Originally posted by: Duddy
Thank you for the awesome answer. I learned from it. I'm only 21, people here expect me to know everything.
I'm only 25.
One of the reasons for the FDIC's existence is to put trust into the banks - most accounts are insured for up to $100,000. It's the guarantee that your money is safe if you put it into the bank. It's why people use banks - they know that they money won't go anywhere if there is a recession. Maybe there'll be a problem converting it to cash at some point if there were to be a run on the banks. But that's one other bonus of the FDIC - it also serves to prevent such runs.
The economy really works on trust. You have to trust that the dollar in your pocket will be worth something today, and that it will still be worth something tomorrow. Otherwise, it's just a wrinkled green piece of paper with a picture of a dead president on it. Money is simply a representation of work, of something done that is of value to some part of a society. When you get money, it's a way of saying, "You've done work good for X amount of value to society. This money will help you keep track of it." Is it always "fair?" No. Is what a doctor does really worth less than what Tiger Woods does? Most would say no, but Tiger Woods makes more than any doctor in history ever has. That's just the way the system happens to work.
Anyhow, once you've got that money, then you want to keep it safe. Sure you can buy a fire safe and keep it in your home, but maybe you don't like keeping thousands of dollars of cash at home. Maybe you want something safer, a place to keep money, like a bank. But you want it to be at least as safe there, if not safer, than at home under your mattress. And you don't want your money to walk away if the bank goes under. So, there's insurance, FDIC insurance, that says that the banks are safe. Again, it's all about trust on some level.
Once the banks have the money, they don't just let it sit in their vaults, or remain as a few digits on a computer. They invest it, and earn interest. Sometimes you get to see a little bit of this. Exactly ow much depends on the bank's accountants, their investors, and on how well the economy is doing in general.
There probably is a recession coming. The market will go down. But it inevitably will recover, and surge forward again, most likely pushing to an even higher peak than we got to with this past growth stage.
Now, I did just withdraw money from a capital appreciation fund. My grandmother got me this account back in 2000, right around when the tech bubble imploded. The initial investment lost almost 60% of its initial value. It finally made it back to its purchase price just two months ago. I withdrew it last week, down 2.38% from its initial value. This will be the year I'm likely to need it for college expenses, and I don't want it to go back down again when I need it most. It's going straight into a savings account, maybe with ING Direct, or some other bank that's offering decent interest rates. Sadly, this money would have done way better if that's where it had been for the past 7 years.