Primary Reserves

You did the lemonade stand in elementary school, the bake sale in high school, and the "special" bake sale in college. Time for the big guns: opening a bank.

The first thing you need to know about a bank: primary reserves. Primary reserves is the bucket of money that you need, at minimum, to run your bank. Even if it’s an online bank, you’ve gotta pay your staff, and pay for web hosting. Some of your primary reserves you’re not going to be allowed to touch. Those are the required reserves, required by the Fed.

While you’re trying to get your bank up and running, it might seem silly to have money just sitting there, but you'd better do it, because you’ll get in trouble with the law otherwise. Plus, if everyone tries to cash out at the same time, you’ll have some money on hand to dish out to them, since it won’t be all tied up in loans.

Say you get your first ten customers, each depositing $2k. That’s $20k in your bank. You have to deduct the required reserves, which is 20%. That means you have to keep $4k in required reserves...no touchie. Then you have to subtract your operating costs. Then, what you have left...you can loan out to people. You’ll make money off the interest they’re paying you...if they pay you. Better check them out first.