Function of Bank
My kids always thought banks are the most powerful places on the planet since they own tons of money there. I had to tell the that the money in the banks doesn’t necessarily belong to the banks. People put their money in the banks (and earn some interest, which will be covered later). Banks pool all the money and lend them to those who need the funds (and banks earn interest too by lending money).
What is Interest
We earn interest when we put money in banks, and banks earn interest when they lend money out. So what exactly is interest? Here is how I explained to my kids: “Imagine you lend $10 to your friend for a year. During the year, you will not see the $10 and will not be able to use it; you also have the risk that your friend will not return the money after a year. Do you feel comfortable lending out $10 for a year? Probably not. What if your friends will pay you an extra $2 interest, and return you $12 after a year? Now it’s probably a better deal?” (I hope they won’t go out, lend money and charge interest from their friends after hearing this!)
Do We Keep All The Money We Earn
This brings up another important topic in financial education. Do we keep all the money we earn? The answer is no, we need to pay our shares to the government in the form of tax, and the government will use this tax income to open schools, hospitals, libraries, etc. Usually, tax is a percentage of our income. Paying taxes is an obligation of citizens, so we are also called ‘taxpayers’.
To be continued…
For other topics on financial intelligence, you can find it here https://nickandmoney.com/category/fi/
Follow me on Twitter: https://twitter.com/nickandmoney
nick and money – improve your finances and wellbeing