How Banks Really Work!

The funny thing about how a bank works is that it functions because of our trust. We give a bank our money to keep it safe for us, and then the bank turns around and gives it to someone else in order to make money for itself. Banks can legally extend considerably more credit than they have cash. We trust that the bank will have our money for us when we go to get it. We trust that it will honor the checks we write to pay our bills.
The thing that's hard to grasp is the fact that while people are putting money into the bank every day, the bank is lending that same money and more to other people every day. Banks consistently extend more credit than they have cash. That's a little scary; but if you go to the bank and demand your money, you'll get it. However, if everyone goes to the bank at the same time and demands their money (a run on the bank), there might be problem.
Banks are just like other businesses. Their product just happens to be money. Other businesses sell widgets or services; banks sell money -- in the form of loans, certificates of deposit (CDs) and other financial products. They make money on the interest they charge on loans because that interest is higher than the interest they pay on depositors' accounts.
Let's look at a mortgage as an example:
Mortgages are typically paid off in incremental payments that gradually chip away at the principal of the loan. This is called amortization. The portion of your payment that goes to pay the interest is much higher than the portion that goes to the principal -- at least for the first several years. You wind up paying about two and a half times the price of your home in mortgage interest because of amortization!
So the banks are telling you to put your money into a checking account and have your money sit in the account waiting to pay bills. The bank would also like you to put your extra money into a savings account that earns very little interest. The bank then turns around and loans you money at a much higher interest rate! The banks are using your money to thier advantage!
There is a much better way to manage your money to rapidly pay-off debt and very rapidly fund your 401k or retirement account!

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