Banks and financial literacy

It’s a bit funny, but I kind-of think banks are a huge impediment to financial literacy. There are two key insights that could be really useful to Joe Public (or, for that matter, me, say ten years ago…) that banks absolutely mess up.

Credits and debits

One is basic double-entry accounting. In double-entry accounting, you enter every figure twice, once as a “credit” against one account, and again as a “debit” against another account. Your accounts are generally divided up into “assets” (stuff you have), “liabilities” (stuff you owe), “income” (to keep track of how much you’ve earned), “expenses” (to keep track of how much you’ve spent). And at the end of the day, you know you’ve done your maths right if you get the same number of debits and credits. And in general, on the accounts that track how much money you actually have, or what you owe, a debit is a good thing (ie you have more money, or less debt), and a credit is correspondingly a bad thing. When you pay a phone bill, you credit your bank account when you withdraw the money (bad, because you have less cash), and debit your phone account (good, because you owe less money).

And of course the bank, in keeping its records, does the opposite — they debit your account (good, because they owe you less money) and credit their cash account (bad, because they’ve had to give away actual money to the phone company).

But then they send you a statement which comes from their perspective — they list the transaction as a debit (from their point of view) instead of as a credit (from your point of view — or at least your accountants point of view). Now maybe you paid attention in Commerce 101, and this is all familiar: but consider how regularly people get letters from banks implying credits are good during their lifetime, compared to how much attention they might pay to whatever bookkeeping instruction they may have once had.

For completeness, I should note that there’s an exception to the “debits good, credits bad” rule that comes up in “income” and “expense” accounts — when the bank charges you a monthly fee, they’ll annotate that internally as “debit your account $5” (good, they owe you less money), and “credit our bank-fees income account $5” (also good).

Assets and Liabilities

If you’ve read Rich Dad, Poor Dad, you can probably skip this section. One of the most interesting parts of that book, for me anyway, was the redefinition of “asset”. Instead of meaning “something you could sell for real money”, the author (and the “Rich Dad” from the title) use the term to mean “something that will give you money just for owning it”. So shares in businesses, rental properties, interest earning deposits, bonds, etc. The key difference is when you think of things like cars or tvs or game consoles: sure, you could sell them if you had to (which makes them an asset in one sense), but you’re more likely to keep them, and have to spend more money to keep them interesting (on fuel and services, on cable tv subscriptions, on buying or renting games).

And really, the latter is a much more valuable perspective: sure, you might look around and see lots of things you could sell for a bunch of cash, but odds on you aren’t going to do that unless you get really desperate. But if you look around and see yourself surrounded by things that are continuing to cost you money, you might look into doing away with some of those, and if you can find things that will actually make you money (or can be converted into making you money), well, then you’re taking proper advantage of the capitalist economy.

But, again, banks don’t really give a damn what’s in your interests here — from their point of view assets are things that they can claim and sell off if you go broke. And how many times does the bank’s point of view get presented to your average Joe, compared to the Rich Dad’s?


  1. Daniel says:

    I’m not sure if you’ve seen this – but it opened my eyes:

  2. Ricky says:

    The BBC’s h2g2 makes a similar observation:

    Accountants calculate their Debits and Credits in a different way to the rest of us because, in the UK at least, most people get their definition of debit and credit from their bank statement. Your statement actually shows the bank’s account with you. The key thing to understand is that the bank’s account with you is a mirror image of your account with the bank. The statement shows how much money the bank owes you (assuming you haven’t got an overdraft, of course). When you write a cheque to someone, you are reducing the bank’s debt to you. This is as good as money coming in, so it’s a ‘debit’ entry.

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