Savings is King, But You Don't Need a Bank - (W1:D4) Debt Free Millionaire Personal Finance Course

Debt-Free Millionaire

Real Life: Consider this: what would happen if you lost your job and you had no money to pay your bills? What would you do to keep your house or apartment? What would you do to put food on the table? Well, if you had savings in the bank, you wouldn’t have to worry. Savings is an amount of money you have stored away for a later time. Normally, you would keep your savings in a separate bank account, called a Savings Account. You can spend your savings on anything you want, but when you spend it, it is no longer available for a time of need.

Most people think of their savings as an emergency fund. You want to build your savings, over time, to equal about 3-6 times your monthly expenses; so, if you spend $3,000 a month, you would want to save $9,000, just in case you lose your job, become disabled, or something drastic happens, because you would still need to pay your bills. This is what a savings account is really for.

History: The first banks are reported to have been started in Mesopotamia, where the people would store grains, precious metals, and even weapons, for a time. More recently, savings banks and savings accounts were established in England, in 1799, and postal savings accounts started in 1861. In the United States, the first savings bank was established on December 13, 1816, as Provident Institution for Savings, in the town of Boston. After the Great Depression (1929-1933), the U.S. Government wanted to reestablish faith in the banking system, and so established the Federal Deposit Insurance Corp. (FDIC) which, in 1934, insured bank accounts up to $5,000. Banking institutions began to flourish, with the emphasis made by the government to save money, and people began saving more and more. Banks began to compete to store this money and first introduced the savings account interest rate - a payment you receive to your account every month, for saving your money in the bank. Beginning at 3% in 1957, it increased to 5% interest by 1986. They offered new customers incentives, like free toasters and wall clocks, to entice them to open a Savings Account in their bank. Banks would use money deposited into savings accounts, to loan to other customers at a higher interest rate, to make money for the bank.

Lately, as the government began allowing banks to borrow money at a low interest rate from the Federal Reserve, and other larger corporate banks, the interest rate in a savings account went from 5% down to around 0.2%, as of 2021. This has caused less people to decide to save in these traditional banks, and instead invest their money (which we will talk about in further chapters). In the past, you would have to visit the local bank to deposit or withdraw your money. Only recently has the internet made electronic transfers and direct deposits available to their clients. Now, with smartphones, money can be transferred in mere seconds, and without the use of a traditional bank.

Vocabulary: Allow me to now introduce some of the words I just mentioned in the history.

Bank – These are businesses that are established to store, loan, exchange, and issue money, as transactions for those depositing or borrowing money.

Deposit – If you have money that you want to keep safe, yet available you would place it in a bank account..

Savings Account – an account that you establish with a bank to store your money and gain interest, while the bank has it. You also give the bank permission to loan this money to someone in need of money.

Withdrawal – When you want your money back, you remove a portion or all of it from your account.

Federal Deposit Insurance Corp. (FDIC) – The U.S. Government’s insurance policy guarantees that these bank accounts will have money if something happens to the economy, up to a certain amount ($250,000 in 2021).

Savings Interest Rate – If you deposit money into a Savings Account, the value will increase at a set amount, each month. This is based on the rate the Fed (definition below) is lending money to banks.

Depositors – Those who deposit money in the bank.

Borrowers – Those who borrow money from the bank.

Lenders - Banks that give money, in the form of a loan.

Federal Reserve Bank (Fed) – This is a central banking system in the U.S. It is both private – it was started with private banks – and government regulated, with rulings from many boards and government officials.

Clarification: The flow of money in banks is rather easy to understand. When you deposit money into your bank account, the bank gives you a little extra money (in the form of interest), depending on how much you deposit, in exchange for your permission to allow them to lend that money to someone who needs to borrow money. They then offer that money to a borrower, and get paid back more than they are giving you to borrow that money. The more people that deposit money, the more money the bank has to loan, or pay back customers that deposited their money in the bank; so, at any time, if you wanted your money back, they would take from the money given to them by another depositor, and give it back to you, in cash. In the past, banks were only able to lend the amount of money that has been deposited by a customer.

In the last 20 years, the U.S. Government has allowed the Federal Reserve (Fed), which is a group of the largest banks and the U.S. Government, to lend money at very low interest rates (so the banks wouldn’t need to borrow from you, but instead, the Fed). And if the Fed is giving out this money for 1%, then the banks wouldn’t offer you 5% anymore for depositing; instead, they would offer you less than 1%, which is why the interest you earn from a savings account is so small. The Fed is allowing banks to borrow at less than 1%.