Understanding Savings Accounts and Personal Finance

Learning the Advantages of Good Personal Finance Habits
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What is a savings account? For a financially educated person this seems like the most stupid and obvious question you’ve ever heard in your life until you realize that MOST people aren’t financially educated. So this page is DEFINITELY for the 99% of you who just don’t know what a savings account is, why we have them, and how they fit into society. Pull up a chair, we’re going to educate you about money and banking.

Savings Accounts: Basic Definition

The absolute most simplistic definition of a savings account is an account at a bank that earns interest. The truth of the matter is that this definition is way too simplistic for most people because it does not describe WHY we have savings accounts, WHO benefits from having money in a savings account, and WHAT happens to the money we put in a savings account.

The answers to these questions are not particularly complicated, and it is my hope that by the end of reading this page you’ll feel not only like you know what a savings account is, but why you should have one. By the end of this page I hope you’ll feel inspired to open a savings account of your own and start participating in building America’s greatness again through PRUDENT banking practices.

Beyond the Basic Definition of a Savings Account

A savings account is not just a bank account that pays interest. In the vast majority of cases it is an INSURED deposit account at a bank. That means that the money in the account is insured against the possibility of the bank where your money is deposited might fail and go bankrupt. Think it can’t happen? Think again. Since the 2008 financial crisis in Sept 2008, well over 300 banks have failed, averaging a steady 3-4 per week since Lehman Brothers went belly-up September 15th 2008. The GOOD news is that individuals like you an I haven’t suffered terrible losses (on our deposits) for the most part because the vast majority of dollars deposited at banks is/has been insured. Banks that “fail” technically close business on one day and “re-OPEN” the next day under the ownership of another existing (stronger) bank which buys the customer accounts (like yours and mine) from the failed bank.

For people like you and I, we conduct business as usual, only the building we go to cash and deposit checks now has a different name and logo. Our accounts remain safe, safer in fact given the new owners of the bank clearly are better money managers than the old owners.

Your Takeaway from This: Banks Fail, But Accounts at Failed Banks Live On Under New Ownership and Better Management

What Does a Savings Account Mean to the Bank Where It Is Held

This is an important question that virtually NO ONE bothers to ask, but it is VERY important to the American economy and we should ALL know it, understand it, and participate in the process.

A bank NEEDS savings accounts for the following reasons:

  • To Have Money Available to Lend and Invest
  • To Make Money in Order to Employ People
  • To Have a Low Cost Source of Capital
  • To Have a Longer Duration Source of Low Cost Financing

This may all seem counter-intuitive to you. You and I think of a savings account as a place we put money and count as an ASSET. A bank on the other hand OWES you that money, so therefore in the eyes of your bank a savings deposit is considered a LIABILITY. The bank OWES you money, and it is for that reason your bank PAYS you interest.

In Other Words a Savings Account Represents

Get it? By putting your hard earned dollars in a savings account YOU are entering a de-facto PARTNERSHIP with your bank. The bank agrees to terms to make your money available to you (that’s in the fine print of all the forms you fill out when you open an account), and PAY YOU interest on the money you have (effectively) lent to them. Being a depositor at a bank in your community or at a national bank allows you to (in a small way) finance the local and broader economy. How? The bank does it for you.

What Happens to the Money You Put in a Savings Account

When you deposit money at your bank, you have lent money to the bank. The banking laws of the United States (and other countries as well) allow your bank to invest the money borrowed from depositors in a way that encourages economic activity by way of home mortgage and other commercial lending. The laws (in laymen’s terms) state that the bank must hold a certain percentage of the money they OWE account holders (depositors) in cash and Treasuries (10%). The technical term associated with this is called “fractional reserve banking.” While I’m not about to get into all the math associated with this what it boils down to is that each dollar you deposit at your savings bank can create UP TO TEN dollars in loans for consumers and businesses. Savings deposits INCREASE lendable funds in the economy by up to 10 times the amount of the deposit.

The Takeaway Is That Putting Money In a Savings Account
Increases Potential Economic Activity

Savings deposits create money for possible business, consumer, and home loans. All of these “big ticket” purchases can be financed ONLY if funds are available for banks to lend. The purchases made via the loans banks are able to make to businesses, consumers, and homeowners keep our economy growing. This is why it is all the more important to HAVE savings accounts and continue to put at least SOME money in them on a regular basis.

Conclusion: What Is A Savings Account

I hope that by now you understand the importance of knowing what is a savings account, why they are important to you, your bank, and the overall economy as a whole. It is my hope you’ll open a savings account for yourself and or your kids. If you’re not sure how to start saving or don’t think you have the money to begin, read about How to Manage a Checking and Savings Account.

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