Banks are the only business in the world that uses somebody else's money to build wealth! Congratulations...your compound interest is helping to build a bank on every corner across America...and it's making them filthy rich.
Here's how it works. When a bank receives money from a depositor, the bank then loans out a portion of that money. This is called fractional lending - it’s how banks make money. They loan out a portion of what has already been deposited. We deposit in - they loan out!
Many banks have minimum amounts of liquidity. That means that they only loan out a certain portion of their total deposits.
For example, let’s say a bank has 50% liquidity; that means that they keep at least 50% of their deposited money ready for customers to withdraw at any time.
But, when you leave that much money just sitting there, the bank isn’t making any significant returns. So… what do most banks do? They loan out most of the money that...