I have too much money! What am I saying? No, no I don't, there's no such thing. I have too much
cash! I mean like this is ridiculous, I don't know, I thought I could just keep hiding it under
my bed. But like, where else am I gonna put it? In this lesson, we'll be learning all about financial
institutions. We'll start with the different types of services financial institutions offer, and then
we'll learn about the different institutions that offer these services. Let's get into it!
There are a ton of financial institutions in modern society.
A financial institution is a company whose business is focused on saving,
lending, exchanging, investing, and ensuring their customers' money.
It's kind of weird if you think about it, they make their money by playing with your money.
In order to understand the difference between the different kinds of financial institutions, we have
to understand the different services they provide. The most common services financial institutions
offer people are savings accounts and checking accounts. Savings and checking accounts are very
similar, so it's no big surprise that a lot of people don't quite understand the difference.
With a savings account, you give your money to the institution and tell them,
"Use this money as you wish. I want it back at some point, just not right now." The institution
rewards your long-term contribution by putting a little extra money into your account called
interest. When you eventually take your money back, there will be more there than what you put
in. We'll learn more about how interest works in the next lesson. A checking account however tells
the institution, "Don't go loaning too much of this out, I'll be needing it back soon."
This is the account people use to pay bills, go shopping, and pay their MiaPrep subscription with.
So, they need that money from the checking account at a moment's notice. Most institutions offer
very little or even no interest on checking accounts because you're not giving them your
money long enough for them to actually use it for anything. One of the things financial institutions
use deposited funds for is to provide loans for things like vehicles, or homes. But don't worry,
they make sure to keep enough cash on hand in case anybody needs to make a withdrawal. Then,
the borrowers pay back the loan with interest, meaning the financial institution gets your money
back plus a little extra profit for themselves. We'll discuss loans more in-depth in a later unit.
Sometimes you have enough money for that big purchase in your account, you just have to use
a cashier's check to pay it. When you ask the financial institution for a cashier's check,
they take money out of your checking account and then provide you with an official check for that
amount, which you can take to the car dealership or real estate agent as payment. Since the check
comes from a verified financial institution, they don't have to worry about the check bouncing,
so your payment is considered good and you can complete your purchase right then and there.
Cashier's checks are a safer and more reliable way of accepting large amounts of cash.
The final major service financial institutions provide is help with investments. Savings
accounts are great, but investing can net you way more interest. The downside is that they're
also riskier - if the investment goes bad, you might end up losing money instead of gaining it.
Luckily, we'll learn about different ways to minimize investment risks later on in this course.
These are the bulk of the services that financial institutions will provide for you.
The big question is which financial institution does what?
Banks are all over the place. You can usually find multiple in just about every town.
While they're most commonly used to open savings and checking accounts, banks also offer the widest
variety of services, including different types of loans, ways to access your money, and more. The
downside to being everywhere and having all these options? Banks are there to make money - for them,
not for you. Savings and checking accounts at banks give you very small amounts of interest,
while loans from banks charge you a lot of interest. Banks also have higher fees for
their services, such as charging you twenty to thirty dollars for a cashier's check. They're a
for-profit business, so they have to find ways to bring in more money than they give away.
Credit unions are similar to banks with one very important difference - they
aren't looking to make a profit. They still offer most of the same services,
but they're willing to give their customers more interest than banks while charging them less.
Wait, if credit unions are like banks just better, why do we still have banks?
Well, the thing is, because credit unions are owned by the members, there have to be strict
criteria for who gets to be a member. It may be open to people who live in a certain town,
or have a certain job, or go to a certain school. But if you don't fall into that specific category,
you don't qualify for membership, so you're stuck using the bank.
Savings and loan associations, or thrifts, also offer deposit services like savings accounts,
typically with better interest rates than banks. However,
unlike banks, savings and loan associations have to do at least 65 percent of their business
in home loans and related assets. Because they're required to do most
of their business with consumers rather than large corporations, savings and loan
associations have had a hard time keeping up with banks and very few still exist today.
Depositing your money into a checking or savings account at a bank, a credit union, or a savings
and loan association is completely safe. You do not have to worry about losing your money.
Bank deposits and thrift deposits are insured through the Federal Deposit Insurance Corporation,
or FDIC for short, up to $250,000. So even if the bank fails or goes bankrupt, you're
still guaranteed your money. Similarly, credit unions are insured by the National Credit Union
Administration, the NCUA, for up to $250,000. If you're looking for somewhere to deposit your money
into a checking or savings account, always double-check that it's insured by the FDIC
or the NCUA. Not all financial institutions are safe places to store your money, though.
Brokerage firms deal exclusively in investment options, which are risky. Remember,
with investments you might gain or lose a bunch of money. Brokerage firms don't offer
typical banking services like savings accounts or loans, but they're the financial institution
people use when they've got extra money that they'd like to try to grow quickly.
Another type of financial institution that operate vastly differently from banks are
insurance companies. Insurance companies collect small amounts of money from a
bunch of people, called policyholders. Then, when one of those policyholders experiences
something that puts their finances in danger, the insurance company gives them a big chunk
out of the pot. We'll learn more about insurance later on in the course.
There are a lot of financial institutions out there in the world, but these are the ones that
you'll mainly be dealing with throughout your life. Several of them use interest,
either to help you make a little more money or to make more money from you off of your debts. In the
next lesson, I'm going to teach you how interest works, as well as some warning signs to look out
for when you're trying to pick which financial institution to do business with. See you then!