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

Many or all of the products here are from our partners that compensate us. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation. Terms may apply to offers listed on this page. APY = Annual Percentage Yield. APYs are subject to change at any time without notice.

KEY POINTS

  • Banks take deposits from customers and use them to help provide loans for other customers.
  • When borrowers pay back their loans with interest, some of that interest goes back to savers.
  • Because of FDIC insurance and laws regarding cash reserves, there's no real risk of loss to savers.

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.

Our Picks for the Best High-Yield Savings Accounts of 2024

APY
up to 4.60%
Rate info Circle with letter I in it. You can earn the maximum APY by having Direct Deposit (no minimum amount required) or by making $5,000 or more in Qualifying Deposits every 30 days. See SoFi Checking and Savings rate sheet at: https://www.sofi.com/legal/banking-rate-sheet.
Min. to earn
$0
APY
4.75%
Rate info Circle with letter I in it. Our Disclosure: Annual Percentage Yields (APY) is subject to change at any time without notice. Offer applies to personal accounts only. Fees may reduce earnings. For High Yield Savings accounts, the rate may change after the account is opened. Visit synchronybank.com for current rates, terms and account requirements. Member FDIC
Min. to earn
$0
APY
4.25%
Rate info Circle with letter I in it. 4.25% annual percentage yield as of June 11, 2024
Min. to earn
$1

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.

These savings accounts are FDIC insured and could earn you 11x your bank

Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts could earn you 11x the national average savings account rate. Click here to uncover the best-in-class accounts that landed a spot on our short list of the best savings accounts for 2024.

Two of our top online savings account picks:

Rates as of Jun 11, 2024 Ratings Methodology
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SoFi Checking and Savings Barclays Online Savings
Member FDIC. Member FDIC.
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4.50/5 Circle with letter I in it. Our ratings are based on a 5 star scale. 5 stars equals Best. 4 stars equals Excellent. 3 stars equals Good. 2 stars equals Fair. 1 star equals Poor. We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
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4.00/5 Circle with letter I in it. Our ratings are based on a 5 star scale. 5 stars equals Best. 4 stars equals Excellent. 3 stars equals Good. 2 stars equals Fair. 1 star equals Poor. We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
= Best
= Excellent
= Good
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APY: up to 4.60%

APY: 4.35%

Min. to earn APY: $0

Min. to earn APY: $0

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