Banks get richer when you save money. But not just that, they get richer in an unfair but legal way. They use your saved money to expand the money they make and they share little or nothing with you.

There is a law or rule that banks in most countries use today where they are only obliged to keep or hold a fraction of the money you give them. They can lend out the rest with sizable interest and give you little or nothing on your savings. The moment you put your money in the bank, it ceases to be yours. If you ask for it in a way that is not convenient for the bank, they will not give it to you. And that is perfectly legal.

The purpose of this piece is to show you what really happens, how it works, and what you should do instead of blindly saving money in the bank.

Understanding Fractional Reserve

This concept is known as Fractional Reserve Banking. And it is a system whereby the bank only keeps a fraction of your deposit. The rest of it, they can lend out even before you walk out of the bank.

Now, you may be thinking that that is how banks are supposed to work. But this is where it gets crazier. Aside from the bank being able to lend out a large percentage of the money you leave with them, they are also able to lend out more than that amount. It is so ridiculous that it amounts to money printing. And this is legal.

It is as bad as if you save $1 with the bank, they can lend out $10 based on your $1. Then they get, let’s say a 10% interest on the $10. They give you the depositor a 1% interest. Can you see those margins?

This may not mean much to you if your savings is not substantial. But if you have 6-figures sitting down in one account for a long time, you should be concerned. And not concerned that the bank is making more money than you. That is not the problem. The problem is that your money is getting devalued by the actions of the bank day by day. So, if your huge amount of money is not in an appreciating asset, you are holding the losing end of the stick.

And if you have ever gone to the bank to withdraw a huge amount of money, this will dawn on you. I recently went to a bank to withdraw a significant amount in cash and I was told I could not. It wasn’t the bank, it was the law. The law states that I cannot collect that much cash at once. And it is my money. This is why you should understand this now.

Debt is the New Cash

Debt became the new money when the US President, Nixon took the dollar off the gold standard. All currencies were already pegged to the US dollar thanks to the Bretton Woods agreement. And with the dollar cutting ties with gold, the banks became a printing press for money.

There is quantitative easing (and also tightening) by central banks which pumps a lot of money into the market. That gets the attention of most people who are financially aware. But what is more disturbing that very few people know is that commercial banks get to be a part of that party too.

These financial laws may not mean anything to the average person, but to the banks and financial institutions, they mean everything. Personally, I believe banks are so powerful that they shouldn’t be run as a profit venture. But they are.

You can be pissed about the reality of money printing, but there is nothing you can do about it as an individual. It is useless to protest why they are devaluing your money. But you can learn the game and play wisely.

The rich take debt from banks and use the debts to acquire or build assets. This is the big game. Play like the rich. Get printed money and use it to create value. Many people are using printed money to speculate in the stock market. Don’t be like those.

Even Apple Uses Debt

Apple is (arguably) the most profitable company in the world. They have billions of dollars in cash reserves. But you know what? They still use debt. They hold their cash reserve as some form of collateral and go borrow money from the bank.

Let’s assume they have $90 billion in cash reserves. They go to the bank and say, “Hey, we have $90 billion, borrow us $10 billion”. And if you have a bit of banking experience, you know that banks prioritize security for their money. They will easily give out that $10 billion loan. And that is how the rich get richer.

Then, Apple will take the $10 billion and create a $25 billion asset. So, if you are good at math, you can begin to see where this is going. Apple (in this illustration) started with $90 billion. In the end, they still have the $90 billion untouched. And now, they have a $25 billion asset too. They owe the bank $11 billion (let’s say at a 10% interest), which they will gradually pay back in maybe 10 years. If the asset makes $1.5 billion in revenue per year, and they pay the bank $1.01 billion per year for their debt, it means they have a profit of $490 million every year. Let’s make it clearer.

At the start, Apple has $90 billion in cash reserves. But in the end, they have;

• The same $90 billion in cash reserves untouched

• An asset worth $25 billion

• A positive yearly cash flow of $490 million

I deliberately used Apple as an example so you can see how crazy the numbers get when you are big.

The Crime that Cripples Most People

Most people realize this “unfair game” and want to jump in. But they make terrible mistakes. In fact, it is not really a mistake. It is more like a price of ignorance. And also a punishment for those who don’t understand finance.

They think they can jump into the debt game like the rich and afford anything they want. So, they use debt to buy liabilities. And the financial system conveniently deceives people by calling everything an asset. They call a liability an asset for long enough, and regular people are taking loans to buy it, thinking they are playing the game of the rich.

For example, people buy homes and think they are buying an asset. The problem is that they get to live in the home and it doesn’t produce any income for them. And therefore, it is only a means of taking money out of people’s pockets. This concept is so important that Robert Kiyosaki had his bestselling book, Rich Dad Poor Dad, to try to correct the notion. And of course, it triggered an outrage that still goes on to date.

What to Do Instead

Do not use debt to buy whatever does not bring money into your pocket. If it doesn’t provide revenue or income, it is not an asset. And hence you should not take on debt for it. It is that simple.

But use debt for your business. Use positive cash flow from your business to buy what you would like. If you are working a job and earning a salary, start a business on the side. Or better still, partner with someone on a business. It may sound ridiculous now, but it can be your saving grace later.

If a business is not your thing at all, then consider investing. The only rule here is that you must have a deep understanding of what you are doing. There is no excuse to just throw money at something without knowing what you are doing.

Regardless of the country you live in, the place would be a better place with more productivity growth. This is why I am more passionate about having a business. Don’t let the thought of what you think of as business weigh you down, there are a lot of proven business structures nowadays. There is definitely one that will fit with you.

Don’t be conditioned into thinking that you have to create a business in your area of expertise. In fact, it is better when it is another area (probably with a partner) where there is no temptation to handle day-to-day operations. Businesses that run on autopilot are the best. And with that, you can get into the debt game.

You will be surprised at how much money is available to you if you choose to get started on this route. You could be a millionaire in a very short time. It can be very difficult to be a millionaire by being an employee. But if you become an entrepreneur and you get a few things right off the bat, it can be very easy. And it is simply because of the game you have decided to play.

Conclusion

The banks get richer (at your expense) when you save money in the bank. Of course, you can keep money in the banks but make sure that your big money is in an asset that appreciates. This is because cash is being devalued every day.

And just imagine, we didn’t even talk about credit card companies and how their maths with money works. This is to tell you that you ought to get smart with money. And you might be thinking, “the $90 billion cash reserve of Apple (in the example), is it not in a bank?”

You have no idea the options that are available to you when you have cash like that. That is a discussion for another day.

Cheers!