In the world, we live in today, who doesn’t have a bank account? Though it is likely that everyone you know has a bank account, how many people really know what happens with their money? You may be surprised to know that it doesn't just simply sit there for your safekeeping.
So, if your money is not just sitting in a vault, then where is it going? There is a lot that people do not understand about the way banks function. If you are feeling confused about this topic, you are not alone.
If you are curious about what your bank really does with your money, follow along with this article. We will tell you four ways banks use the money we give them. After this article, you will know exactly where your money is going.
Making Money
You probably know that banks use your money to make more money, right? However, you are likely still wondering just how the banks use the money to make more money. So, here are four simple things you never knew about how banks really use your money.
1. Lending
One of the ways banks use your money is by lending to borrowers. The banks lend the money out for a fee that gives the bank profit on the money. The money is basically used as the capital from which the bank gains.
It’s basically the wheels of capitalism that runs the money world because the money you put in will be loaned out and the banks then resell the loans. This system is especially effective in a country like the U.S., where citizens are more likely to borrow money.
2. Investing
The money you deposit in banks can also be used to invest in interest-earning assets. Banks are businesses and the best business practice today is finding the best ways to invest the money you have.
Investing in other businesses means more profit for the bank, and since they don’t have money to invest that’s where your money comes in. The investments that the banks make for high-interest could be through various means, like investment securities, property, and even in equipment.
Of course, there are some deposits that are used to invest long-term. The long-term assets are the ones that yield an even higher return on investment.
3. Providing Funds For Investment Companies
Where do you think investment companies like Mutual Funds, UTI and others get the huge amounts to invest? The investment companies generally don’t have any money of their own to invest. Your money is used by the banks to invest in mutual funds and make a profit. The profit that the investment companies make is then used to enrich the bank through interest earnings. Rather than banks borrowing money to lend to the investment companies, they’d rather use deposits.
4. Expansion
Have you ever tried to figure out how banks expand their branches and the promotion of other products? Majorly, it is through the deposits you make that the bans then use to expand their services. All in all, these products aren’t assured to succeed, so, whose money can be better utilized? You guessed right, your own deposits.
Conclusion
Banks generally are the grease that runs the wheels of the economy in the world. They get, lend, and recycle money that they don’t have. The money they have to spend, lend or invest comes from the depositors. For many years, depositors have wondered how bankers have been using their money. Rather than banks’ lending money from the government, which comes at high interested, they’d rather use your money. Then, they pay you a little interest from what they make.
