From: alexhormozi
In 2022, a significant economic shift occurred, leading to changes in investment strategies, including moving cash out of traditional banks [00:00:02]. Understanding what to do with cash while waiting to make investment moves is crucial [00:00:49].
The Nature of Bank Deposits
When cash is deposited into a bank, it’s essentially a loan made by the depositor to the bank [00:01:11]. This means the depositor becomes a creditor of the bank [00:01:17]. If the bank fails, they owe the depositor money [00:01:20]. Any amount exceeding the FDIC insured limit can be lost if the bank goes bankrupt [00:02:18].
How Banks Utilize Deposits
Banks primarily use deposited money in two ways:
- Purchasing Government Bonds: Banks loan money to the government by buying bonds [00:01:24]. The risk of the government not paying back is extremely low, as they have the ability to print money [00:01:31].
- Issuing Loans: Banks also loan out money to individuals for things like mortgages [00:01:37].
Banks generate profit by lending money at a higher rate than they pay depositors [00:01:39]. For example, banks might pay depositors between 0.1% and 1% annually on their money [00:01:41]. Meanwhile, they might lend this money to the government at a 4% annual return, earning 40 times more than they pay out [00:01:46].
Risk and Return in Lending
When loaning money, two key factors are considered:
- Interest Rate: The return received on the loan [00:02:00].
- Likelihood of Repayment: The probability of getting the money back [00:02:06].
Taking on higher risk typically means a higher potential return [00:02:13].
The Alternative: U.S. Treasuries
An alternative to traditional bank accounts for holding cash is investing in U.S. Treasuries [00:02:46]. These are viewed not as an investment vehicle but as a safer bank account [00:02:52].
Why Treasuries?
- Lower Risk: The U.S. government is considered less likely to go bankrupt than a bank [00:02:54].
- Higher Returns: U.S. Treasuries often offer higher interest rates than typical bank accounts [00:03:02].
- Liquidity/Leverage: Loans can be taken against Treasuries for up to 80% of their value [00:03:07]. This allows investors to maintain interest earnings while deploying capital elsewhere [00:03:16]. Banks generally do not publicize this option because it reduces their profitability [00:03:19].
This reevaluation of traditional banking methods emphasizes prioritizing smart money management techniques that offer better returns and security for idle cash.