Banking

Comparison of the performance of Anderson Bank, Cincinnati, OH compared to its peer group

In APA style

Abstract

In this report I would be focussing on the performance of Anderson Bank for the period October 1, 2005 to September 30, 2006. Analysing the performance from the UBPR (attached as a separate file) and comparing with its peer group median (50th percentile) consisting of 376 banks matched according to FFIEC’s uniformity criteria. Its relative performance within its peer group is expressed as a percentile, which means that Anderson has outperformed that specified percentage of banks within its peer group on that criterion.

Interest Income: Total interest income, that a bank earns as interest from its lending e.g. personal loans, business loans, mortgages etc is higher for Anderson than its peer group (70th percentile). The bank has improved its interest income performance relative to its peers substantially from 2003 (when it was substantially behind the average) onwards. This indicates that in recent years, Anderson has aggressively lent money to its customers.

Interest expenditure: Total interest expenditure (e.g. interests it pays for its funds that it has acquired from various sources- savings, money market and brokered deposits, other borrowings) is higher than that of its peer group, specifically at 77th percentile. This indicates that Anderson is prepared to pay more interest than the average bank within it is per group for acquiring funds to pursue its aggressive lending policy. Again, the figures show consistency from 2003, establishing this as part of its policy.

 Interest margin or net interest income refers to the difference between income and expenditure, which for Anderson in 2006 is roughly similar to that of its peer group (53rd percentile). But it represents a substantial improvement over the past few years, indicating a successful policy of aggressive lending to improve its performance.

Non-interest incomes: This refers to the bank’s income from activities not related to lending like service charges, fees from sale of insurance, loan origination fees, proprietary trading and safe deposit rent. In 2006, Anderson’s performance has been quite poor within its peer group compared to the median (53rd percentile). Again, comparing to the trend over previous years, Anderson has always relied less than its peers on non-interest earning.

 Non-interest expense: This refers to the bank’s expense on personnel, services and maintenance of fixed assets like premises.  Compared to its peer group, Anderson has outperformed its peers over the recent years, and in 2006, it was ranked at 29th percentile. This indicates that Anderson has kept its operating costs relatively low, and has been cost-efficient.

6. Return on Assets (ROA) is good metric for assessing the management performance of banks, defined as the net income as a percent of total assets (highly leveraged in case of banks due to heavy borrowings). For Anderson, it is 1.15% compared to the peer group median of 1.21 %, thus making its ROA similar to that of its peers at the 52nd percentile. By banking standards, these figures show that Anderson’s performance, like the average bank in its peer group, was quite good in 2006. Over the last few years, since 2003, Anderson’s own performance has improved significantly within its peer group (mid-40th percentile to 52 at present).

Reference List

www.fdic.gov

Anderson bank website

CHALLENGES OF MICROFINANCE BANKING IN NIGERIA-1 Nigerians, like many other Africans are generally known as their brother’s keepers in view of the extended family system. But when truly analyzed, there is a possibility that this may not be so? Perhaps a hypothetical deep may reveal that not up to 10% of Nigerians would invest in ventures or people that would yield them nothing in return and here I mean, “Returns in the short run or in the immediate”. The returns may be financial, emotional, spiritual, relational or social.

But fact is, there is something the investors expect in return when they give and these could include being worshipped as personal heroes, fear of harassments, fear of being harmed, for family ties, religious ties, being perceived as a caring corporate organization with the intent of bigger business tickets etc. Hardly do the “Nigerian rich” set aside a portion of their riches for the “unknown poor” or for true charity except such gifts are meant to make them be seen by the Society or Divinity as good or circumvent some threatening harms etc.

This anti-poor behavior is projected into organizations; corporate, social, religious and sometimes even Government and parastatals as people see only the short end of developments without heeding the social woes of economic imbalance and insecurity. Consequent upon my above beliefs, I may classify the challenges of Microfinance banking in Nigeria under five (5) main headings: 1. COMMUNICATION GAPS AND INADEQUATE AWARENESS

As a background to the undeniable problem of communication for effective microfinance, listen to this quote by Stan Paris on his article on Microfinance As A Means of Reaching The People “Problems of communication are endemic in the industry, dating back to what could be considered the first micro-loan. In 1976, Muhammad Yunus, a young economics professor at Chittagong University, Bangladesh, took his students into a small village where he discovered a woman crafting beautiful stools out of bamboo. He inquired what the woman earned for her work after repaying the trader from hom she borrowed. She told him she earned the equivalent of 2 cents in net profit. Yunus was appalled. He wanted to help her find a means of financing that would allow her to make more net profit. But, first, Yunus had an enormous communication barrier to overcome. That was a time in Bangladesh when women didn’t touch money and didn’t talk to men, explains Sam Daley-Harris, director of the Microcredit Summit Campaign, an important facilitator of dialogue in the industry. Yunus had to have a female student ask the woman a question, then return to tell him the answer.

There were barriers of communication even in explaining the value proposition. ” Truth is that today, communication barriers exists heavily in Nigeria particularly given that even within a State, there exist as many languages and dialects as exists ethnic groups. Also, high level of illiteracy even among the educated who fails to read important things that would enable them take positive steps towards personal, interpersonal and national development. I recall given many flyers of Elim Kit “n” Kin to a friend of mine who is well educated and is on a billion naira business locally and international.

This guy was in a church service when a play-lets on Kit “n” Kin was delivered by a group of young people. But after the service, he approached me on how to go about empowering a friend he wants to help and when I suggested kit “n” Kin, he asked me what that was? Obviously, my educated friend neither read the flyer which is comprehensive and explanatory nor listened to the play….. here lies the problem of many Nigerians of all classes, hence my concern for communication on micro financing. Lets now look at some of areas of specific communication challenges in Nigerian Microbanking

In adequate awareness campaigns and supports by the regulators: The CBN and the NDIC as Federal Government’s engine of economic development need to do greater and continuous campaigns to all stake holders; investors, universal banks, the banking public, the micro targeted poor and low-medium scale entrepreneurs until the micro banking ideas sink in the society and gets well accepted. I hear and read the Governor of CBN assuring the public of safety of the Consolidated Banks. But the Similar truths and campaigns should also be carried for the microfinance industry Lack of trust by the oor themselves who believe that the microfinance banks are just like the unregulated community banks and unregulated finance houses. Going by the antecedents of the banking industry in general, no one would blame the people for lack of trust. Only effective and far-reaching campaigns and exhibited trust in the microfinance banks by the government and the regulators can achieve this desirable confidence. An Uneducated Population: A critical ill of the populace in Nigeria is the bottom, bottom level of poor education of the people.

A country where less than 10% of the populace pays attention to the print media, less than 20% listen or watch educative audio-visuals is a great challenge to information dissemination. Incidentally, the literally “very” educated people do not read handbills and communicative documents that deal with those things like microfinance banking since they have no interest in such activities. A survey of how many people would read this documentary would shock you even if the Guardian Newspapers circulate it free to just the middle and upper classers. This attitude is worse with the targeted microfinance clients.

They are more interested in chasing their “kobos” than reading or listening to programs that would help them build up and improve on their standards of living The Active Poor’s Current Preference for Gifts Than Loans. Generally, a hindrance to economic development in Nigeria is the gift preference of the poor as a culture from political and religious biases. The politicians, the rich in religious circles, towns and villages all over Nigeria have cultured the poor to beggarliness and dependence rather than empowerment for productive and financial independence.

Gifts are not usually regarded as re-investment treasures by the receivers. This is why givers ought to challenge the receivers to effectively put their gifts to work by rendering these helps through microfinance banks. Products such as ELIM Kit “n” Kin are meant for well intended givers to assist the poor live above perpetual begging. It is known internationally that micro-financing is not charity. Micro funds are meant for the productive activities of the beneficiaries.

Consequently, only people who fall within the active poor or low income earners who are willing and able to utilize the loans for productive activities and repay both interest and capital are the bona-fide candidates for microfinance. 2. ANTI-POOR ATTITUDES OF NIGERIANS Dearth of quality investments in microfinance banks:. Most surplus spenders and investors in Nigeria, because of the lethargic attitudes to the poor, would not invest in Micro finance banks. They prefer to invest in the “billion naira profit making consolidated banks”.

Again, Nigeria investors are coasted by the quick-return and trader-like attitudes which surely does not result in a meaningful development for the Nation. They are therefore unable to go through the gestation period required in the young microfinance industry for their investments to start yielding good dividends. The Grameen Bank of Mohammad Yunus did not start making profit in year one, but today, that bank is one of the most profitable financial institutions in Asia and yet, it is a financial institution with classic recognition for adding the greatest value to humanity.

Snobbish and selfish attitudes by the financially well to do Nigerians. Hopefully, good campaigns and direct involvement by the who is who in Nigeria would solve the current snub by the rich on poverty alleviation programs and enable these categories of Nigerians see that Microfinance is both a good and rewarding investment and a good development project that directly and indirectly impact their lives. 3. INSUFFICIENT SUPPORT FROM THE REGULATORS AND GOVERNMENTS

Poor buy-ins and competitive approaches by the State Governments and Local Governments. The policy direction towards the millennium development goals is that one percent of the annual votes of the State and Local Governments should be channeled to Microfinance banks for on-lending to the poor and low to medium scale entrepreneurs. So far, very few states have taken steps to get this started. Lagos state is a shinning example that has taken the lead to effectively and efficiently put microfinance banking into focus.

Their microfinance institutionalization, the dept of involvement of the Ministry of Women Affairs and Poverty Alleviation in developmental activities at the grassroots is equaled by non I know in Nigeria of today. This Ministry is not just a moribund ministry; it is a ministry that is empowered and achieving evidential results. This ministry needs to be copied by every state in Nigeria. Today, some 800 microfinance banks are established in Nigeria, but some states rather than use the services of these banks licensed by the CBN, choose to find a round about way of dealing with mega banks or establishing their “owned” micro credit institutions.

It is my candid opinion that government involvements in microfinance banking would be counterproductive as they should concern themselves with policy formulation and control rather than implementation. How can someone formulate policies, implement it and effectively control it? Nigerian Microfinance banks have what it takes to manage micro funds for states and international bodies and should be given the chance to do so under strict supervision and controls.

Banks and money go side by side; banking emerged when people had money and needed secure places to store it. The other reason for the emergence was that trading activities had grown and thus merchants needed loans and funds to carry out expeditions to far and wide places.

History of Banking in United States

America needed banks immediately after independence as Congress needed to pay off the new nation’s debt. Alexander Hamilton the first secretary of treasury suggested Congress create a Bank of the United States to help refinance all these debts in 1791. “The bank would be the only national bank, and it would hold the federal government’s deposits and lend to the government and business”.

This bank served as the federal government fiscal agent, receiving its revenues, holding its deposits, and making payments. The shares of the First Bank were owned by domestic as well as foreign investors. In 1929 America faced depression, in which the financial structure (businesses), including banks, were badly damaged. Several banks went out of business and many businesses went bankrupt. The extent of the depression was so deep that by 1933 one of four Americans was unemployed. Soon the depression was over and banks were revived.

Even after the depression of 1929 and the deregulation of the 1970’s the Central banking in the United States has progressed and modified over the last 200 years. There are many reasons for the popularity of banking. The most important reason is  enhanced banking technology, which has given us ATM and VISA , also known as plastic money. The other feature commonly used now is online banking.

Online Banking

Online banking is based on the technology of the internet and the usage of personal computers. In earlier days banks used powerfull computers to computerize millions of transactions carried out every day. Through internet branches of the same bank can develop networks, through which they could keep up to date with transaction and could provide services to customer of any branch.

The first bank which provided features of online banking was the Royal Bank of Scotland in 1997 in just ten years online banking has gained so much popularity, that almost all banks provide certain features of online banking if not all.  A “Recent survey revealed that 90% more small and medium-sized businesses use online banking now than five years ago” (guardian limited).

“Online banking has several different names like e-banking, internet banking and even home banking. This technology emerged in the 80’s and since then has developed. Online banking is a system of banking in which customers can view their account details, pay bills, and transfer money by means of the Internet.” (Internet banking definition – Dictionary – MSN Encarta)

Certain banks are traditional and even provide features of online banking.  While others are only online banks and have no physical presence. One of the examples of a bank which is developing from the traditional banking and now trying to provide certain features of the online banking is Glacier Bank. It is planning to offer certain features in the online banking such as

• Transfer funds between accounts
• View current transactions, images of checks and deposit slips
• Access prior months bank statements
• Download account information
• Pay your bills
• Funds stay in your account until the payment clears the bank.
• Make loan payments

Thus, before converting to an online banking, we would examine some advantages and disadvantages of the online banking over the traditional banking for the customers as well as for the bank itself.

Advantages of Online Banking

E-banking is relatively a new advancement in the field of banking even then there are many business and customers who have switched from traditional to online banking. The reason being quite obvious, its advantages. Online banking has advantages which no one can ignore the most attracting advantage being the convenience and flexibility it provides.

Flexibility of time,  an example of flexibility can be taken from the fact that now there are no time limitations you can pay bill at any time of the day or night no need to rush at the bank to avoid due date, of the bill. Then there is convenience an example of which can be that there is no need to wait in queues and no wasting of time in traffic everything is a just a click away.

Internet has globalized this world and in the same online banking is globalize. Difference in cities or countries even continent does not effect e-banking if u have any kind of  money crises you can log on from any where in the world and can solve your problem in minutes. Transaction is very fast and effective; many online banking sites now offer sophisticated tools to help you manage all your assets more effectively. A simple example of this can be taken from the simple accounting software – some online banks provide to simplify record keeping.

Another advantage of online banking is that less paper work has to be done and once u have entered information, it doesn’t need to be re-entered for similar consequent checks, and future payments can be programmed to occur automatically. Another advantage can be that online banking is cheaper than traditional banking as online banks don’t have to pay for real estate.

Disadvantages of Online Banking

With advantages, online banking has many disadvantages which created hindrance in the way of online banking – one of them is security. The most important question in a customer’s mind is security. The customer can never be sure if an action he requested has occurred or not and as paper is not used the chances of a valid prove with banks stamp on it is not available. Then there is hacking, if your password is hacked you can loose all your bank balance.

There are other minor problems which have created problems for online banking, but these problems can easily be resolved. Sometime to open an account or transfer from commercial to online banking can be very time consuming and in convenient. This is a very temporary problem. The other problem is the time to learn how to move around online banks, some customers might get discouraged if they don’t get a hang of how to operate in online banks.

Then there is internet connection if the internet connection is very slow transaction can take a lot of time. If the banks change there website address without notice for updating it can create confusion and can lead customers in the wrong direction. “Another drawback can be that some banks offer online banking in a limited area only. In addition, when an account holder pays online, he/she may have to put in a check request as much as two weeks before the payment is due to that the person has lost up to two weeks of interest on that payment.”

 “ Online-only banks have a few additional drawbacks an account holder has to mail in deposits (other than direct deposits), and some services that traditional banks offer are difficult or impossible for online-only banks to offer, such as traveler’s checks and cashier’s checks” (investor words).

Even though there are many disadvantages in online banking but they are all minor issues which are either temporary or easily resolvable. Thus online banking is getting very popular with time and it is expected that in near future the concept of a physical bank would decrease drastically. With advantages and disadvantages of online banking another subject which is important is that how online banking has affected commercial banks.

Effects of Online Banking on Commercial Banks

The biggest effect of any kind of automation is unemployment. With the increase in usage of online banks the number of commercial banks is decreasing and thus people who were working in banks are getting redundant. The other direct effect on commercial banks is that as banks are getting virtual there is no need for a physical bank. The idea of a virtual bank makes banks cheaper and easily accessible. Now braches of a bank are not needed in every town thus the cost of managing offices has ended, no electricity builds any maintenance expenditures and no money wasted on stationery. Thus the effect of online banks o commercial banks is that, as online banking is increasing commercial banking is decreasing.

In commercial banking, the costumers account is managed or recorded by the employees with the emergence of online banking this trend has changed; now the customer himself manages his accounts. Another impact of online banking on traditional banking is that as banks are getting online face to face contact has reduced.

Due to which a new user does not get the proper guidance and awareness of the facilities provided by the bank. In order to omit this obstruction a commercial bank has developed a new department. The department of telephone operators who are available 24 hours a-day new users as well as old one, can contact these operators at any time to get opinion about a desired subject

ATM cards or plastic money is a kind of online banking now people don’t stand in queues in order to transact money. People can transact money through any ATM machine which can be found just round the corner of every road. Commercial banks who earned money previously from customers now earn money from customers as well as through owners of shops. Now most of the shopkeepers have machines with the help of it u can pay your bills through cards. Commercial banks charge a certain percentage on your bill amount and with every transaction the bank directly gets the extra amount charged. Thus the ways of earning have changed with the help of online banking.

Commercial banking had the facility to cater people of an area but with online banking the commercial banks are responsible to cater people all around the globe. For example a person living in Canada is visiting London for business and a cherub has bounced he can contact London branch for assistance. Thus it can be said that commercial banks have more clients to deal with then they ever had to before.

Job structure have even changed due to commercial banking previously the sole responsibility of bankers was maintaining account, recording transactions or transferring money from one branch to another. Now online banking can easily deal with such features therefore the responsibility of bankers have converted from accounting to convincing. Employees are responsible to convince their customers to take car loan through credit loans, insurances and many other features. Thus salaries are based on how well communicate and convince rather then how good your math, accounts is.

Online banking has changed commercial banking to an extend, the only feature that an online bank is not been able to overcome is the satisfaction that face to face communication gives.

Conclusion

Check Free Analytic Research Services which discovered that 56% of the U.S. online households are paying at least one bill online, up from 52% in June 2004. These figures and advantages and disadvantages of the online banking suggest that it is not late to introduce the online banking by Glacier Bank. It has been evident that that the online bill payment and usage of other feature of the online banking are becoming more important for consumers.

Thus, according to my analysis, I would recommend Glacier Bank to start its online services as soon as possible. As advantages of the online banking are far more prominent than disadvantages, it is also observed that the online banking is becoming more and more popular to increase their customers and profits. Glacier bank should start the online feature. If not completely, but it should provide partial features in order to increase the business.

Technology is progressing at a remarkable speed many people have tried to slow its pace or completely terminate it but no one has managed to achieve it. Thus technology is advancing in every field and online banking is just a feature of it which is developing beyond imagination. Gone are the days when people used to visit banks frequently for transactions or other related activities. Computers or lets say internet has taken place of huge bank buildings

Online banking is getting popular with time “forecasts show that the number of households that receive bills electronically as well as pay them online will increase to more than 40 million by the end of 2005 from less than 3 million in Forecasts 2001” (Erdener Kaynak). The static’s suggest that with a small p of time online banking will be the norm of the day it would became vital for business and routine transaction.

Online banking has no major disadvantages. It is predicted that the online banking would have such an impact on commercial banks that commercial banks would not only loose their importance but without its implementation they would thrown out from the market.

References

1. Consumer attitudes towards online banking: a new Strategic marketing medium for commercial banks
2. http://www.inderscience.com/storage/f694281111235107.pdf Accessed on 20^th April
3. Guardian limited http://technology.guardian.co.uk/online/businesssolutions/story/0,,1315579,00.html Accessed on 19^th April
4. Investor’s words http://www.investorwords.com/3420/online_banking.html Accessed on 20^th April
5. Internet banking definition – Dictionary – MSN Encarta http://encarta.msn.com/dictionary_701706860/Internet_banking.html Accessed on 20^th April
6. Online banking Definition http://www.investorwords.com/3420/online_banking.html Accessed on 20^th April
7. THE FIRST BANK OF THE UNITED STATES http://www.phil.frb.org/education/history/history_of_Banking1.html

A minimum cash balance required by a bank is called a compensating balance.

Also, a compensating balance is used to offset the amount of money brought upon by the bank to make a business loan

Introduction:

In this particular task of the unit I will describe the internal and external finance sources for a particular selected business. In this task I will use the same company as I did before in the previous part of the unit.

The name of the company is Media Markt. In this task we will get to know where money actually comes from to actually create such a big company which is well known of its electronic products.

What are the main ways in which the Business can access its financial resources? In this particular task I’m using the company: Mediamarkt. The business can access its financial resources in two ways:

1. From within the business ( Internal Source).
2. From outside the business( External Source).

Internal Source:

The internal Sources for the owner of Media Markt can be from the business savings or the owners own savings. For Media Markt the owner had to use his own personal savings to start the business, as we see Media Markt at the moment, very big and so much product, It wasn’t like this years ago, because the owner had to start small and in this way he grew each year by selling good products and by fulfilling the the needs of the customers.

Capital from Profits:

Once Media Markt was started the owner-operated accurately. The money he made as a profit he puts it back into the business as a investment to expand the company properly. In this way he kept on doing that and now as we can see Media Markt is one of the biggest companies selling high quality eletronic devices. In which way does the Internal Source give an Advantage to the business? As the business is being started by the owner of Media Markt Himself he doesn’t have to be pay any interest at all to a particular bank, because he used his own personal savings to start the business. The good thing about the owner of Media Markt is that he didn’t lend money from different banks, because otherwise he would have been in a debt loss, in this could have been a bad thing for the business, because if half of the profit goes to the bank, the owner can’t invest money to make the company bigger.

External Sources :

The External sources are also in other words Sources from the outside. Media Markt made use of different kind of external sources to expand their business. By for example, Building societies, Leasing, Venture Capitalists, and Friends or Family.

Media Markt Building Societies: As the company built societies outside of the company it is a good advantage fort hem, becayse building societies are also able to offer loans, business accounts, commercial mortgages and overdraft facillities based on the business plan of Media markt.

Media Markt Leasing a business:

For Media Markt Leasing means that resources can be used by the business while they are being paid for to a finance company. Until the last payment is made on the agreement, the goods are not owned by the business, and if payments are not made the finance company can take them back.

Media Markt using Venture Capitalists:

These are professionals that invest an upcoming new business such as Media Markt in which they also did, however they do that usually in a return for a share in the ownership.

Friends and Family:

The owner of Media Markt had its own savings also but he wanted to expand Media Markt as a business that is the reason he also used the money of his friends and family in return for a share in the company. He can also lend money from a bank but that is often a risk, because if the business doesn’t turn into a succes the owner will be in a very high debt.

Banks:

As Media Markt didn’t have a lot money they needed the help of the bank in terms of finance, because starting up a business costs a lot of money in many, the building, the technological equipments and offices are needed to create a good business in a country. In this way they had a base to start on with the money to expand the business thoroughly.

Hire Purchase:

The hire purchase method is a really important one for Media Markt. They use the resources and they are also being paid, which means that they are allowed to make use of the resources as they are paying accurately for these, however it doesn’t mean that these goods are owned by the business itself. However, it is essential to know that Media Markt has to do the payment to the finance company, otherwise they can take the goods back that Media Markt has in the business, which is either way a loss for Media Markt and a bad corporate image.

A double-entry bookkeeping system has many advantages over the single-entry book keeping system. The double-entry system allows the bookkeeper to see a relationship of two accounts that are affected by each transaction. For each debit in the double-entry system there must be an equal credit to offset that amount. For example, the sale of books would affect two accounts- instead of one. First cash would be debited and then revenue would be credited. This would show a dynamic effect on the business. In a single-accounting system only the revenue would record an effect, and thus the increase in cash would not be apparent.

The double-entry system shows an immediate effect of each transaction and it allows for more accounts in the bookkeeping register such as assets and liabilities. Thus the double-entry accounting system allows for a detailed relationship to show from each transaction. Another advantage of double-entry is the visible equality of balances in the debit and credit columns. This equality allows for the easy detection of errors, mistakes, and fraud in a business. Single-entry bookkeeping allows for errors in the records, no room for tracking detailed asset and liability accounts, and it does not give a detailed picture of the company’s financial position.

An individual’s bank account is classified as an accounts payable account. Accounts payable is a liability account for the bank; liability means that they owe the customer a certain balance. For a liability account the positive balance is a credit. Likewise, a debit to such an account causes a decrease in the balance. Thus the bank is using the correct terminology to describe this transaction. Furthermore, the bank is using the proper term, credit, which corresponds to the positive increase in the balance caused by the deposit in cash. Using debit would be inaccurate as that is only a positive increase in an expense or asset account; and in the case of a checking account- a liability for a bank- it is a decrease in cash.

References

1. Quick MBA. (2007). Double Entry Bookkeeping. Retrieved October October 26, 2008, from http://www.quickmba.com/accounting/fin/single-entry/

He believed that in order to improve the turret financial situation, it is important for people to stop getting increasing loans. However, he also agreed that there are debts that cannot be avoided, such as student loan correspond to the high tuition fee. Therefore, he concluded that borrowing loan has risk, and it is important for future youth to avoid debt as much as they can. According to Warren Buffet, the problem of increasing debt is getting worse and worse.

Many people become rely only on borrowing more loans to pay back their debts; however, this technique would only be harmful to people’s insane since their debt could never be completely paid. In the recent years, people get used to pay their spending with credit cards. By using credit cards, people are less likely to realize how much they are spending since they are not carrying the actual cash. Therefore, people do not think carefully when they are buying stuff.

Without real cash, they could not recognize whether the product is actually worth for the price and whether the product is really necessary for buying. People would not identify the seriousness of their spending problem until the monthly bills come to their hands. Unfortunately, omen of them would not change their habits; instead, they might open a new credit card to recover the others’ debts. Gradually, their debts are increasing, and they would not be able to pay them back to the banks.

Thus, Warren Buffet suggested people to begin eliminate their bad habits of borrowing loans step by step. People can organize their daily expenses into a notebook or to their technical devices. They can mark down all their spending, so that they would be able to find out what are necessary and what are not. By doing so, they can only spend their money within their budgets, so that they can eave money rather than keeping borrowing loans. On the other hand, Warren Buffet admitted that some loans are not avoidable according to the situation.

For instance, the college tuition fee is getting higher and higher each year. The University of California has just agreed to increase 5% tuition fee to its students, which bring a lot of financial problems to many families. One of my friends was anger and lost after the US system announced the news, because her family is also paying tuition for her twin sister and her brother at the same time. In this situation, her family has o borrow more loans to pay for the tuition; otherwise, the three children will not be able to get education.

However, Warren Buffet suggested that students should try to minimize the loans they borrow. For example, I think they should try to do work-study or do part-time jobs as long as they can help their parents from getting more debts without paying back much. Also, people should try their best to find the best banks to borrow loans, which would offer them the lowest interest rates and the most benefits. Overall, I was convinced that it is important for people to know how to engage their money and become awareness of the amount of money they are borrowing.