How Much Profit Do Banks Really Generate With Our Money?

The following charts depict one level of how VELOCITY creates profits for banks. This example shows some of what they earn on one $100,000 deposit into a CD for 5 years earning 1.5%.
I have mapped out a scenario where the bank divided that $100,000 into four $25,000 vehicle loans @ 4% for 48 months, to four separate borrowers.

This example depicts the bank holding the monthly vehicle loan repayments till they accumulate another $25,000 for another vehicle loan. This is not what banks do normally. What does that mean?
Do you think the bank will hold onto 12 months of payments before it lends the money to another borrower? Never!!!

As soon as that money comes in, it goes out again. That will be velocity level two. When those repayments are deposited back in to the bank, we have velocity level three.So the velocity levels are going across and down at the same time. I just don’t show them all.

There are normally many levels of velocity but once you understand the first, you can apply it to the others.

This is the most conservative illustration and even so, the results are impressive for the bank.

So the first chart shows months one through twelve of the forty eight month car loans. It shows the amortization schedule for one $25,000 vehicle separating the principal and interest of each payment.

The next two columns show the interest and principal separated totals of all the car loans for the corresponding month. That would be 4 car loans from months 1 through 12.

At the end of twelve months it also shows the interest accumulated in the five year Certificate of Deposit (CD)

To view each chart please just CLICK on it to enlarge.

After twelve months the bank has now recouped $27,095.04 in monthly car repayments and so the bank can lend another $25,000 to another fifth borrower.

As I stated earlier, banks would not normally hold on to the repayments before lending that money again. But for ease of understanding, I have not re-lent the repayments till month 13.

Also note that the bank increased 'Sally the Savers' $100,000 to $101,508.46 due to earned interest for the first of the five years.

Notice the bank has recouped $25,401.60 in loan repayments but within only nine months this time. A sixth borrower can now buy a $25,000 car.

With six car loans being repaid, the bank has enough to lend borrower number seven $25,000 in only eight months this time.

For year two of the 5 year CD the bank paid $1,531.22 in interest to 'Sally the Saver' for the use of her $100,000 for the second year.

Seven months later, another $27,659.52 has been repaid to the bank who lends $25,000 of it to borrower number eight for another vehicle.

Also, 3 years are up for the 5 year CD and so $1,554.31 more interest has been compounded over the past year. Sally now has accumulated $4,593.99 to add to her $100,000.00

Six months later another $27,095.04 is repaid so another $25,000 loan is made to borrower number nine.

After 47 months another $25,401.60 has been generated with nine car loan repayments over five months and so loan number ten is now in force.

After the final .18 cents has been paid back on month 48 the first 4 vehicles are now paid off and 'Sally the Saver' has earned another  $1,577.76 making her total deposit now equal $106,171.75.

The bank has earned a 62.79% return on their money, so far, on level one of the velocity scale.

But remember, banks can lend ten times what the deposit equals so that percentage is only if you don't include the fact that they actually lent ten times the amount deposited in the CD. Ten times 62.79% = 627.9%. Yes, that is what banks do.
This example also shows a 4% interest rate for all vehicle loans. Most loans are higher than that.

This example also only shows the first level of velocity. Banks will never wait twelve months before they put those repayments to work.

They lend them out again immediately upon receiving them. That will be level two of velocity levels x 10. Can you imagine?

Also, the interest that is being added to the principal $100,000, which equals $6,171.75 at the moment, is also available for the bank to velocitize as well.

If the bank is lending money they don't really have, ($900,000 in this scenario), isn't the interest and the principal that comes in from these loans, all free wealth to them?

So let's keep this chart going as even though the first four loans are complete, the CD is a 5 year CD and so we'll keep this going for five years.

There are now 6 active loans left on the 1st level of our velocity example as the first four are fully paid off..

The last eight months of repayments on the six remaining cars has yielded $27,659.52, enough for another $25,000 car loan for Borrower number eleven.

And

Another $27,659.52 will be generated over the next seven months, two months past the 60 month or 5 year mark for the CD anniversary date.

The bank has paid an interest rate of 1.5% to 'Sally the Saver' over the five year term of her CD. So her $100,000 grew by $7,773.30 over the five years.Yippee!!!

But that interest growth has to be taxed and she has had no access to her own money all that time. Well she could have, if she was willing to pay a penalty. However, most people are happy that their money is safe and FDIC insured in a CD.

So if ‘Sally the Saver’ earned 1.5% how much did the bank earn while velocitizing that $100,000 and charging their borrowers 4%? Which is just 2 1/2% more than they paid 'Sally the Saver'. But, on top of that the bank also has to deduct from that profit margin their expenses, so most people think the bank is earning about the same as what they are paying their customers. If this was true then how did the bank more than double ‘Sally the Savers’ $100,000 in just five years?

that for every $1.00 deposited, the bank can lend $10.00, so after paying back ‘Sally the Saver’ her $100,000 and paying her a generous $7,773.30 of interest for the use of her money for five years, they really ended up with $1,000,000.00

Or did they? Whoops, let's not forget that this scenario is portraying only one limited level of velocity. I am only counting the repayments after they add up to the price of another $25,000 vehicle. So think about what these amounts would look like if every single monthly repayment was lent, every single month, as soon as it was deposited into the bank.

If the bank only took in $19,785.49 of interest payments, where did the other $86,474.87 come from?

Because the bank was lending the same money over and over and over and over and over again, for five years, all the interest AND principal payments were extra, free money, after that first $100,000 was paid back.

Don’t forget to times that by ten.

...at 60 months (the end of the 5 year term) only 5 cars are paid off so far.

So the earnings of the bank will continue for another 43 months till the eleventh vehicle loan is paid off.

Of course 'Sally the Saver' has had her $100,000 returned to her but she may want another safe CD for her money to grow in for another 5 years. The bank hopes so.

Why do financial institutions restrict you from access to your savings and often penalize you if you want to use your money before a set date?

Because you interrupt their cash flow velocity.

The longer they have access to your cash, the more profits they generate for themselves. If they didn’t penalize you, you would use your money more often.

If they didn’t restrict your use, you would velocitize your money more often.

If they didn’t have control of your money, you would have control of your money to velocitize it for your self.

Banks move the right amount of money, into the right account, at the right time, for the right amount of time, and they do that all the time. All they do is move money.

But what are we taught to do with our money?

Have it sitting and growing for later on, right?

They want our money to be stangnant for us, so they have free-rein to move it for themselves..

the government and the banks working together want you to put your money into multiple savings buckets for as long as possible, with restricted access of course?

And think about what methods they use to entice you to put and keep your money in their buckets. A big one being tax-deferred. Ha, Ha Ha. That is a whole other topic though.

What are some of your choices? Let's see, We have savings accounts, CD's and Money Markets. These offer a little interest for short term savings.

Now what about 529's for college savings plans. These are encouraged to begin when the new baby is born so they can have use of your money for 18 or more years.

Then there are the forty year vehicles for retirement, IRA, Roth IRA, 401(k). There are annuities and pensions and social security and oh so many mutual funds, stocks, bonds etc. etc. Each bucket seems to serve one purpose for you but they all tie up, restrict your access to your money and are taxed. These restrictions penalize you if you do need to use some or all of it, and they offer no or limited guarantees and growth.

Just think of the lost opportunity this creates for you not being able to velocitize your own money.

One more thing - Ever thought about the fact that only around 2% of Term Life Insurance policy death benefits are ever paid? Ever wondered why that is?

... they do about Volume and Velocity. Can you see why financing your own needs through your own banking system is just so so so much more lucrative than any other way of building wealth.

Do you see why rate-of-return is insignificant compared to volume and velocity?

If your money, your savings, your investments, are all tied up but you want to buy a car or pay for your daughter’s wedding, or buy some furniture or go on a vacation, or pay for your son’s college education, what are you forced to do? Borrow money from a financial institution!

So, what if there was a different way of banking? How soon would you want to know about it?

Do you want to learn how you can borrow from your own bank and velocitize your own money?

If so, go to my blog and contact me..... right now.