Hello! We get interest on our savings again. But where does this money actually come from? What does the bank do with your money? we tell you.
I was a little shocked recently: Savings interest was credited to my account. It wasn’t a universal amount, but still. It’s been a long time since we all cared at all. But where does this interest actually come from? How does the bank make money to pay you? To understand this, you need to know what the bank does with your savings.
This is how the bank works
You can see the bank as a kind of middleman between the people who have money to spare and the people who need it. Do you want to save? Then you now have money left over that you want to save for later. You store your savings in the bank. But do you really need the money? Then you borrow from the bank and pay it back later. The bank ensures that everyone who wants to save can save. Anyone who wants to borrow can borrow. These people hold the bank together.
It works like this: Let’s say you save €10,000 and put it into your savings account. And you get interested in this. But at the same time someone comes to the bank for a loan. This person needs €50,000 to renew. The bank then lends your savings and those of others. The loan plus interest is paid back to the bank later. This is how the bank makes money from your savings.
Checking spreads and savings account
Almost everyone has a checking account and a savings account. You want to be able to quickly withdraw money into your checking account. Sometimes you use a pin, do the shopping and pay the bills. That is why the bank does nothing with this. But you don’t need your savings right now. I put that money aside for later. Since you don’t need your savings right away, the bank can use that money to invest.
Where do your savings go?
Savings in the bank are not kept in a large safe until you come to collect them again. Once your money is deposited into a savings account, the bank decides what happens to it. The bank invests your savings in different ways. Consider offering mortgages, investing in government bonds, corporate bonds, and loans to businesses and consumers. Your money travels all the way.
Open a savings account
You go to the bank to open a savings account. Here you put money that you don’t need now, but want to save for later.
Savings have been deposited
The bank sees savings coming. And you decide what to do with it. Part of it is invested and part of it is put into the bank’s piggy bank.
There your money goes!
Your savings can go either way. Go out into the wide world, so to speak. It is used as an investment. This can be a business loan, but also a mortgage for first time buyers. Banks also invest in socially responsible projects.
We get back to you again
Do you need your savings now? No problem! Whenever you want, you can simply withdraw your money. Every bank has a large stock of money. So you don’t have to wait for your savings to go back to the bank.
How does a bank make money?
The bank pays you a fee on your savings (i.e. savings interest). These are costs for the bank. But at the same time, the bank also makes a profit. Your savings are loaned out. The person who borrows the money pays interest to the bank. This is the income of the bank. The interest on the loan is higher than the interest on savings. This means that more money goes into the bank with your savings than you spend. The bank makes money from the difference in interest rates. So banks invest your savings to make a return (profit).
Is this safe?
Investing and lending money always involves risks. Also to banks. However, you don’t have to worry about your savings suddenly disappearing. Banks don’t just invest in everything and everyone. Strict conditions apply. In addition, each bank is obliged to keep part of the savings as a reserve. This is, as it were, their piggy bank, in which they can quickly pay off savings. This way the funds remain available and you can withdraw your saved money.
Is your bank going bankrupt? Fortunately, there is also a deposit guarantee system. With this you have at least a guarantee of up to 100,000 euros.