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An introduction to the purpose of financial institutions and why they are safer than keeping money under a mattress.
If you hid 100 was in a bank, it would be 100% safe. How is that possible?
A bank is a financial institution licensed to receive deposits and make loans. Think of a bank like a high-tech library, but instead of books, it manages money. When you put money into the bank, it is called a deposit. The bank doesn't just let your cash sit in a dusty corner; they keep it in a secure vault and use advanced computer systems to track every penny. Their main job is to keep your money safe while providing services that help you use it easily.
Quick Check
What is the specific term for putting money into a bank account?
Answer
A deposit.
Keeping money at home is risky because of theft, fire, or even just losing it. Most banks in the United States are protected by the FDIC (Federal Deposit Insurance Corporation). This is a government agency that acts like a superhero shield. If an FDIC-insured bank ever runs out of money or closes down, the government guarantees that you will get your money back, up to . This makes a bank one of the safest places on Earth for your savings.
Imagine you have 50 back. Total loss = $0.
Quick Check
Up to what amount does the FDIC insure an individual's money in a bank?
Answer
$250,000
There are three main reasons people choose banks over mattresses: Safety, Convenience, and Interest. Safety comes from the vault and the FDIC. Convenience means you can use a debit card or an ATM to get money anywhere, instead of carrying piles of cash. Finally, banks pay you interest. This is a small amount of extra money the bank gives you just for keeping your money with them. It's like your money is 'hiring' the bank to work for you!
Suppose you have 2\%100100 \times 0.02 = 2100 + 2 = 1022$ for doing nothing!
Banks use your deposits to help the community by giving loans. However, they must keep a certain amount, called a reserve, in the vault. If a bank has in deposits and the reserve requirement is , how much can they lend out? 1. Calculate the reserve: . 2. Subtract the reserve from the total: . 3. The bank can lend to help someone buy a car or start a business.
Which organization protects your money if a bank fails?
What is 'interest' in a savings account?
Keeping $1,000 in a shoebox at home is safer than keeping it in an FDIC-insured bank.
Review Tomorrow
In 24 hours, try to explain to a family member what the FDIC is and why it makes banks safe.
Practice Activity
Look at a pretend bank statement and identify where the 'deposits' are listed and if any 'interest' was earned.