Banks Profit From Your Debt, Investors Own Banks
Banks are designed to make money, and often, that means profiting from customers who borrow money, especially when those customers carry high-interest debt like credit cards. This system benefits the banks, but understanding how it works can help individuals shift from being consumers to becoming investors.
When you deposit money into a bank, it doesn’t just sit in a vault. Banks operate on a system called fractional reserve lending.
This means they lend out a significant portion of your deposit, keeping only a fraction on hand. For example, if you deposit $100, the bank might lend out $90 to someone else, earning interest on that loan.
Fractional Reserve Lending Explained
This process repeats. The $90 loan is spent and deposited into another bank, which then lends out 90% of that amount, and so on. This system relies on the assumption that not all customers will withdraw their money simultaneously.
If a large number of people tried to pull their money out at once, known as a bank run, the bank wouldn’t have enough cash on hand, potentially leading to collapse. This is why deposit insurance, like the FDIC in the U.S., was created to protect customer funds up to a certain limit, typically $250,000.
Bankers Aren’t Financial Advisors
It’s crucial to remember that your banker is not your financial advisor. Their primary goal is to make money for the bank, often through commissions. When you seek a loan for a large purchase like a house or car, a banker might encourage you to borrow more than you need.
The larger the loan, the bigger their commission check. Once you sign the paperwork, the loan often becomes someone else’s problem as the bank may sell it off to other investors.
Saving vs. Investing: The Inflation Trap
Keeping large sums of money in a standard savings account might feel safe, but it often doesn’t keep pace with inflation. For instance, if inflation is 23% over five years, your savings might only grow by 1% or less in a typical account.
This means your money actually loses purchasing power; you can buy less with the same amount of money over time. To truly build wealth, money needs to be invested, not just saved.
Investing: Owning a Piece of the Bank
Instead of just depositing money, consider becoming an owner of the banks themselves. While a savings account might offer a meager 0.4% to 0.5% interest, investing in bank stocks can yield higher returns through dividends and stock appreciation.
For example, as of the transcript’s recording, JP Morgan Chase offered a dividend yield of around 2.4%, Bank of America around 2.8%, and TD Bank around 4.9%. These dividends are cash payments given to shareholders for owning the stock.
Understanding Investment Risks and Rewards
Investing in stocks does carry risks. Bank stocks, like any investment, can lose value if the company performs poorly or faces bankruptcy. However, the potential upside is significant.
If a bank becomes more profitable, its stock price can rise, and it may increase its dividend payments. This is how investors can potentially earn more than they would from a simple savings account, by working for profit rather than just interest.
Shifting Your Financial Mindset
The economic system is largely designed to benefit investors. Schools often teach people to get jobs and save, but not necessarily how to build significant wealth. Becoming an investor means shifting from a consumer mindset to an ownership mindset.
This involves controlling spending, saving strategically, and then investing extra money in assets like stocks, real estate, or other businesses. By becoming an owner, you can benefit from the profits generated by these assets.
Market Briefs: Your Guide to Investing
For those looking to understand the financial markets better and learn how to invest, resources like the free daily newsletter Market Briefs can be helpful. It breaks down complex financial topics into easy-to-understand insights. Subscribers also often receive bonuses, such as investing master classes, to further educate themselves on building wealth through smart financial decisions.
The next step for individuals is to educate themselves on investing and understand how the economic system can work for them, rather than against them, by becoming owners of assets that generate profit.
Source: Your Bank Doesn’t Want You to Know THIS About Your Money (YouTube)
