Dating back to the earliest days of U.S. history, the traditional savings account has always played an important role in our banking and economic systems. Savings and real estate ownership were two of the first forms of investment and equity accumulation in this country. That is, people have been making money by owning real estate since America began.
Banks, insured since after the Great Depression by the full faith and credit of the federal government, take in deposits - the very lifeblood of banks - and pay a modest rate of interest to depositors. Based on my personal experience, I have found that the rate of interest paid on savings accounts is at or just above the rate of inflation. Credit unions often offer more competitive rates, so be sure to check which ones you're qualified to join, and compare their rates to those of local banks.
While there have been several funds and structures for insuring banking deposits over the past sixty-plus years, today those deposits are insured by the FDIC, the federal agency that serves both as an insurer of depository funds and a regulator of bank activity. The FDICis the only federal banking regulator that has mandated regulatory authority over all banks licensed and operating in theUnited States. Likewise, banks are among the rare breed of quasi-public, quasi-private entities that enjoy the benefit of a preferred relationship with theU.S. federal government.
It is the banks' job to put that savings capital - your and my individual savings accounts on deposit - to work for the benefit of the bank and its shareholders. To perform this duty, banks take those same deposits, which might pay 3 percent annual interest, add on 2 to 3 percent for overhead costs and another 2 to 3 percent in "profit," and lend the funds out to consumer and commercial borrowers for a wide range of needs. This means, in this example, that the banks' "benchmark lending rate" to borrowers must be in the 7 to 9 percent range.
While this may sound like banks are making money hand over fist, the reality is quite different. It is true that, as a result of banks having to put up capital of only 8 to 10 percent while the public provides the remaining 90 to 92 percent of every dollar lent, banks have an incredible opportunity for leverage. That is part of the reason that banks are one of the oldest industries in America today.
But there is not much room for error in banking, and banks will eat through their 2 percent profit margin and quickly begin to lose money if they are not making solid credit decisions. This said, the savings account holder is always covered against loss, as long as they stay within the $100,000 maximum deposit limit. Bank savings accounts are both the most conservative form of "investment," and the lowest yielding.
Much of this information will be over the heads of little ones. That's okay. This information is really for you and your older children. Let's get back to the school-age kids who are now becoming bank depositors.
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