Surprise! This Is What Actually Happens to Your Money When It's in a Bank

It might seem like it's just sitting there, but it's not.

If you have a checking or a savings account, you probably know how bank accounts work on the consumer end. You put money in, the bank keeps it safe and sometimes pays you a little interest, and then when you need the money again, you can take it out.

But have you ever wondered why banks are willing to do this in the first place? What's in it for them? Here's a closer look at what happens behind the scenes.

Banks have to make money somehow

Deposit accounts are only one side of a bank's business, but they're critical to the success of the other half of its business: loans. Banks lend money to help people make large purchases. This could be anything from a car all the way up to a mansion. But banks can't just print money to give to people, so they have to get it from somewhere -- and that somewhere is from people like you who place your money in savings accounts.

Now, don't panic. This doesn't mean the bank has given your money away to some stranger or that you're going to be met with an I.O.U. next time you need to withdraw your cash. By law, banks need to keep a certain amount of cash in reserve so that account holders who want to access their money can do so.

Because of this, it's pretty unlikely that you'll lose money by keeping it in a savings account. The only way this might happen would be if a ton of customers at the same bank all tried to withdraw their savings at once. In that case, the bank could default.

That's what happened to a lot of banks during the Great Depression, but we've learned a few things since then. Banks now have Federal Deposit Insurance Corporation (FDIC) insurance to reimburse customers up to $250,000 per person per account per bank should they fail. Credit union accounts have similar insurance, but it's backed by the National Credit Union Administration (NCUA). So unless you're keeping insanely large sums in your bank account, there's no real risk of loss for you.

What's in it for you?

OK, so banks use your money to fund loans for their other customers. Then what? If you've ever taken out a loan, you probably know you have to pay back what you owe over time plus some interest. Most of that interest goes to the bank, but a portion of it goes back to the savers who enabled the bank to provide the loan in the first place.

Your cut is in the form of an annual percentage yield (APY). This varies by bank and over time. Some brick-and-mortar banks only offer 0.01% APY, while some online banks offer more than 3.00% APY. A higher APY means more money for you. Keeping more money in your account also leads to gaining more interest on it.

Savings account interest is compounded daily, but it's usually paid out monthly. That means that though you're technically earning interest on your savings every day, the bank holds onto it and deposits it into your account once a month.

This is how banks incentivize savers to open deposit accounts with them. And the more deposits they have, the more loans they can provide, and the cycle continues.

How to get the most out of your bank accounts

Earning interest on your savings is great, but you need the right account if you want to maximize your growth. Ideally, you'd choose a high-yield savings account from an online bank. Not only do these offer much higher APYs than you find with brick-and-mortar banks, they also tend to skip annoying fees, like monthly maintenance charges. This can help you hold onto more of what you earn.

The right savings account is different for everyone, so it's best to explore a few options before deciding which is right for you. APY might be top of mind, but make sure you verify that your bank is FDIC-insured as well so you know your money is protected.