Okay, so we all know what a bank is. But, what really goes on behind those teller counters and big wooden desks? How much cash is in a bank and who does it belong to? When we deposit money, where does it go? We’re going to make the complicated world of banks easy to understand. It’s Lily here, your Financial Go-To Girl reporting for duty on another Financial Literacy Lesson (FLL)!
Okay, girls, let’s start with the basics. The reason why you put your money in the bank in the first place is because most likely, it’s much safer in a regulated facility than somewhere like your house, where it can be stolen. There are two types of accounts, which are a savings account and a checking account. The savings account is sued for exactly that-savings! You put your money in the bank to save it for a later time. That account actually has something called interest. Interest is a percentage of the total amount you put in the bank that adds on every cycle, which is usually a year. Wait, that was a lot of words. Let’s break it down. Say I put $100 in my savings account with 2% interest from the bank. 2% of $100 is $2, so my new total after the interest is added is simply $102! That was easy, right?
A Checking account is what you use on a daily basis. You can deposit money and take money out on a regular basis, and you can even sue this account with a debit card, which automatically deducts that amount you spend somewhere when you use it.
So, that’s why WE use banks. But, how do banks make profit? And, how do we know our money is safe? Well, banks make a profit because of the whole idea of loans. When you put your money in the bank, thr bank uses the money it then has to give out a loan of money to someone else. Just like the bank pays you interest, the bank CHARGEs interest to person it is loaning the money to, but at a higher rate. They keep the difference, and “voila!” they have a profit! Before the Great Depression, there was no security. People lost all of their money when the banks collapsed, and their lives were ruined. Now, we have the FDIC, or the Federal Deposit Insurance Company to help solve that problem. They protect your money, but only to a certain amount. The company will only protect $100,000 in one bank, so if you have more, you have to split up between banks. Okay, so I think that was the basic stuff about banks, but I found out so much more! Check back to talk more about banks with me, Lily!