ShmoopTube

Where Monty Python meets your 10th grade teacher.

Search Thousands of Shmoop Videos


College and Career Videos 565 videos

College Tour: University of Redlands
14258 Views

Get ready to sing some nonsense words, because today we're taking a look at the University of Redlands. You'll know what we're talking about soon e...

College Tour: University of Chicago
123 Views

Grab a char-dog and watch out for flaming birds, it's time to take a tour of the University of Chicago. Oh and erm, if you would sign this waiver f...

College and Career Goals 1.3 The Graduation Maze Runner
104 Views

We're talking about the tasks you'll need to complete before graduating here...not a literal life-threatening maze. Colleges aren't that cruel...

See All

Personal Finance 101 Part 7: Savings Account Interest 351 Views


Share It!



Transcript

00:01

We speak student!

00:05

Personal Finance 101

00:08

Savings Account Interest

00:10

a la Shmoop

00:12

Even if you don't put your money in the market...

00:14

Let's say I have my hundred dollars

00:16

and I put it in a savings account.

00:17

I'm getting some tiny amount of interest on it.

00:20

What is happening that is

00:22

allowing the bank to just give me money for doing nothing?

00:27

Got it. So let's say you put in

00:29

a thousand dollars in a savings account.

00:33

And for that illiquidity, for your promise, essentially,

00:37

of leaving that thousand dollars with the bank for a pretty long period of time,

00:41

they will give you a little more interest,

00:44

like, say it's one percent a year,

00:46

meaning they're only paying you ten dollars

00:48

a year for that thousand bucks

00:50

that you've given them.

00:52

But at least it's something I guess,

00:54

What they will do is they'll turn around and put that thousand dollars

00:59

in a pool with lots of other monies

01:02

that they'll loan out to things like mortgages

01:05

or other credit loans or other risk-management things

01:08

for insurance companies, and so on.

01:10

[ screaming ]

01:12

But they will typically take your money

01:14

and loan it out at six percent.

01:17

So they're paying you one percent.

01:19

They probably have one percent costs

01:21

that they have to process it and send you the papers every month.

01:24

So their cost is two percent on that thousand dollars,

01:28

but they're getting six percent.

01:29

So they make a four percent spread, or $40 a year,

01:33

profit to the bank -- gross profit,

01:35

because they have to advertise and do a lot of legal compliance

01:38

and other things to make everything work out.

01:39

So when I put my thousand dollars in the bank,

01:41

I'm loaning a thousand dollars to the bank.

01:43

That's exactly right.

01:44

And it's not really even to the bank.

01:46

Think of the bank as a broker in between.

01:48

You're giving it to the bank who will then

01:50

quickly go and find someone else

01:52

who wants to borrow money.

01:53

And they'll get that money in their hands.

01:55

And it's why you see banks advertising so aggressively,

01:58

"Hey, get your mortgage here! Get a credit line here!

02:01

Get a second mortgage here! Get this and that credit product."

02:04

They make a lot of money selling money.

02:07

[ pig snorts ]

02:10

[ whoop ]

02:11

Why do banks give me money for investing in a savings account?

02:17

[ screaming ] [ pig snorts ]

Related Videos

College Tour: University of Redlands
14258 Views

Get ready to sing some nonsense words, because today we're taking a look at the University of Redlands. You'll know what we're talking about soon e...

College Tour: University of Chicago
123 Views

Grab a char-dog and watch out for flaming birds, it's time to take a tour of the University of Chicago. Oh and erm, if you would sign this waiver f...

College and Career Goals 1.3 The Graduation Maze Runner
104 Views

We're talking about the tasks you'll need to complete before graduating here...not a literal life-threatening maze. Colleges aren't that cruel...

College and Career 1.4 Get SMART Goals
386 Views

What's so great about being smarrrt? Yes, we're aware we spelled it with three R's. Oh, just bear with us. You'll see.

College and Career 1.1 Why All The Fuss About Goals?
295 Views

Goals are important. Especially in soccer, because without them, soccer would be boring.* - *denotes sarcasm