You may be a kid, but chances are you know how banks work! You simply go deposit your money for safekeeping, and withdraw it when you need it,...
Banking for Kids: How Banks Work!
RSS Feed | Text Size
You may be a kid, but chances are you know how banks work! You simply go deposit your money for safekeeping, and withdraw it when you need it, right? While this is true, the entire banking process is actually a lot more complicated. Read this article to learn what really goes on behind the scenes of your local bank, and what it means for your money.
So, you've saved up enough cash that you're able to open your first savings account. Your parents have helped you sign up, you've handed over your money, and, all in all, you're feeling pretty satisfied. Your money will remain there, locked up safely in a vault until you're ready to use it, right? Not quite! While a bank is certainly a safe place to keep your money, behind the scenes there is a lot more going on than meets the eye! Here's a peek into the journey your money will take, from the time you put it in the bank until it makes its way back to you.
What is a Bank Account?
A bank account gives people a place to keep their money safe until they need it. In general, you give your money to a bank by depositing it in some form of account, then withdrawing it when you're ready to use it. We'll explain what actually happens to your money in the meantime in the 'Business of Banking' section below.
Savings and Checking Accounts
A savings account is ideal for those who don't want to spend their money right away. It's safe, and it's easy to make regular deposits. As we'll explain later, by depositing your money and leaving it for a while, you can even make more money by earning interest.
A checking account is ideal for those who need to use their money often. You may or may not earn interest as you would with a savings account, but you can safely deposit your money into a bank rather than carrying it around with you. This will reduce the likelihood of its being lost or stolen. When you're ready to use your money, you can use either a plastic card called a debit card, or you can write a paper check. A store can then exchange that check for the money that's owed, and this amount is then deducted directly from your checking account.
The Business of Banking
When your money is deposited in a bank, the bank doesn't simply lock it away. In fact, it invests your money so that it can make more money of its own. In return, the bank pays you interest for the use of your cash, which is why savings accounts grow with time. In order for the bank to have enough money to pay interest to its customers, it must earn income. It does this by collecting money from people and businesses who want to keep their money in the bank. The bank often lends this money to others as well, charging them interest for their loans.
So, what keeps the bank from spending all of your money, closing down, and running for the hills? The FDIC, or Federal Deposit Insurance Corporation, does the job. The FDIC's main job is insuring the savings of millions of people in FDIC banks across the country. It visits banks to be sure they abide by all FDIC rules and regulations. When a bank has a sign that reads 'Insured by the FDIC,' it means that if a bank ever doesn't have the money to pay back the people it owes, the FDIC will be sure you're paid!
For more information on banking or the FDIC, visit the FDIC's official page, www.fdic.gov.