of the recession.
My recent post Entrepreneur Fridays- Konture Music Group
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March 30, 2011 at 8:18 am (UTC -4 )
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