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Personal Finance 101 Part 7: Savings Account Interest 351 Views


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Transcript

00:01

We speak student!

00:05

Personal Finance 101

00:08

Savings Account Interest

00:10

a la Shmoop

00:12

Even if you don't put your money in the market...

00:14

Let's say I have my hundred dollars

00:16

and I put it in a savings account.

00:17

I'm getting some tiny amount of interest on it.

00:20

What is happening that is

00:22

allowing the bank to just give me money for doing nothing?

00:27

Got it. So let's say you put in

00:29

a thousand dollars in a savings account.

00:33

And for that illiquidity, for your promise, essentially,

00:37

of leaving that thousand dollars with the bank for a pretty long period of time,

00:41

they will give you a little more interest,

00:44

like, say it's one percent a year,

00:46

meaning they're only paying you ten dollars

00:48

a year for that thousand bucks

00:50

that you've given them.

00:52

But at least it's something I guess,

00:54

What they will do is they'll turn around and put that thousand dollars

00:59

in a pool with lots of other monies

01:02

that they'll loan out to things like mortgages

01:05

or other credit loans or other risk-management things

01:08

for insurance companies, and so on.

01:10

[ screaming ]

01:12

But they will typically take your money

01:14

and loan it out at six percent.

01:17

So they're paying you one percent.

01:19

They probably have one percent costs

01:21

that they have to process it and send you the papers every month.

01:24

So their cost is two percent on that thousand dollars,

01:28

but they're getting six percent.

01:29

So they make a four percent spread, or $40 a year,

01:33

profit to the bank -- gross profit,

01:35

because they have to advertise and do a lot of legal compliance

01:38

and other things to make everything work out.

01:39

So when I put my thousand dollars in the bank,

01:41

I'm loaning a thousand dollars to the bank.

01:43

That's exactly right.

01:44

And it's not really even to the bank.

01:46

Think of the bank as a broker in between.

01:48

You're giving it to the bank who will then

01:50

quickly go and find someone else

01:52

who wants to borrow money.

01:53

And they'll get that money in their hands.

01:55

And it's why you see banks advertising so aggressively,

01:58

"Hey, get your mortgage here! Get a credit line here!

02:01

Get a second mortgage here! Get this and that credit product."

02:04

They make a lot of money selling money.

02:07

[ pig snorts ]

02:10

[ whoop ]

02:11

Why do banks give me money for investing in a savings account?

02:17

[ screaming ] [ pig snorts ]

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