How banks create money

Today we will explain how banks create money out of thin air. Yes, you might not believe it, banks create money out of thin air.

To explain how this is possible let's talk about what a bank does. A bank accepts deposits from the customers but doesn't just hold that money. If all banks did was holding other people's money, there would be no profit in that. Instead what a bank does it takes that money and it loans most of it out. You might wonder, why can't it loan all of it out? And the answer is because sometimes customers come back and they want to withdraw some of that money.

So, if you and I and everybody else goes to the bank the same time to get our money out, the bank does not have that money. They wouldn't be able to pay us, and the bank would default. That's called a bank run and it's bad.

In the United States there is a Deposit Insurance to make sure bank runs don't happen, but the point is the bank doesn't hold all those deposits. They loan it out. The amount of deposits that the bank needs to hold by law is called a required reserve. In the United States it's 10%. This means that the other 90% is something called excess reserves and they're free to loan that out.

Let's say someone goes into a bank and deposit a hundred dollars from their pocket into the bank. This won't change the money supply because money from your pocket is part of money supply, so is demand deposits inside banks. So far there's been no change in the money supply but here's where the magic happens - the bank is going to hold a certain percentage by law let's say 10% so they're going to hold $10. That means they are going to loan the other 90 out.

The person who deposited $100 has $100 in the account but the person who borrowed the 90 also has now $90. That $90 is money that was created from thin air and did not exist until the loan occurred.

If that person's going to spend that $90 and eventually that $90 can make its way back into another bank that other bank is going to take that $90. It's going to hold 10% and require reserves so 9 dollars it holds, and it's going to loan the other $81. Out of that 81 new dollars is new money supply - it was not created until the loan occurred.

Eventually the person who borrow the money is going to take it and spend it and that's going to make its way to a new bank and the same thing is going to happen again and again, and again, and again.

Now it turns out that the Initial deposit of $100 is actually going to become $900 of new money created.

The way you could calculate it is by looking at something called the money multiplier, which is one over the reserve ratio. In this case when the reserve ratio is 10% that meant the money multipliers 1 over 0.1 so it's 10. If you are asking yourself ‘if the initial amount deposited was $100 and the multiplier is 10 why didn't a thousand dollars of new money get created?’ And the reason why is - because the initial hundred dollars was actually part of the money supply to start off with, so the only amount of new money that was created was from the initial loan of $90. The calculation is $90 times 10 equals $900 of new money created.

And that explains the whole idea of fractional reserve banking! Banks hold a portion of deposits and they loan the rest out and whenever they loan it out, they create new money.

How many digits is a bank account number?

We will be answering a question coming from our FB page. A lady is interested in ‘how many digits are there in a typical bank account number?’

And straight to the answer.
In the US the number of digits in a typical bank account number is between 7 and 16 digits. Yes, those numbers depend on the country, the bank, and the type of account you might have with that bank.

The typical account number usually have 10-16 digits. The number is specific to your personal account. If you use a checkbook – the digits will be printed on the bottom of the checks as a second set of numbers, just next to the bank routing number. Another option to find your bank account number is to look at your monthly statements – the number should be printed there.
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In the UK – the bank accounts are usually made of 6-digit sort code and 8-digit account number. The sort codes' purpose is to identify the bank branch and are usually in the form of 11-11-11. The sort codes usually do not have a check digit. The account numbers have an 8-digit number and contain a specific bank check digit.

All UK bank accounts also have IBANs (International Bank Account Number(s)). IBANs are mandated by the European Union to facilitate international bank transactions. British IBANs have 22 characters mix of digits and letters. IBANs start with ‘GB’, then the 3rd and 4th digits are a pair of modulo-97 check numbers, 5th to 8th positions are reserved for the bank-specific code, positions 9 to 14 consist of the bank sort code characters, and in the end (15th to 22nd) there is the bank account number.
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In Canada, the basic account info is represented in about 7-digits number. Some banks might use more digits – up to 11. The bank number itself is usually 3 digits, the branch name is about 3 digits, the branch number is 5 digits. And then you have the account number itself (3 digits), branch number (5 digits), and then the bank account number which is about 7 digits.

As usual, you can check those numbers on the bottom of any account checks the bank provided to you. Also, you should be able to check your bank account number digitally, by logging into your bank account online and checking your account information.

The bank account numbers are used by any bank to electronically deposit your payroll or charge your regular payments, etc… If you are trying to transfer funds internationally, there will be some additional numbers to be used to make that possible, to identify your bank on the international payment system.

As a bottom line - banks distinguish between savings, checking, and time deposits by altering the number of digits in any specific account number. As mentioned above, some of the digits will represent the branch of the bank it was opened at, and the others will represent the account holder. the number of digits is important internally to the teller processing the bank account number.

Should I keep my money in the bank

Recently, we received a question from a guy who seems to have a lot of money and asks should he keep them in the bank or at home? As usual, we will answer the money question looking at it from different angles and providing the best financial option.

1. Storing money at home is not a good idea
It depends on your income, but in general, if you keep more than 200USD in your house – that’s a bad idea. There are two main reasons for this. You might get robbed, or you might lose your money via an accident (fire, neglect, etc…)

2. You are losing on interest rate
Yes, we know the rate is negligible (nowadays), but even so, every bit is important. Besides, the interest rate might change in the future as currently, it is at minimum for over decades.

3. Money loses value over time
Sad but true. Printing money and “healthy inflation” are the main reasons. The devaluation is actually huge and about 3-5% over each year (could be more during a crisis). One US dollar in 1913 had the same buying power as 26 US dollars in 2020. That’s 2600% devaluation for a little bit more than 100 years period, and it means roughly 260% devaluation per 10 years. The recent 20 years were not so aggressive, so it could be less but probably still about 100% for the recent 10 years.

4. Money is protected in the bank (in many countries)
The banks are the safest place for up to a specific amount of money.  In many countries, governments issued protective laws and directives to protect a certain amount of money. In the UK for example, the money is protected by the Financial Services Compensation Scheme (FSCS) for up to 85,000 GBP, per person per firm in 2020.

In the US the Federal Deposit Insurance Corporation (FDIC) insures the money deposited into each bank, up to 250,000 USD for each account.

It is important to remember – if you have more than that limit stored, move the excess to another bank to be fully protected in case of emergency or crisis.

5. Accidentally throwing away cash or leaving it behind
It happens more often than you could imagine. Many people reported they completely forgot about the money stored in the mattress and when throwing it away or leaving the place, the money was gone for good.

In June 2009, an Israeli woman threw out an old mattress. What she was not realizing - it was stuffed with her mother's 1million dollars life savings. The culprit, identified only as Anat, had bought the new bedding as a surprise for her mother. When her mother found out about her gift, she lost consciousness, before revealing the contents of the mattress.

Ontario man forgot about 100,000 CAD inside an old TV. He hid the money decades ago and completely forgot about it. Luckily, the TV was sent for recycling and the employees of the Ontario recycling plant were in shock to find the treasure well hidden, inside the crappy TV.

So, the bottom line is – it’s really a bad idea to keep money at home. It’s much better to keep them safe in the bank or invest using alternatives we will be covering in a future topic.

Can you cash a ripped check

If you possess a ripped or damaged check, here is what you could do in order to be able to cash that check and receive the money.

If you received the check as a gift or some sort of payment for your services there are two possibilities: you could either deposit it or cash in the corresponding bank. If by accident it has been ripped – there is still a possibility to cash it out.

I. General rules applying to checks, either valid or ripped

1. The cashier will use a machine for the process of verification. If the check is completely ripped and torn – it might not be suitable to be processed by the machine. The check needs to be printed with special magnetic ink to be processed by the magnetic ink recognition machine.

2. Ensure the check is valid. A valid check will have any of the following characteristics:
- Issuer’s name
- Account number
- The amount of the check. It needs to be in numbers and words
- The date the check was issued
- The paper of the check is different than normal plain sheet paper
- The signature of the check’s issuer

3. Find out if the person who issued the check is financially ok by
- Acquiring the full name
- The complete and up-to-date home address
- The most recent phone number
- Driver’s license number
- Any other passport or card number

Those will help you verify if the issuer has enough funds to cover the amount issued with the check. The bank could obtain information.

4. Make sure your details are correctly written on the check
- If your name does not match with the one over the documents you provide to verify your identity cashing out will be refused.
- If the check is instead issued to a business name, the bank might deposit the funds to the business account, and does not let you cash out in one go

5. The check date is important
- Missing or inaccurate issue date, either by being ripped or thorn will probably turn the check invalid
- Beware not to cash out late. If you try to get your money 6 months after the withdrawn date – the banker has the right to refuse serving the check

6. The check amount written in words should match the numerical amount
- The amount written should match on both places, otherwise cashing out will be refused
7. Check signature
- It must be valid. Ask the issuer to show some other signed documents to ensure the signature is correct.

8. Sign under endorse here section in the bank
- The cash withdrawer should sign under the “endorse here” section. Usually at the back of the check.
- If more than one person – all of them should put their signatures under the section.

II. Cashing a ripped or thorn check

1. The process might be different for every different bank.

2. Bring your check or the pieces to the banker. Ask if it could be processed, even though it was accidentally ripped.

3. It is important all the information on the ripped check to be visible and still valid.

4. If not possible to be cashed out the ripped check could be returned to the issuer, so he issues a replacement check.

5. If the tear is insignificant and the important information of the ripped check is intact (e.g. number, signature, date, name, etc..) there should not be a problem cashing it. If the damage to the ripped check is significant, call the issuer and ask for a replacement check as quickly as possible. Most companies have strict policies how to handle ripped check. Some may ask you to post it back to them so they can destroy the ripped check internally.

6. If the bank is going to charge you for the ripped check, you might look at some alternative banks before proceeding.

In conclusion – it is frustrating and difficult to deal with a ripped check situation. Timing is essential. Try with the ripped check immediately in a bank, and if not successful don’t delay asking for replacement of the torn check at the issuer.

I would like to buy and sell shares online

The article will cover some of the rules for buying and selling shares online.
* The first thing you need is a bank account and also in Internet access on your computer.
* The set-up with most of the traders is free.
* There is usually a small fee for every trade/transaction (about £1-3).
* The trading itself is easy and intuitive. You will be offered a price for the shares requested and have a couple of seconds (10-30) to decide if you would like to complete the trade or not.
* The actual payment transaction is done a couple of days later (depending on your account settings).
* With some traders there are rules of how many times you could reject the offer so you don’t constantly bother them just to check the shares price.
* Some traders also have minimum trade quantity – so you have to buy a minimum of 100 shares for example.
* If you have an account with most of the major banks – you should be able to set up an online trading account with them.
* Do not expect to earn tons of money quickly – it really takes time (and some luck) to be a successful shares trader.
* Keep in mind that you could always lose your money (or at least part of it) – so do not invest money you cannot afford to lose.
* There is always a chance. Nevertheless - you should read analysis and have a strategy for every company you are investing in (to minimize the impact of having bad luck).

What is equity

We all know it has to do something with banks and properties. And in this article we will try to describe equity and answer your questions you might have about it:

* Simply said, equity is a financial term used to describe the value of money that a specific person would potentially be eligible to if they were to sell a property and settle all the mortgages, loans and money borrowed against this specific property.
* Equity is a financial term calculating the total assets left after subtracting the total liabilities.
* Equity is also the difference between property value and what the owner owes against that property in terms of mortgage or loans.
* Equity could be released if a person goes bankrupt. In this scenario, the property is sold on the market and the mortgage and the loans are subtracted from the total value received. The person is granted what is left from the money.
* Equity release could be done via IVA (Individual Voluntary Arrangement). In the IVA scenario a person will continue to do monthly payments that cannot go over the maximum that the person could afford to pay. The period usually stays the same and part of the debt/mortgage could even be written off.

How to choose a bank

Choosing a bank could be quite challenging today. There are so many financial trusts owning a huge amount of banks. Here are the most important questions to consider when choosing a bank.

* Start by planning and thinking. What do you need from your bank? What kind of financial services? Are you a saver and need better interest rates for your saving accounts or prefer being able to often do overdrafts at better rates?
* Consolidate your accounts. Over time modern business people tend to have too many bank accounts in different banks. The advantage of that is that people are not putting all the eggs in one basket, the disadvantage is tons of admin maintaining and looking after so many accounts. Think about consolidating some of your accounts. Most of the people hardly need more than one current and a couple of saving accounts.
* If you are in the US use comparison bank services like BankRate or FindABetterBank. Compare not only the rates of different accounts but look at the specific terms & conditions and bank policies.
* Look for large and widely known bank is usually safer. The famous banks though usually do not provide the most valuable products. Keep the balance and choose a bank that will provide good terms but is also well known.
* The location and the size of the bank are also important. It really is great to have a bank branch near your home. If you travel abroad often it is also a good idea to choose an international bank with branches in the countries you visit.
* Be careful with the bank fees. Make sure you are choosing a bank that does not make you pay a fee every time you do something with them. Unfortunately, banks have the right to change that and even if you start with a bank that does not have regular fees for using ATM, bank withdraws or online banking, eventually, the bank might introduce fees in due time.
* Call a bank representative and ask your most important questions. Do not let anybody delude you with vague answers. Be persistent and ask for clear and straightforward answers.
* Consider which products you would be using and do not pay for something you are not. For example, there is a different kind of insurances but think about if you are receiving any value from your optional products. If not – terminate them.
* Do not be afraid to leave when you find out that the chosen bank does not actually provide value and the services they promised.
* Some banks have specifically designed products for people with a lot of cash. Other banks specialize in providing loans with decent rates. Think about what do you need and choose your bank accordingly.

What is certificate of deposit

There are many people with saving accounts who do not know that they could profit more if they use a certificate of deposit instead. Here is what a certificate of deposit is and why it is advantageous compared to a savings account:
* A certificate of deposit is a contract between a bank and another party that allows the bearer to receive interest and the initial deposit after a specific term.
* Certificates of deposit are low-risk and low-return (still usually higher than saving accounts) investment.
* Certificates of deposit are a very safe form of investment – you will get your money back and the interest too.
* Even if the bank goes bankrupt your deposit is insured (to a certain amount – usually $250k or £100k) and a certificate bearer will still get the money back.
* A certificate of deposit has a term and the interest + the deposited amount is given back after the term is over.
* The disadvantage is that if someone breaks the term and would like to withdraw the money earlier there will usually be a charge for it and the interest would not be paid.
* There are many different types of certificates of deposit – traditional, liquid, bump-up, etc...
* You could benefit from a certificate of deposit if you have some spare money you would like to lend for a long-term duration.
* Certificate of deposit is usually better than a savings account because you earn better interest. On the other end, you can’t simply withdraw your money at any time.

What is debt

In this article, we will discuss debt and the definition of “what is debt”
* Debt is usually amount owned by an organization (company or NGO), the Government or any individual to cover funds or other goods borrowed.
* Debt is an amount of money borrowed by one person to another.
* Debt is also the amount of money borrowed from one party by another.
* A debt is usually used by companies and individuals to purchase something they could not afford normally.
* A debt is an amount of money borrowed by an individual or a company to be paid back at later date and usually there is a cost in doing this - called interest.
* Loans, commercial paper, bonds, and others are all examples of debt.
* There are different operations that could be done with debt, for example, debt sales or debt consolidation.

What is current account

The article will answer the question “What a current account is?” and “What could you do with a current account?”

* A current account is a bank account where you could deposit and withdraw money.
* Usually you could manage your current account in the bank branches, online, with cash machines or over the phone.
* A debit card and even checkbook usually accompany a current account. You could use your debit card to withdraw money from your current account or shop online/offline.
* Almost everybody could open a current account. There are usually no limitations on how many current accounts one person could have too.
* There are current accounts that offer overdraft if you need it.
* The current account usually offers a lower interest rate than a savings account but is more flexible on your money availability.
* Based on different promotions and offers a current account could offer additional extras like insurance or additional interest rate (usually bound to specific monthly income category).
* The current account is your daily basic account to do your shopping, bills and manage other expenditures.
* Usually there is no monthly fee or tax to support a current account. The bank is making money by operating with your money.

How to find my bank account number

Here is an article that answers all questions like:
How to find my bank account number?
What is my bank account number?
How to identify my bank account number?

Here are the best answers regarding identifying your bank account number:
* The bank account number is usually a number between 8-13 digits.
* You could identify your bank account number by looking at your debit/credit card. The account number should be after the bank sort code.
* The bank account number is not your primary credit/debit card number.
* On checks there are usually 3 sets of numbers. The first one (nine-digit) is the bank routing number, the second one (a short one) is usually the check number and the last one usually your account number.
* Call your bank and provide your details to find your bank account number.
* Look at your bank monthly statements. There should be the routing number/sort code (of the bank) and after that your bank account number (between 8 and 13 digits).
* The bank account number is listed at the bottom of each one of your checks in your checkbook.
* If you have online access to your account check there – your account number will be shown next to each of your bank accounts.

Will a bank take a ripped check

In this article, we are going to answer all questions regarding “banks taking ripped or torn checks”.

As usual, the best answers are summarized below:
* When it comes to a ripped check - it really depends if the bank will approve cashing it out. Tape it together and go to a cashier in the bank.
* The bank may decide to reject a ripped or torn check if the signature or the amount is torn.
* Get your ID and show it to a cashier in a bank. Explain what happened and show the check.
* You could try and tape the check together and then show it to the cashier.
* The most important part of a check is the signature and the amount – make sure those are clearly visible and undamaged.
* The account number is also important - make sure it is clearly visible and undamaged.
* Call your bank first and explain the situation. If they tell you they will reject the check still go and visit them and insist they accept the check.
* If you tape the check make sure you use transparent tape so the information is clearly visible.
* Do not rip your check into very small pieces – the bank will not accept it this way.