Why do banks accept deposits? Let’s explain with our fingers

Almost anyone can open a deposit, and the bank will charge interest on the invested amount. This will allow you to have passive income that can cover inflation.

Few people question why banks pay depositors at all. Most people simply dream that someday they will be able to open a deposit worth several million and live comfortably on just one interest. But how does it all work? Is it possible to get rich by investing?

Bank deposit

For a bank to make a profit, it needs to have money. This is how it works: first capital is invested, and then it makes a profit. It turns out that the bank needs to attract this money in order to make money. He can take a loan from the Central Bank or receive funds from citizens.

Next, the bank uses the raised money for its own benefit:

• Creates reserves.
• Buys foreign currency for speculative purposes.
• Issues loans.
• Invests in different tools.

A common example would be a loan. The bank accepts a deposit from a client, promising, say, 10% per year. And with this money he issues a loan to another person at 20%. It turns out that the difference of 10% will be the lender’s profit. You can study how this works in practice here on the calculator on the financial portal Vyberu.ru

It is clear that the bank is not a benefactor in this case. He himself receives even greater financial benefits. In the end, everyone is happy with everything. The bank makes money and the depositor receives interest.

About interest rates

Dreams of living on one percent are utopian. The fact is that interest on deposits depends on the key rate of the Central Bank. And it, in turn, is set taking into account current and projected inflation. If you don’t go into all the details, the interest rate on deposits in banks will be little different from the rate of depreciation.

This means that you should not count on real income. Suppose a deposit was opened in the amount of 1,000,000 rubles at 5% for 1 year. And inflation for the same year was 4%. After 12 months, the depositor’s account will have 1.05 million rubles. No one forbids you to withdraw interest (50,000 rubles) and leave your million on deposit. However, the real value of this million will be lower. Roughly speaking, what could have been bought a year ago for 1,000,000 rubles now costs 1,040,000 rubles.

Now it’s worth imagining that for 10 years inflation will always be 4% per year, and the investor will annually withdraw the accrued interest and spend it. In 10 years, due to inflation, a product that could be bought for RUB 1,000,000 will cost RUB 1,480,000. It is clear that living on interest is not financially profitable. Here, official inflation was also taken into account, and not actual inflation, which may turn out to be higher. Therefore, the deposit is more suitable for saving capital from depreciation.

There is a possibility that the deposit will not even save you from inflation. This is possible in two cases:

1. If the inflation rate over time turns out to be greater than the return on the deposit.
2. If the depositor closes the savings deposit early, the interest will be recalculated at the lowest rate.

But it’s still better to keep money in a bank than at home, where there will be no protection against inflation at all.