By Todd Williams
Banks play a major role in the economic development and financial growth of the entire country. The period following the great depression saw radical changes in the banking industry that proved to be beneficial for the building of consumer confidence in the banking system.
While our confidence has grown our knowledge and understanding of how banks work has not.
While one could write a doctoral dissertation on the banking system, these tips will focus only on a few things we should all be aware of:
1. What is a bank?
The primary purpose of banks has always been to act as a storage house for unused financial resources. It is a place where those who have excess money place in storage. The banks then use that money to loan to those who need capital to expand their business or to make major purchases.
2. How banks make money
Banks make money the old fashioned way. They buy it low, and sell it high. Here is how it works. The bank receives your money in the form of a deposit to a checking or savings account. They pay you a certain interest rate (rental fee) for the privilege of holding your money. They then loan the money to individuals or businesses and charge them a higher interest rate (rental fee) for the use of the money. The difference between what they pay you, and what they get from the loan is called the net interest margin. Sounds reasonable right? Hold on a minute, there’s more…
3. Holes in your pockets
Banks also make money by charging fees. Banks may charge you a fee to hold your checking account with them, and may charge you a per check fee, a fee for not having a minimum balance, and a host of other reasons. This is called fee income. Fee income for many banks is big profit!
Fee income is free income to the bank.
Fee income can erode your hard earned money. Every month a bank that charges you a fee for the privilege of holding your money is in actuality transferring wealth from you to them.
Banks also make money by charging fees. Banks may charge you a fee to hold your checking account with them, and may charge you a per check fee, a fee for not having a minimum balance, and a host of other reasons. This is called fee income. Fee income for many banks is big profit!
Fee income is free income to the bank.
Fee income can erode your hard earned money. Every month a bank that charges you a fee for the privilege of holding your money is in actuality transferring wealth from you to them.
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