Here's What Your Bank Actually Does With Your Money

So you just deposited cash or a check into your savings account. Maybe it was a standard paycheck, or maybe it was millions in lottery winnings. Either way, you might be wondering:

What happens to my money now?

You probably know that the bank doesn't just hold your money in a vault until you need it. But what do they actually do with it? And should you be worried? Here's what to know.

Your Deposit Doesn't Sit Around Waiting for You

Your bank takes your money and lends most of it right back out: Usually to other customers taking out mortgages and car loans or landing credit cards. That's not a small thing: It's literally how banks operate, and one of the big reasons they can afford to stay in business.

Say the bank lends out $900 of your deposit as part of someone's auto loan. That borrower spends the money, and it eventually lands in another bank as a new deposit — which gets lent out again. Multiply that across millions of accounts, and you can see how banks create far more credit than physical cash exists.

Your money might also get invested in things like Treasury bonds, or parked with the Federal Reserve. The point here is that they keep only a small piece of your deposit on hand.

This setup is called fractional reserve banking, and it's been the model in the U.S. for over a century. It's why a "bank run," while mostly theoretical, can be dangerous. If everyone asked for their money on the same day, the cash simply isn't all there.

Yes, Your Money is Protected

The good news: The FDIC insures up to $250,000 per depositor, per bank, for each account ownership category. That protects you against things like bank failure, and it kicks in automatically; you don't have to sign up or pay for it.

So even though your specific dollars are out the door as loans, you're not actually exposed to the bank's financial decisions. If the bank collapses, the FDIC steps in to make sure you get your insured balance back, up to a point, typically within a few business days.

How Does Your Balance Compare?

The median American household keeps about $8,000 across checking, savings, and similar accounts, according to Motley Fool Money research. The average balance is much higher, over $62,000, because a small number of large accounts pull that number way up.

If your balance looks nothing like either figure, that's normal; these are broad averages, not a target to hit. And someone who has, say, $20,000 in the bank probably has a much higher net worth than just $20,000. You've also got things like investments and property to factor in.

The bottom line: A small balance doesn't mean someone is poor, and a big balance might not even mean they're wealthy (or as wealthy as they could be).

No matter your life situation, it's recommended that you build an emergency fund. That's three to six months' worth of expenses to cover you in the event of job loss or any other sort of emergency.

Check out Old National's savings options.

This article was written by Ryan Wilcox from The Motley Fool and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to legal@industrydive.com.