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Over the past few years, I've noticed that the concept of being your own bank is becoming more and more popular. Especially after the global financial crisis of 2008, and with the rise of Bitcoin and other blockchain cryptocurrencies, the idea of being in charge of your own money and wealth and not relying on seemingly failing or corrupt public financial systems is becoming increasingly attractive to everyone I know.

Privatized and individualized banking is not actually a new idea. In fact, it's more than a few centuries old. What is relatively new is the increasing availability of traditional banking functions to the average individual. However, doing this usually requires pulling together different products and services in order to have something that works coherently like a bank.

In this series of blogposts, I'm going to explore this idea of being your own bank. I'll be looking at how traditional banks work, and how the average person can pull together different services to achieve the same effect as a traditional bank.

Disclaimer: I am not a financial advisor and am certainly not qualified to give legal financial advice. All the ideas and opinions expressed in this article are mine, and should not be used as personal investment or financial advice. Please do your due diligence in research and caution and perhaps consult with an attorney or actual professional to determine what may be best for you.

Why Become Your Own Bank?

I personally don't have much of a problem with traditional banks and financial institutions. I believe they are meant to fulfill an important role in today's society in helping us store and manage our finances in an unobtrusive and straight-forward way. I also believe that, as long as society is moving forward, there won't be any real time in the future where we don't rely on these institutions and services. This is because finances are simply a way for us all to communicate value to one another, and there will always need to be some kind of intermediary to help us manage that communication of value and, more importantly, trust. Some of us have more time in the day to manage it, while others of us have less. Yet, for all of us, I believe that understanding the processes of banks and money management is simply a stepping stone to living a better and more productive life.

So why become your own bank? If these other services are there for us to store and spend money how we want, why would we want to waste our time being one instead of doing what we want?

I think answering this is a bit tricky. As a caveat, I don't even believe that being your own bank is necessarily for everyone. Rather, it comes down to mindset. If we think of money as simply something we earn in order to spend, then certainly, we wouldn't need to learn the intricacies of banking at all. However, if we instead understand money–a source of value which we earn–as an extension of ourselves, then learning to manage that value would definitely be a smart thing to do! Thus, learning how to be the bank instead of relying on others to perform banking functions for us allows us to be much more in control of ourselves and our value in the world.

How Banks Work

I think it's important to define what a bank is, or rather, how a bank functions. This is so we can sift out all the pomp and circumstance (and perhaps emotional and institutional baggage) that have surrounded the idea of a bank so as to make it useful for the average person.

A bank has two primary functions. The first is storage. The average person thinks of the bank as a place to store their money. However, historically, banks have always stored more than just fiat currency. Many people store important and valued items in banks. In this way, understanding banking more as a general storage of value rather than simple “money” is more beneficial when we think about being our own bank.

The second function of a bank is lending. Banks loan out chunks of money and are repaid that lended value over time with interest. In this way, they increase the amount they originally held. Lending itself serves two functions. First, it pays the bankers for their trouble. Second, it allows the value stored at a bank keep up with and, in most cases, outpace inflation. This particular function is perhaps the most important thing that banks do. It's also probably the most misunderstood and, especially after the 2008 financial crisis, the thing many institutional banks are most hated for.

It's important to note that liquidity (i.e. the freedom of movement) of currency is extremely important to a bank. The more liquid (or free) the money is in a bank, the more they are able to lend and, thus, make money for themselves.

That's About It!

So that's the basics of what banks are. In order to understand how we can become a bank, we first need to understand the different functions of a bank. Basically, a traditional bank stores value from different clients, and then lends that value out to other clients, and receives that value back over time with interest. This storage and lending process allows the bank to accumulate more value over time, and eventually earn a profit from their managerial practices.

The average individual can also take advantage of these functions themselves, and earn more for their money if they manage it well. In this way, we become our own bank, and are able to control our own finances and wealth the way we want.

In the next blog post, I want to talk about an essential and yet often misunderstood part of economics that I mentioned a bit above: the topic of inflation.

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