Wealth Formula Podcast

Let’s talk, for a minute, about how a bank works. You deposit money in the bank. These days, they pay you less than 1 percent interest. Because they are a bank, they are able to lend out most of the money you deposited. This is called the fractional reserve system. It’s complicated and best addressed in detail on another episode. However, in a nutshell, this is how it works. The bank only needs to keep a tiny percentage of what you deposit and can lend out the rest. So, say you deposit $10. The bank lends out $9 and keeps your $1 in the bank. Of course you never told them to do that. You assume your money is in the bank and that you can access it anytime you want. And…in theory…you can. That is as long as everyone wants there money back at the same time. So, when the bank lends out your money to a borrower, they charge a much higher rate than what they are paying you and they make a lot of money. Did they pay you for putting your money at risk? Hardly. Wouldn’t it be nice if a bank told you what it was doing