ShmoopTube

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We speak student!

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Personal Finance 101

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Savings Account Interest

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a la Shmoop

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

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Let's say I have my hundred dollars

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and I put it in a savings account.

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

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What is happening that is

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

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Got it. So let's say you put in

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a thousand dollars in a savings account.

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And for that illiquidity, for your promise, essentially,

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

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they will give you a little more interest,

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like, say it's one percent a year,

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meaning they're only paying you ten dollars

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a year for that thousand bucks

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that you've given them.

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But at least it's something I guess,

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

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in a pool with lots of other monies

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that they'll loan out to things like mortgages

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or other credit loans or other risk-management things

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for insurance companies, and so on.

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[ screaming ]

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But they will typically take your money

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and loan it out at six percent.

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So they're paying you one percent.

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They probably have one percent costs

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

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So their cost is two percent on that thousand dollars,

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but they're getting six percent.

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

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profit to the bank -- gross profit,

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

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and other things to make everything work out.

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So when I put my thousand dollars in the bank,

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I'm loaning a thousand dollars to the bank.

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That's exactly right.

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And it's not really even to the bank.

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Think of the bank as a broker in between.

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You're giving it to the bank who will then

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quickly go and find someone else

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who wants to borrow money.

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And they'll get that money in their hands.

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

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

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

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They make a lot of money selling money.

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[ pig snorts ]

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[ whoop ]

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

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[ screaming ] [ pig snorts ]

Full Transcript