Financial Literacy for Everyone

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What is a bank?

A good way to stay out of financial problems is to save money for things you want and need, as well as for emergencies and long term goals. One could save money in a savings account at a bank.

A bank is a business, privately owned or owned by government, that accepts people's money for safekeeping. The bank pays you interest so that your money grows. Interest is the benefit you get for keeping your money in the bank. The more money you have in the bank, the more interest you will get and the faster your money will "grow." It is important to manage your savings account so that you do not run up bank charges that could be more than the interest you earn.

When you give your money to the bank to keep, you are in fact lending your money to the bank to invest or to lend out to people or organisations. These people or organisations will pay the bank interest on the loan. The interest charged to borrow money is higher than the interest paid on savings.

A bank is also called a financial institution. Not all financial institutions are banks. Insurance companies, for example, are financial institutions, but they are not banks.

Banks are regulated by law. This means that they have to follow very strict rules to make sure your money is safe.

Putting money into the bank is much safer than putting money under your mattress, because the bank, by law, takes responsibility for your money. If a bank is robbed, the bank loses the money, not you. If your bank burns down, the bank loses the money, not you.

However, a bank can go broke, also called "bankrupt." During the financial crisis in 2008 and 2009, a number of banks in America went bankrupt because they lent out more money than they accepted as savings. When a bank goes bankrupt, you lose your money.

What is a bank account?

When you save your money at a bank, it is put in a bank account. The bank account has a unique number and your name and details are attached to it. This means that there will be nobody else with the same bank account number as you.

Information of all the activity in an account, that is money coming in or money going out, is called the account history and it is kept on the bank's computer system. Account histories can be an important tool to detect if somebody has been stealing your identity or stealing from your account. Your account history could also help you to build up a good credit record.

Types of bank accounts

There are many different types of bank accounts, for example:

  • A savings account
  • A cheque account
  • A money market account
  • A call account and
  • A term account

A savings account is the most basic way to start saving at a bank. Savings accounts are available at most banks. You can withdraw your money any time you like, but the interest rate on most savings accounts can be low.

The amount of money in a savings account increases as it earns interest and as the person deposits more money into the account.

Bank costs and charges

Banks charge fees for most of the transactions that people do. To give good service, banks make it easy for people to draw money, apply for a loan or do a balance enquiry. It is important to remember that you pay for all of these services.

Even though the service charges of the banks might look like a small fee per transaction, a number of small fees could add up to a lot of money. You have to budget for service fees.

The bank charges differ between banks. It is worthwhile to compare bank charges when you want to open an account.