What Happens to Your Money After You Put It in the Bank?

You’ve probably been told to put your money into a bank account for safe keeping. But have you ever stopped to ask what actually happens to your money once it’s there? Does it just sit in a vault? That's what happens in the movies. Well, in real life, it works a little bit differently. Let's break it down, step by step.

Step 1: You Deposit Your Money

Let's say you go to the bank with $100 and hand it to the teller (or transfer it digitally). The bank adds $100 to your balance, and it looks like your money is just sitting there, waiting for you to use it. However, your money is already on the move.

Step 2: The Bank Lends Out Your Money

Banks won't make any money if they just let your money sit around. Remember, cash is what's called a depreciating asset, which means it loses value over time (that's due to inflation). Therefore, in order to turn a profit, banks lend out your money to other people and charge them interest.

For example, if someone wants to buy a car, but they don’t have $10,000, they would go to the bank and ask for a loan. At this point, the bank gives them the money, and the borrower agrees to pay back $10,000 plus interest. That interest is how banks make money.

Wait… so do they give away your money??

Well technically yes, but don’t worry. Banks are required by law to keep some of your money in reserve (which means keeping it, rather than giving it away).

Also, no matter what, you can always see your full balance in your account. That’s because banks track everything digitally. Even though your exact $100 bill that you deposited might be helping someone else buy a car or a house, you can still pull out a $100 bill whenever you want.

Step 3: You earn a little interest.

So, we know banks are making money by loaning your money to others, but what's in it for you? Well, banks also pay you a tiny bit of interest for letting them use your money.

It's pretty much them saying: “Thanks for trusting us with your money. Here’s a few extra cents!”

Notice how I said a few extra cents. The interest banks pay you is way less than what the bank earns lending your money out. That's why it's really important to have your money invested into assets like stocks and bonds, which can make you real money. Savings accounts should be used if you're saving up for a big purchase, or want some extra, easily accessible cash for an emergency. However, for long term growth, investing is always a better bet than saving.

What if the bank gives out too many loans and can't pay people back when they want money?

That’s a great question. Imagine if everyone tried to take out their money at the same time, but the bank had already loaned out most of it. That’s called a bank run.

This scenario has actually played out before. For example, during the Great Depression, tons of people got scared that banks didn’t have enough money to give theirs back, so they rushed to withdraw their savings all at once. Banks couldn't keep up, and many went out of business. This made the Great Depression significantly worse.

So how do we prevent that from happening?

Luckily, the US learned their lesson after the Great Depression. Now, there are a lot more rules in place to prevent banks from being irresponsible, and also to bail them out if something bad happens. For example:

• Banks are required by law to keep a certain amount of cash in reserve at all times.

• The Federal Reserve (the U.S. central bank that smaller banks borrow from) also steps in during emergencies to help banks get extra cash.

• Most importantly, the FDIC (Federal Deposit Insurance Corporation) guarantees that your money is protected up to $250,000. That way, even if a bank fails, you have some cash left over.

So, while bank runs were once a big problem, systems are now in place to make sure your money stays safe.