Your Mobile Deposits Are Actually Being Invested
Banks invest the money we deposit in our checking and savings accounts. Yes, you read that correctly. Money deposited in your checking account doesn’t actually sit there waiting for you to come back. The balance you see when you log-in to check your accounts is accurate, but your bank is actually putting your money to work.
Here’s how: You deposit a $1,000 check into your account. The bank will probably keep $100 on hand (known as the reserve), and invest or loan out the other $900. This practice is called fractional reserve banking. Makes sense, right? A fraction of your banking accounts are kept in reserve.
Hmm, Is That Safe?
Yes. There are rules around the amount needed in reserve, which are set by The Federal Reserve (The Fed). A small portion (say, about 10%) of cash is kept on hand for withdrawals.
Maybe your economics or social studies teacher showed you the bank run scene from It’s A Wonderful Life to help you understand this. The scene explains that when people lose faith in the bank, and every client goes to cash in their entire account, a bank would be in trouble. They don’t have enough money on hand to cash out everyone’s entire account that day. But they have enough for you to live for the next month or two.
What Are They Investing In, Anyway?
The investments banks make range from mortgages (to you, your neighbors, regular people), loans to other companies, short-term debt investments… you get the picture. As a ‘thank you’ for borrowing your deposits, you receive payments in the form of interest on your account.
Since interest rates on mortgages and loans has been incredibly low in recent history (hovering around 4%), that’s also why the amount of interest paid to you is minimal. In 2017 the average savings account interest rate was 0.06%.
Which leads to the question: If your bank is investing your money for you, why shouldn’t you take some of that and invest it for yourself?
For the Occupy Wall Street folks: First, I urge you to read Why Wall Street Matters. Then take some time to think about what earning 0.06% on your dollars, vs earning 6% on your dollars will do for you in the long run. There are multitudes of socially responsible ways to invest, which I’ll cover soon.
For those terrified of another crises: Start by understanding compounding interest and the wage gap. Investing small amounts over time has proven to be a good long term strategy. [See also: Ellevest, which will make getting started with this a breeze.]
I recently came across a story of a young woman who hadn’t started investing. She was a few years away from turning 30, and had a sizable savings account. No 401(k) or other personal investment accounts. As I pondered why someone that age would need north of $30,000 in savings, it hit me that her bank was investing her money anyway.
All she was getting was a few measly getting pennies for it. And she was really doing herself a disservice by keeping all her cash in a low interest savings account, instead of putting some money to work in an investment account.