Some basic bank products Most common deposit products Then these rates, in turn, influence other rates throughout the financial marketplace. This amount varies and often needs a little tweaking, depending on the market activities of the day. (The amount of their total assets and liabilities determines the percentage they need to keep.). This is the rate banks charge each other for overnight loans to meet their legal obligations. Well, there are many factors, but the root of that number is usually the Fed Funds Rate. Where do these bank interest rates come from? And maybe even coming out ahead if you earn more from your money than you pay in interest. Ideally, you want the smallest gap possible between interest income and what you pay to borrow. And an even closer eye on what you’re paying to borrow money, since some loans have rates that change. So to make sure you maximize your own earnings, you want to keep a close eye on what your money gets you. And they can use any money that gets paid back early to make even more loans. They wind up earning about 4% on the money you originally deposited. And the bank turns around and uses that same money to make a 5% loan. Say you decide to put your money in a bank CD at 1%.

Profit is truly one of the most familiar of all basic finance concepts! And the larger the gap between what the bank pays for deposits and what they charge for loans, the more profit they make. Of course, banks make it their goal to do exactly the opposite. And you want to pay the lowest interest rates possible on any debt you have. What about bank interest rates?Īs a bank customer, you want to earn as much interest as possible from your deposits. If you want to know more about how banks use your money to in effect “create” more money, this article goes into much more detail: How Banks Create Money. This puts it directly into the economy - like an economic booster shot. An alternative theory is to give the money to the poor and middle class first, since they are more likely to spend it. Although there are ample arguments on both sides. Unfortunately, it doesn’t always make it all the way down. And, as the theory explains, that investment will eventually reach the rest of us. Please note that this is not the same as trickle down theory, where rich folks get the money so they can then invest it. In a way, they are creating money that goes into the economy and helps create even more money. But meanwhile, the bank puts it to work in all kinds of bank products, earning them money. And even though you can get it when you want it. Your money doesn’t just sit there resting, even if you see it in your checking or savings account. And they are a good example of how a bank really operates. Obviously, Jimmy Stewart’s character was explaining mortgages. No, you’re thinking of this place all wrong. If you remember the film It’s a Wonderful Life, there’s a scene where Jimmy Stewart is trying to stop a run on the bank. Banks use your money to make money for themselves by creating all kinds of loan products. And your money isn’t really just sitting there.ĭo you ever wonder what happens to your money? And what the bank gets in return? Drum roll. But they don’t offer you a safe haven just out of the goodness of their hearts. And if it’s a savings or checking account (demand deposits), you can use it whenever you need (demand) it. We all know that you can put your money in a bank. And you may even surprise a few people with what you do know! Let’s start with how banks work I want you to never again feel that others can take advantage of you for what you DON’T know. But there are some basic finance concepts that absolutely can help.

In fact, I haven’t used a lot of what I learned.

I also threw in a few economic concepts, for some extra MBA flavor.Īlthough it took me two years to get my MBA, most likely you don’t need all that. So with that idea in mind, I put together this basic financial literacy guide to help you strengthen your business savvy. Especially knowledge of basic finance concepts. Do you ever wonder what a Finance MBA knows that you don’t know? Is it really all that special? Well, I believe that knowledge truly is power.

Finances 101