How Banks Create Money Out Of Thin Air

Bankers know how to create money out of thin air. In fact, banks are money factories. Banks exist to make money. You might think that banks are in business to provide services such as banking accounts and loans to their customers. It's true that banks provide essential financial services. However, the reason that the banks provide such services is that banks need money to use as raw material to create more money. Where does this money come from? It comes from customer deposits. In other words, it comes from the money you and I deposit into the bank.
Notice very carefully, banks "create" money. It's not simply that banks "earn" profits when they provide bank services and loans. Banks actually "create" new money that did not exist before.
Here is an example of how banks create money. You deposit $100,000 into a one-year Certificate of Deposit at 5% interest. The bank now can use your money to create loans.
The Federal Reserve sets the reserve rate for the bank from 3-10%. A 3% reserve rate means that the bank must keep 3% of the $100,000 on reserve and can loan the remaining 97%. A 10% reserve rate means that the bank must keep 10% of the $100,000 on reserve and can loan the remaining 90%. For our example, let's assume that the reserve rate is 10%. This allows the bank to loan $90,000 of your $100,000 deposit.
So, the bank makes Loan #1 of $90,000 and keeps $10,000 on reserve. This is the critical point where the bank creates money. According to the bank's balance sheet, the $90,000 loan to the borrower is also a $90,000 asset for the bank. By its own brand of money magic, the bank has created $90,000 out of thin air.

But the process does not stop here. Since the bank now has an asset of $90,000, it can make another loan based on this asset. Since the same Federal Reserve rules apply, the bank must keep 10% of this asset on reserve. This means it can loan only 90% of the $90,000. This means that Loan #2 is $81,000. By creating another loan, the bank has created another asset. The $81,000 loan to the borrower becomes an $81,000 asset for the bank. Once again the bank creates money out of thin air.
And since the bank now has an additional $81,000 asset, it can make another loan. Once again, the bank must keep 10% of this asset on reserve. This means it can loan only 90% of the $81,000 asset. Loan #3 is $72,900.
Federal Reserve rules allow the bank to make five to six loans based on the original $100,000 deposit. Each loan creates an additional asset. We'll stop at three loans, review the process, and add up how much money the bank has created.

You deposit $100,000 into a CD. The bank creates three loans based on the original $100,000 deposit. Loan /Asset #1 = $90,000 Loan/Asset #2 = $81,000. Loan/Asset #3 = $72,900. The total = $243,900 in assets for the bank. This is $243,900 in new money.
When you cash out your CD, you get your $100,000 deposit back, in addition to the $5,000 interest. Meanwhile, the bank has created $243,900 of new money. After it pays you 5% interest, the bank has made a tidy profit of $238,900. ($243,900 - $5,000 = $238,900.) If the numbers are confusing, go over them again until you see how magical this process is. This is how banks create money.
To make this point, I have oversimplified the process. A bank doesn't really make a series of separate loans based on a single deposit. Your deposits become part of a pool of money the bank can use to make loans. But this oversimplified example demonstrates how banks create money out of thin air. A bank manufactures money by using the deposits of customers to make loans. The loans become assets and the assets turn into money.
What difference does it make to see how banks use money to create money? You and I can't do what banks do, by loaning on the same money more than once. The real point of this example is to take some of the mystery out of money.

The process a bank uses to create money demonstrates that money is not a commodity in limited supply, where there is only so much to go around. Money is not equivalent to currency. Money is created in money-making transactions, which means there is no potential limit to money.
So, if you want more money, think the way bankers think. Ask how you can use money to create more money. If you really think the way bankers think, you will use someone else's money to create more money. The crucial idea behind all of this is: The greatest limit to money is the belief that money is limited.

Kalinda Rose Stevenson, Ph.D. Discover the difference between earning money and making money in a real estate investing book, "No Money Limits." Visit http://www.NoMoneyLimits.com for your Free "52 Heart of Money Insights."

How to Be a Banking Customer VIP

Once you hit 18, unless your parents are kind enough to help you out, you're on your own. This new independence can be a blast; however, to continue to fully enjoy this time there are a few things that will help you afford your new freedom. One of the first is to have your bank accounts in place.
How you manage your bank accounts today will determine whether you're able to live the lifestyle you desire tomorrow. That's why it's important to open a bank account and establish a relationship with a bank as soon as possible. Opening a bank account will help you to develop a proven track record which can give you advantages when you need a student loan, a car loan, student credit card or a mortgage.
Why open a bank account?

1. Safety - Money that is held in a FDIC insured bank is safer than holding onto cash. Your accounts are insured by the government up to $100,000 so there is not a risk of losing money.
2. Interest - Everyday you have money sitting in a checking or savings account, the bank is paying you interest. Interest rates vary depending on the bank so when choosing a bank this is an important feature to compare.
3. Organizing your budget - A checking account is the hub of your finances. Money you deposit in there can be directed to pay bill, savings and investments.
4. Easier - With online banking you can set up your accounts to automatically pay your bills each month. Once you set this up once you're done. You just need to make sure you have enough money in your account when your bills go out.
5. Tracking - Paying someone in cash can result in problems. That money can be pocketed instead of applied to your bill and there's no way for you to prove you paid them. Paying by check, credit card or debit card will leave a paper trail that will prove you paid the bill.
6. Direct deposit - Rather than giving you physical checks you employer can just deposit your earnings directly into your bank account. This saves you a trip to the bank and often you're able to access the money immediately.
7. Future services -Building a long-term relationship with a bank will benefit you more over time. As your banking needs grow you can get better terms on student loans, student credit cards, auto loans and other services the longer you have a relationship with a bank.
How to Open a Bank Account.

When you open a bank account you should be looking to build a long partnership with the financial institution. Building a long-term relationship with a bank means you will one day receive preferred treatment. The next time you need a student credit card or other type of loan, you will typically qualify easier and pay lower fees because of the relationship you have built. Think of it this way: the sooner you open your bank account, the sooner you will enjoy preferred treatment.
Find a bank that offers services you need now and may need in the future. Immediately, your needs just may be for a checking account. However in the future you may need a savings account, student loan, student credit card and may want to invest money in the stock market. It's much easier to locate one financial institution that can handle all your future needs.

In order to decide which bank is right for you and your money, you need to consider your expectations and purpose for opening a bank abcount: is it for business, pleasure, savings, wage-depositing, eventual loans, etc.?
Check out a few banks and compare bank fees, service charges, and interest rates. Also make sure their ATM's are convenient. If not you could rack up additional fees for using other bank's ATM machines.
When shopping for a bank account to open, choose one that offers a quality online bill pay service. Online banking simplifies your life and makes all your banking transactions available at the click of a button. This allows you to check balances from the comfort of your own home and electronically pay monthly bills without ever writing a check. It also, it gives others the impression your bills are handled by a professional accountant.
Opening a bank account is the first step in building your financial foundation. The sooner you start developing a relationship with a bank or financial institution the more benefits you will receive now and in the future.

The National Financial Educators Council is the leading provider of financial education resources and financial literacy curriculum. Get your copy of our latest tips, a copy of our financial literacy grant guide and receive free video lessons at http://www.FinancialEducatorsCouncil.org.