puzzle piece over fed reserve seal

How Do Federal Reserve Banks Get Funded?

The Federal Reserve, the country’s central bank, is self-funded: It mostly gets its operations covered via interest from securities that it owns as part of the Fed’s open market operations (OMO).

That said, the funding goes towards making sure these banks do their important work. This includes making sure the U.S. economy runs smoothly and serves the public interest. The Fed also manages short-term interest rates, which in turn affects the availability of credit and eventually things like consumer spending, investment, employment, and inflation.

The bank’s goals with these actions is to promote maximum employment, keep prices stable, and keep long-term interest rates moderate.

Who Owns the Federal Reserve Bank?

Even though parts of the Federal Reserve are structured like a private bank, the Fed is not owned by anyone. Congress created the Federal Reserve in 1913, and it remains an independent government agency. However, the board that oversees it — which is appointed by the president and confirmed by the Senate — still reports to Congress today.

Its leaders are required to testify in Congress and submit a lengthy report on its plans twice a year. The Federal Reserve actually consists of 12 Reserve Banks spread across different regions of the U.S. Although each one has a board of directors and is incorporated, it’s not actually a private entity and the banks aren’t in business to make a profit.

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How Does the Federal Reserve Make Money?

The Federal Reserve does not “make” money exactly, in that it doesn’t print money — that’s the Treasury Department’s job. But it does serve as a bank for other banks and government agencies, allowing them to open accounts to hold their reserves, take out loans, issue government securities, and take other actions.

When it comes to other banks, the Fed is there to lend to them in case they have problems getting funding, either because of unexpected fluctuations in their loans and deposits or due to extreme events, such as the COVID-19 crisis.

The Fed lends at a higher rate than the market in order to ensure that it’s used as a last resort. The Federal Reserve does not lend money or provide bank accounts for individuals, as retail banks do.

In other words, your checking and savings accounts won’t be held at a Federal Reserve Bank.

While the Federal Reserve does not actually print money, it does put in orders with the U.S. Treasury for “Federal Reserve notes” based on the demand it expects both domestically and internationally.

Here’s more detail on how the Fed works and keeps our economy humming along.

Fractional Reserve Banking and the Money Multiplier

Fractional reserve banking describes the system in which only a fraction of the money on deposit is actually held as cash and available for withdrawals by customers. Here are a few aspects of this system to note:

•   The Federal Reserve wants to ensure that banks keep enough money on hand so that when customers come in seeking cash, they aren’t turned away. To accomplish this, the Fed sets a reserve requirement (often 10% of all deposits) that banks must keep available. In response to the COVID-19 pandemic, this was lowered to 0% in an effort to stimulate the economy.

•   The Fed buys treasuries to help create monetary reserves. It sends the funds to banks so they can make loans with it, up to that reserve requirement limit mentioned above.

•   Another aspect of fractional reserve banking is what is known as the money multiplier. Financial analysts use a money multiplier equation to calculate the impact of the funds kept on reserve on the economy in general. It estimates how much money is created in the economy by the reserve system.

Here’s how the calculation looks: The amount on deposit is multiplied by one divided by the reserve requirement. So if a bank had $100 million on deposit, you would multiply that by one divided by 10% to get $1 billion. That $1 billion represents money potentially created by lending out the 90% not kept on reserve at the bank.

Recommended: Different Types of Bank Accounts and How They Work

The Credit Market Funnel

Another way of looking at the Federal Reserve’s role in our nation’s economy is the credit market funnel, meaning that the Fed funnels funds to businesses to grow the economy. Say the U.S. Treasury printed $20 billion in new bills, and the Fed credited $80 billion in liquid accounts. You might think the American economy got an infusion of $100 billion. But it’s actually much more than that. Credit markets act as a funnel in terms of distributing funds. As new loans are issued, more money is created. That $100 billion could trigger a tenfold monetary increase to $1 trillion.

Determining the Money Supply

Here’s another facet of what the Federal Reserve does: It considers whether our country’s money supply should be boosted. This can impact the state of the American economy. A larger money supply can lower interest rates and get more cash to consumers, which typically stimulates spending. If the Fed does feel that the money supply needs to be increased, it will typically augment bank reserves. It might purchase Treasury bonds and distribute those to banks’ reserve funds. The banks can then use some of those funds for loans and other activities.

Money Creation Mechanism

As you’ve learned, the Federal Reserve plays a vital role in determining how and when to influence the money supply in the U.S. economy. It often boils down to the Fed buying securities and putting them in the reserves of commercial banks. Those banks can then augment the amount of money in circulation by lending funds to both businesses and consumers.

Recommended: How to Set Financial Goals and Set Yourself Up for Success

How Is the Federal Reserve Funded?

So where does the Fed get its money? Unlike other government agencies, the Federal Reserve doesn’t get its money from Congress as part of the usual budget process.

Instead, Federal Reserve funding comes mainly through interest on government securities that it bought on the open market.

These primarily include U.S. Treasury securities, mortgage-backed securities, and government-sponsored enterprise (GSE) securities.

How much money does the Federal Reserve have? As of May 2024, the Fed had nearly $7.4 trillion in assets on its balance sheet. Those have grown significantly compared to 2007 (before the financial crisis hit), when the Fed had just around $870 billion in assets.

The reason for this has to do with the Fed’s response to the Great Recession and the COVID-19 crisis, among other factors. But remember how the Federal Reserve isn’t in it for the profit? Once it pays its own overhead, the rest of its earnings go right into the country’s coffers in the U.S. Treasury.

How the Fed Affects Interest Rates

In its attempts to steer the ship of the U.S. economy on a solid course, one of the main things the Fed does is influence interest rates. The Fed can either raise or lower the federal funds rate, which is the rate at which financial institutions that hold deposits can borrow and lend funds they keep at Federal Reserve banks from each other.

The Federal Open Market Committee, which is made up of some members of the Fed’s Board of Governors and others, meets multiple times a year to determine what they want the federal fund rates to be.

These decisions then influence other longer-term interest rates, such as those on savings accounts, mortgages, and loans.

The Fed often cuts interest rates to energize the economy by making it less expensive for businesses and consumers to borrow money. It raises rates when inflation seems too high, as was the case a couple of years ago.

The rate had been cut to the 0.00% to 0.25% rate in March of 2020 due to the emergence of the COVID-19 pandemic and its expected economic impacts. However, by September of 2022, with inflation surging to 40-year highs, the rate was raised to the 3.00% to 3.25% range. As of July 2024, the Fed’s interest rate is 5.25% to 5.50%, which is far below its peak of 20% in December 1980, when the Fed was reacting to runaway inflation.

The Takeaway

Understanding the role of the Federal Reserve in our economy and how it is funded can help explain how the Fed balances our money reserves, controls inflation, and stimulates the economy’s growth. Especially in the current economic climate, knowing how the Federal Reserve works can enhance your financial literacy. This in turn can help you better manage your own money.

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FAQ

How does the Federal Reserve obtain money?

The Fed makes money mainly through interest on government securities — such as U.S. Treasury securities, mortgage-backed securities, and government-sponsored enterprise (GSE) securities — that it bought on the open market.

Who gives money to the Federal Reserve?

The Federal Reserve isn’t given money; it finances its operations via the interest made on the securities it owns.

Is the Federal Reserve self-funded?

Yes, the Federal Reserve is self-funded. It doesn’t get money via Congress but through the interest earned on the government securities that it buys.

Does the Federal Reserve print money out of thin air?

While the Federal Reserve has the power to print money, there’s a delicate balance at work. If the Fed just ordered the Treasury Department’s Bureau of Engraving and Printing to print more money without a commensurate increase in economic activity, it could trigger inflationary growth, which isn’t desirable.


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As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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What Is Stagflation & Will It Happen Again?

Stagflation is an economic term that is actually a combination of the words stagnation and inflation — and describes an economy that is both stagnant, and experiencing inflation. For investors, it’s worth being aware of what it means, because of the threat it poses to economies and markets.

Stagflation creates potentially disastrous conditions where people experiencing a decline in purchasing power also feel discouraged against investing. It can create a chain reaction of wealth-destroying events where unemployment climbs and economic output slows, contributing to a national economic malaise.

What Is Stagflation?

Stagflation is a term used to describe a situation when the economy is growing slowly (stagnation) and prices rise rapidly (inflation).

The term was coined by British Conservative Party politician Iain Norman Macleod in a 1965 speech to Parliament. At the time, the United Kingdom was in the midst of simultaneous high inflation and unemployment. In the speech to Parliament, Macleod said, “We now have the worst of both worlds – not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of ‘stagflation’ situation and history in modern terms is indeed being made.”

Usually, economists and analysts will use the unemployment rate as a proxy for economic activity when discussing stagflation. So, a period of stagflation is when unemployment rises while inflation — as measured by the consumer price index (CPI) — accelerates above normally acceptable levels of price growth.

However, like many economic concepts, there is no standard definition of stagflation. Policymakers, elected officials, and investors will use the term stagflation in various economic scenarios.

Recommended: Understanding the Different Economic Indicators

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Stagflation vs Inflation

Inflation is a general increase in the average prices of goods and services. In contrast, stagflation is a combination of stagnant economic growth and rising inflation.

Low levels of inflation are normal for an economy; there’s a reason why movie theater tickets cost more today than they did in the 1950s. Inflation doesn’t become an issue until prices get out of control and spiral upwards. Policymakers within the Federal Reserve like inflation to rise about 2% each year.

You can have inflation without stagflation, but you can’t have stagflation without inflation.


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Has Stagflation Ever Happened?

Before the 1970s, economists didn’t think stagflation — a period of rising unemployment and inflation — was possible. Theoretically, inflation should decrease when unemployment increases because workers have less bargaining power to get higher wages. So, the theory goes, stagflation shouldn’t happen.

However, stagflation did occur in the United States from the mid-1970s. During the 1973-1975 recession, the U.S. experienced five quarters where the gross domestic product (GDP) decreased. Inflation peaked at 12.2% in November 1974, and the unemployment rate rose to 9.0% in May 1975.

This stagflation cycle was part of a larger sequence of events called the Nixon Shock.

Responding to increasing inflation in 1971, President Richard Nixon imposed wage and price controls and surcharges on imports. This created a perfect-storm condition where, when the 1973 oil crisis hit, those surcharges on imports made prices at the gas pump — and across many U.S. industries — skyrocket to then-record prices. The rising prices helped lead to a wage-price spiral, where inflation led to workers asking for higher wages, which led to more inflation, and so on.

The Federal Reserve raised interest rates to combat the inflation of the early-70s, but this only created a recession and high unemployment without tamping down inflation. Thus, a prolonged economic stagnation accompanying inflation occurred — a stagflation situation.

While the economy recovered slightly in the late 1970s, inflation remained a problem for the rest of the decade. Federal Reserve chairman Paul Volcker eventually hiked interest rates to 20% by 1981, triggering a recession to get inflation under control.

Recommended: Here are some ways to hedge against inflation.

Will Stagflation Happen Again?

There are debates about whether stagflation will or could occur again in the United States. There’s always a chance, but the circumstances need to be just right for it to happen.

Most recently, the economy was in a precarious situation in early 2022, with inflation running high after the fallout of the Covid-19 pandemic, and the Federal Reserve raising interest rates at a historic pace to combat it. The Fed was trying to curb inflation with the hope of a soft landing, in which an economy slows enough that prices stop rising quickly but not so slowly that it sparks a recession.

As of July 2024, inflation has moderated, and the economy has not slipped into a recession – but things can always change. So, the economy has not, so far, seen widespread stagnation, and inflation has come down – it appears that stagflation has been avoided.

While no one can predict the future, it stands to reason that events that have happened in the past can happen again. Stagflation may occur again, but this doesn’t have to be a dire situation as long as you prepare your financial situation.

How Can Stagflation Impact Investors?

Economic stagnation can have several impacts on investors. Firstly, it can lead to lower returns on investment as companies are less likely to grow and expand in a stagnant economy. This can lead to investors becoming more risk-averse as they seek out investments that are more likely to provide stability and income.

Secondly, stagnation can also lead to higher levels of unemployment, which can, in turn, lead to social unrest and political instability. This can make it more difficult for companies to operate in a given country and lead to investors losing confidence in the economy.

A slowdown of economic activity lasting several months sounds like it can only be a bad thing. But a recession does not necessarily mean the death knell for your finances. For some investors, there are, perhaps surprisingly, compelling strategies to consider when the market is down. Volatility may allow investors to buy low and then make appreciable gains as the market corrects itself.

Recommended: How to Invest During Inflation

The Takeaway

Stagflation occurs when an economy experiences simultaneous high inflation and high unemployment. It’s a situation that often leads to decreased spending by consumers and businesses, which can further stall economic growth and investment returns.

Stagflation has occurred before in the U.S. — notably during the Nixon Shock of the early 1970s — and there is no reason to think it won’t happen again at some point.

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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How Do You Write a Check to Yourself?

How Do You Write a Check to Yourself?

Writing a check to yourself is one way to withdraw money from your bank account or transfer funds from one account to another. While there are other, more high-tech methods for making these transactions, writing a check to yourself is an easy option.

But it’s not the best choice for every situation. Sometimes, it’s more efficient to move funds electronically or visit an ATM to make a withdrawal. Here’s when writing a check to yourself makes sense, and how to do it.

Key Points

•   Writing a check to yourself is a way to transfer money between your own accounts.

•   Start by writing your name as the payee and the amount you want to transfer.

•   Sign the check on the signature line as the payer and write “For Deposit Only” on the back.

•   Deposit the check into your other account through a mobile banking app or at a bank branch.

•   Keep a record of the transaction for your own records and to reconcile your accounts.

How to Write a Check


If you don’t often use your checkbook, you may be wondering how to write a check. First, be sure to use a pen (that way, the information can’t be erased) and choose blue or black ink. Then, for every check you write, fill in each of the following details:

•  The date

•  Pay to the order of (the person or company the check is for)

•  The amount the check is for in numbers

•  The amount written out

•  Memo (this is optional—you can use it to note what the check is for—or leave it blank)

•  Your signature

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Recommended: Ordering Checks – A Complete Guide

How to Write a Check to Yourself


The only difference when you write a check to yourself, versus a check to someone else, is that you put your own name on the “Pay to the order of” line. Then, just like you do for every other check you write, you’ll add the date, the dollar amount written in numbers, the dollar amount written in words, an optional memo, and finally, your signature.

Be sure to record the amount the check is for in the check register that comes with your checks when you order them (you should keep this in your checkbook along with the checks themselves). In the register, write down the date, the check number, the name of the person the check is for and/or what it’s for, and the amount. This will help you balance your checkbook so you know how much money is in your account.

Why Would You Write a Check to Yourself?


Writing a check to yourself is the low-tech way of transferring money from one bank account to another, or withdrawing money from your bank account. Here is when it can make sense to write a check to yourself.

•  Making a transfer. If you’re closing one bank account and opening another, you can move funds by writing a check to yourself. You can also write yourself a check to deposit funds from one account into another at the same bank. Or, if you have accounts at different banks, you can transfer money by writing yourself a check from one bank and depositing it in the other.

•  Getting cash from your bank account. If you want to withdraw money from the bank, you can simply write yourself a check, take it to the teller at the bank, and cash it. Just be sure to endorse the check by signing it on the back.

Examples of When You Would Write a Check to Yourself

If you have money in different bank accounts and need to consolidate your funds in order to make a large purchase, you could write a check to yourself. For example, if you’re remodeling and need to transfer $20,000 from your home equity line of credit (in one institution) to your bank account (in a different institution), you can write a check to yourself to transfer the money.

Recommended: Does Net Worth Include Home Equity

When Writing a Check to Yourself Doesn’t Make Sense


Writing a check to yourself isn’t always the best, most efficient option for transferring funds or obtaining cash. Online banking, electronic transfers, and ATMs are typically faster and easier ways to get transactions done.

Transferring Money Within the Same Bank


If you have two accounts at the same bank and you want to move money from one account to the other, it’s much quicker and more convenient to transfer your money through online banking. Writing yourself a check to do this is a hassle.

Recommended: How Many Bank Accounts Should I Have?

Getting cash out of your account


If you need to withdraw cash from your account, using an ATM can be faster and easier. If you write a check to yourself, you will need to visit the bank and go through a teller in order to cash the check and get your money. Just make sure to use an ATM within your bank’s network to help avoid ATM fees.

Risks and Concerns of Writing a Check to Yourself


When writing a check to yourself, never make the check out to “Cash.” Instead, always put your own name on the “Pay to the order of” line. This helps protect you. Otherwise, if a check is made out to “Cash,” and the check is lost or stolen, anyone can cash it.

Recommended: What Is the Difference Between Transunion and Equifax

Other Ways to Move Your Money


There are several other ways to move money that are more convenient than writing a check to yourself. This includes wire transfers, ACH transfers, electronic funds transfers, and electronic banking.

Wire Transfer

Often, when people use the term “wire transfer,” they’re referring to any electronic transfer of funds, but the technical definition involves an electronic transfer from one bank or credit union to another. To make a wire transfer, you’ll pay a fee, usually between $5 and $50, and need to provide the recipient’s bank account information.

Recommended: What Credit Score is Needed to Buy a Car

ACH or Electronic Fund Transfer

An ACH is an electronic funds transfer across banks and credit unions. If you have direct deposit for your paychecks, for instance, that money is transferred to your bank account through ACH (which stands for Automated Clearing House). You can use ACH to transfer money from an account at one bank to an account at another. The transaction is often free, but check with your bank to make sure.

Electronic Banking

Online banking will allow you to move your money from one account to another within the same bank. All you need to do is log into your online account and use the “transfer” feature.

The Takeaway


Writing a check to yourself is one way to transfer money or obtain cash, but there are many methods for doing these things that are often more convenient, such as online banking or electronic transfers. Exploring all the options can help you decide what makes the most sense for you.

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FAQ

Can you legally write a check to yourself?

Yes, it is legal to write a check to yourself, as long as you’re not writing the check for more money than you have in the bank. It would be illegal to write a check for more funds than you have and then try to cash it.

Can I write a large check to myself?

Yes, you can write a large check to yourself if you have enough funds in your account to cover the amount. Never write checks for more money than you have in your bank account.

Can you write your own check and cash it?

Yes, you can write your own check and cash it at your bank or at any other location that offers this service.


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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Understanding the Simple Deposit Multiplier

Understanding the Simple Deposit Multiplier

Banking can be a complex thing, but understanding what’s known as the simple deposit multiplier doesn’t have to be. The simple deposit multiplier is the multiple by which a bank can lend out funds based on the reserve requirements. It ensures the bank maintains the minimum amount of money on hand to keep bank operations up and running. It also gives the bank the opportunity to boost the economy.

What Is a Deposit Multiplier?

Also called the deposit expansion multiplier or simple deposit multiplier, a deposit multiplier is the maximum amount of money banks can create based on reserved units. To put it another way, it’s the multiple that banks use to know how much they can lend out vs. money kept on hand (say, in checking accounts) according to the existing reserve requirement. The deposit multiplier is typically a percentage of the amount deposited at a bank.

Why does the deposit multiplier concept matter? It plays a key role in the fractional reserve banking system, or FRB. This system involves the stipulation that banks must keep a certain amount of money on hand in reserves to conduct their day-to-day business. More specifically, the U.S. central bank, the Federal Reserve, mandates that banks hold a certain amount of money, known as required reserves, to make sure there is enough month for withdrawals from depositors. Any excess money that remains after the bank fulfills its daily operations can be loaned to borrowers (say, for mortgages). The amount that can be used for loans is determined by the deposit multiplier.

By accepting deposits and then making loans, banks have the ability to increase and decrease the money supply. When a financial institution lends out money in excess of its required reserves to businesses and consumers, it can amplify the money supply. That’s why the deposit multiplier metric matters; it’s a key way that the Federal Reserve and central banks can control the money supply as part of an overall monetary policy.

Recommended: How Long Does It Take For a Direct Deposit to Go Through?

How Does a Deposit Multiplier Work?

Here’s how a deposit multiplier works: When the account holder puts money in any of the different kinds of deposit accounts offered, the bank holds a percentage of it. This percentage is called the reserve requirement, which is set by the Federal Reserve. It helps ensure that the bank keeps an adequate amount of cash reserves available to meet the needs of withdrawal requests.

Keeping money accessible on demand can be critical. This protects against people trying to withdraw cash in keeping with fund availability rules and finding that their money is unavailable, which could be a deeply problematic and distressing experience.

A deposit multiplier is the multiple that allows banks to lend out money that’s deposited in the bank. This is the maximum amount of money the bank can lend out according to the value of its reserves. It is typically expressed as a percentage. You’ll learn more about that in a moment.

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Real Life Examples of a Deposit Multiplier

To understand a deposit multiplier, it’s wise to understand a few basic banking concepts.

•   For banks, deposits are liabilities, because it is money owned by the account holder, and loans are assets for banks, because that money belongs to the financial institution and must be repaid.

•   Banks also have reserves, which are deposits in the bank or in the Federal Reserve. Reserves are cash available to the bank.

◦   There is also an amount the bank must keep on hand, known as required reserves.

◦   Excess reserves is the term used to describe when the bank has more reserves than is required; these funds can in turn be lent out.

Now, if someone makes a $1,000 deposit, the bank’s liabilities and reserves would increase by $1,000. If the required reserve ratio is 10%, that means must keep $100 on hold and available, but the other 90%, or $900, may be lent. This allows the bank to expand the economy and profit.

To see how the simple deposit multiplier works, consider an example in which a deposit of $10,000 was made and the required reserve ratio is 5%, meaning $500 has to stay on hand.

The deposit multiplier formula is: 1 / reserve ratio.

So with a required reserve ratio of 20%, the deposit multiplier is five. That means that for every dollar in the bank’s reserves, the financial institution can boost the money supply by up to $5. If the reserve ratio was 5%, the deposit multiplier would be 20, and the bank could build the money supply by $20 for each dollar held in reserve. As you see, the lower the reserve ratio is, the higher the deposit multiplier is and the more it can lend out.

Recommended: Benefits of Using Mobile Deposit

How Do You Find the Simple Deposit Multiplier?

The simple deposit multiplier is a ratio between bank reserves and bank deposits. It’s important for maintaining the money supply of the economy and the banking system.

As noted above, this figure is calculated by dividing 1 by the required reserve ratio. For example, if the required reserve ratio is 10%, this means the deposit multiplier is 10. For banks, this means that for every $10 deposited, a total of $1 must be kept in reserves, and the bank can increase the money supply by $10 for each dollar it’s holding.

Deposit Multiplier and the Economy

The Federal Reserve, which is the U.S. central bank, uses the deposit multiplier as one of its monetary tools to control the supply of money in the economy. Usually the money that is deposited in a bank is unlikely to stay in the bank. The money that a consumer deposits in a bank is lent out to another consumer in the form of a loan. The deposit multiplier measures this change in checkable deposits as bank reserves change.

Banks are creating money by expanding the amount of reserves into a larger amount of deposits. If the bank decides to keep a small amount of deposits as reserves that means more money is sent to other banks and more deposits are created at these other banks. If a bank decides to keep a larger sum of deposits as reserves, that means less money or new deposits are made in other banks or circulated among consumers.

When money is loaned out to a consumer, at some point that loan will be repaid and deposited back into the banking system. If there is a required reserve ratio of 10%, then 10% of that new deposit will remain in the bank and the rest can be loaned out into the economy. This cycle fuels economic growth, not to mention profit for the bank.

Recommended: How to Deposit Cash in an ATM

Deposit Multiplier vs Money Multiplier

While these two terms sound quite similar and are closely connected, they are not quite interchangeable. Consider the differences between a deposit multiplier vs. money multiplier.

•   The deposit multiplier is the maximum amount of money banks can create by lending funds. Some deposited money must remain on hand according to the required reserve ratio, but the rest can be used to grow the economy as indicated by this figure. The deposit multiplier is calculated as one divided by the reserve ratio.

•   The money multiplier is the increase in the bank’s money supply. It measures the change in money supply created through bank lending and is usually lower than the deposit multiplier since banks don’t lend all of their reserves.

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The Takeaway

The deposit multiplier is a tool used by financial institutions. It expresses the maximum amount of money a bank can create based on its cash held in reserves. The figure is calculated as one divided by the required reserve ratio; the lower the reserve ratio is, the higher the deposit multiplier is and the more a bank can lend out. The deposit multiplier can help to optimize an economy’s money supply, which is why this metric is used by central banks all over the world.

If you are a personal banking client, you probably aren’t too focused on the deposit multiplier. You likely want convenience, high interest rates, and low fees. If so, check out what SoFi offers.

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FAQ

How do you use a deposit multiplier?

The deposit multiplier is used to determine the amount of money that can be created with the funds in a bank’s money supply.

How are deposit levels calculated?

In banking, the loan-to-deposit ratio (LDR) is calculated by dividing the bank’s total amount of loans but the sum of deposits over a specific time period. Loans are considered assets, by the way, since the money is the bank’s, while deposits are deemed liabilities, since they belong to the account holder.

What is the formula for a simple deposit multiplier?

To find the deposit multiplier, you divide one by the required reserve ratio. So if the reserve ratio is 5%, the deposit multiplier is 20. If the reserve ratio is 10%, the deposit multiplier is 10.


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SoFi members with direct deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.

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Shares vs Stocks: What’s the Difference?

The difference between the terms stock and shares is a simple one. An investor buys shares of stock in a company. The stock represents the company, and is sold in units called shares.

Thus, an investor can own a certain number of shares of a company’s stock: e.g., they might own 100 shares of Company A. But it’s incorrect to say an investor owns 100 stocks in Company A. If an investor owns 100 stocks, that would mean they own shares of stock in 100 different companies.

Key Points

•   The terms “shares” and “stock” are often used in tandem, but they refer to different aspects of an equity investment.

•   A stock is a broad term for the asset, while a share is the unit of ownership.

•   Owning 100 shares implies you have 100 units of one company’s stock, while owning 100 stocks means you have stakes in 100 different companies.

•   Ordinary shares are the same as common stock, and preference shares are the same as preferred stock.

•   Common stockholders have voting rights and may receive dividends; preferred stockholders usually don’t have voting rights, but they often receive dividends before common stockholders.

Stock vs Share: Comparison

A stock is the actual asset you purchase, while a share is the unit of measurement for that asset.

So, investing in a certain stock means you’re investing in that company. A share tells you how much of that stock you own.

Differences Between Stocks and Shares

Stocks

Shares

A stock refers to the publicly-traded company that issues shares A share is the unit of measurement of ownership in a company
Stocks can refer to the ownership of many different companies Shares usually refer to the specific ownership stake in a company
Stock is a more general term Share is a more precise term

For example, if you are interested in investing in Company A, you will buy 100 shares of Company A stock. Owning 100 shares of Company A would give you a specific ownership stake in the company.

In contrast, if you said you wanted to buy 100 stocks, that would generally mean you wanted to buy shares of 100 different companies.

You could buy 10 shares of one company’s stock, 50 shares of another, 1,000 shares of another, and so on. Shares represent the percentage of ownership you have in that company.

Recommended: How to Invest in Stocks: A Beginner’s Guide

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What Are Stocks?

Stocks, also called equities, are a type of security that gives investors a stake in a publicly traded company. A publicly traded company trades on a stock exchange, like the New York Stock Exchange or Nasdaq.

When you buy stock, you buy a share or fractional shares of a publicly traded company. You essentially own a small piece of the company, hoping to get a return on your investment.

Companies typically issue stock to raise capital. Usually, the goal is to grow the business or launch a new product, but the company could also use the money to pay off debts or for another purpose.

Why Should I Buy Stocks?

Generally, people buy stocks with the hope that the company they invest in will earn money, and as a result, the investor will see a return or growth. There are two ways to earn money through stock ownership: dividends and capital appreciation.

Dividends are payouts a company makes to its shareholders. When a company is profitable, it can choose to share some of its profits with its shareholders through dividend payments. Typically, companies pay dividends on a specified schedule, often quarterly, although they can pay them at any time.

The second way to earn money is through capital appreciation, which is when a stock’s price increases above the purchase price. However, capital appreciation doesn’t lock in your gains; you don’t realize your profits until you sell your stock. And there is no guarantee that a stock will appreciate. Sometimes, owing to a range of factors, a stock’s price may drop, and investors may incur a loss.

If you sell stock and realize a profit, you must pay capital gains taxes on the earnings. The amount of tax you owe on your earnings depends on the type of asset, and how long you held it before selling.

Types of Stocks

There are two main types of stocks that investors can buy and sell.

•   Common stock: The type of stock most people invest in, common stockholders have voting rights and may receive dividends.

•   Preferred stock: Investors of this type of stock usually don’t have voting rights, but they often receive dividends before common stockholders. Preferred stock also gives investors a higher claim to assets than common stockholders if the company is liquidated.

Recommended: Preferred Stock vs. Common Stock

How Are Stocks Categorized?

Beyond common and preferred stocks, investors can buy and sell many different types of stocks. Usually, investors break down the various categories of stocks based on investing styles and company size, among other factors.

By Different Styles of Investing

Investors may divide up stocks of different companies into value and growth stocks.

Growth stocks have the potential for high earnings that may outpace the market. Growth stocks don’t usually pay dividends, so investors looking at these stocks hope to make money through capital gains when they sell their shares after the price increases.

Growth stocks are often tech, biotech, and some consumer discretionary companies. As the name suggests, consumer discretionary companies sell goods or services that consumers don’t consider essential.

Value stocks, in contrast, are stocks that investors consider to be trading below a price that accurately reflects the company’s strength. Value stocks usually have a lower price-to-earnings ratio.

Value investors are hoping to buy a stock when its price is low relative to its earnings, holding it until the market corrects and the stock price goes up to the point that better reflects the company’s underlying value.

Recommended: Value vs. Growth Stocks

By Market Cap

Market capitalization, often referred to as market cap, is a common way to categorize stocks. Market cap is a measure of a company’s value. Below is a breakdown of market cap categories:

•   Micro-Cap: $50 million to $300 million

•   Small-Cap: $300 million to $2 billion

•   Mid-Cap: $2 billion to $10 billion

•   Large-Cap: $10 billion or higher

•   Mega-Cap: $200 billion or higher

Generally speaking, companies with larger market capitalizations are older, more established, and have greater international exposure. Meanwhile, smaller-cap stocks tend to be newer, less established, and more domestically oriented. Smaller-cap companies can be riskier but also offer more growth potential.

What Are Shares?

A share is a piece of the company an investor can own. A share is a unit of ownership (e.g., you own 10 shares), whereas stock is a measurement of equity (e.g., you own 10% of the company).

Think of shares as a small portion of a company. So, if a company were a pie, a share would be a slice of said pie: the more slices, the more shares.

Shares play a role when calculating a company’s market cap. To find the market cap of a publicly traded company, you multiply the stock’s price by the number of outstanding shares, which is the number of shares currently owned by shareholders. This can also be referred to as shares outstanding, and the exact number can fluctuate over time.

Changes in the number of shares available can occur for various reasons. For example, if a company decides to release more shares to the public, the number of shares would increase.

Additionally you can own shares in a variety of assets other than stocks, like mutual funds, exchange-traded funds (ETFs), limited partnerships (LPs), and real estate investment trusts (REIT).

Types of Shares

Like with stock, investors may own different types of shares.

•   Ordinary shares are the same as common stock. Holders of ordinary shares are entitled to vote on corporate matters and may receive dividends.

•   Preference shares are the same as preferred shares. Holders of preferred shares usually receive dividends before common stock dividends are issued. If the company enters bankruptcy, shareholders of preference shares may be paid from company assets before common stockholders.

•   Deferred shares are shares usually issued to company founders and executives where they are the last in line to be paid in bankruptcy proceedings, following preferred and common stockholders.

•   Non-voting shares, as the name suggests, do not confer voting rights to the shareholder. Non-voting shares may have different dividend rights and rights to company assets in the event of liquidation compared to holders of voting shares.

Stock Splits Definition

A stock split is a decision made by the board of directors of a company to adjust the price of their stock without changing the company’s overall value. It is one of the ways how the number of a company’s outstanding shares can change.

A company usually initiates a stock split when its stock price gets too high. For example, if a company’s stock is trading at over $1,000, it can be difficult for some investors to purchase and limits the availability of buyers.

To remedy this problem, a company will issue new shares through a stock split, lowering the price of each share but maintaining its market cap. A 10-for-1 stock split, for instance, would exchange 1 share worth $1,000 into 10 shares, each worth $100. Your total investment value remains the same, but the number of shares you own increases.

Other Ways to Own Stock

Trading company stocks or shares isn’t the only way to own equities. One alternative is to invest in shares of a mutual fund, a managed investment fund that pools money from several different investors. The money is then invested in various securities, including stocks and bonds.

Another option for investors is exchange-traded funds (ETFs). Like mutual funds, ETFs are baskets of securities packaged into a single investment vehicle. But unlike mutual funds, investors can trade shares of ETFs all day in the stock market.

One significant benefit that mutual funds and ETFs offer is portfolio diversification. A mutual fund and ETF can either be actively managed by a financial professional or passively managed, which means the fund tracks an index like the S&P 500.

Another way besides stocks or shares to get exposure in the market is through options trading. Options are contracts giving the purchaser the right — but not always the obligation — to buy or sell a security, like stock or (ETF), at a fixed price within a specific period of time.

The Takeaway

The difference between stocks and shares is that a share represents a unit of ownership in a company, while stocks refer to the ownership of one or more companies. It’s common to use both terms when discussing equity investments. But knowing the distinction between the two terms can help you better understand the stock market and investing.

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Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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