Remember the Secret of the Lion teaches that you need to save first before you pay for anything else? For Sophie to make her goals a reality she is going to have to use the Secret of the Lion. The question is, who can she save with?
Themba reminds Sophie of their discussion earlier in the day about formal and informal financial institutions. Sophie says she remembers that they both can lend her money and help her save but they have processes, costs and regulations.
Let’s look at the difference between formal and informal financial institutions
| Formal Institutions | Informal Institutions |
|---|---|
| Regulated by legislation and you are therefore protected as a consumer | You as a consumer are not protected because there are no laws governing them |
| Larger in size and power with access to loads of cash | Often single owners or member driven often with access to smaller amounts of cash |
| Function in line with very specific rules and procedures governed by contracts | Interest rates are high and often-non-negotiable |
| Fair dealings with clients across the board | Often relies on personal relationships and trust as opposed to formal rules and procedures. Dealings with clients may sometimes be preferential as certain people may get better rates than others |
| Strict payment plans that protect both the consumer and the institution | Some lenders may use unconventional methods of collecting payments and interest |
| Formal financial institutions have insurance and your money is safe and secure at all times | Money saved in informal clubs often do not have insurance |
Can you think of any more differences between formal and informal institutions?
No matter what you choose to do, you need to know the risks and benefits involved. Let’s look at Sophie’s situation. She has two children to feed as well as herself, her partner and her parents. What would the best option for her be?
Sophie wants to know more about banking before she decides what she should use to help her reach her goals.
Themba tells Sophie that banks are businesses. They are in the business of keeping money safe and lending money to people who need it and can afford to borrow it. They offer a wide variety of services from saving to credit cards to long-term loans.
Themba asks Sophie if she has a bank account. Sophie says she does not but is worried that banks will steal her money from her. Themba explains that banks exist to keep peoples’ money safe. If you put it in the right account, it can earn interest and grow, and it will also be safe from theft.
Themba laughs. Yes, they do charge you a fee, but you can keep those costs down if you use the bank account efficiently. Let’s have a look at how you can keep your bank costs down.
Sophie nods her head; she thinks she might go and see the bank now to open an account. Themba tells her she needs to think about what type of account she would like.
Banks have various types of accounts. These accounts work differently and have different costs as well as interest rates. Sophie needs to make sure that she gets the bank to explain all the different types of accounts they have. She will then be able to choose the best one for her needs. Themba reminds her to ask the bank what the fees are and how she will be charged. She also needs to find out if she needs to have a certain amount in the account at all times to keep the account open.