Deposits

Deposits are funds that individuals or businesses place with a financial institution, most commonly a bank. Think of it as leaving your money in a secure vault, but one that's working behind the scenes. For you, the depositor, this money is an asset—a resource you own that appears on your personal balance sheet. For the bank, however, your deposit is a liability—it's money they owe back to you on demand or at a specified time. In exchange for the privilege of using your money, the bank typically pays you a small amount of interest. While they might seem like the most basic financial product, deposits are the lifeblood of the modern banking system. They provide the raw material (cash) that banks use to issue loans, mortgages, and other credit products, fueling economic activity. For an investor, understanding deposits is step one in managing cash, but it's crucial to know their limitations, especially when it comes to building long-term wealth.

When you deposit €1,000 into your account, the bank doesn't just lock it in a safe with your name on it. Instead, under a system called fractional reserve banking, it's legally required to keep only a small fraction of that amount on hand as reserves. The rest? It gets loaned out to other customers who might be buying a house or starting a business, earning the bank a much higher interest rate than the pittance it pays you. This is the fundamental business model of banking: borrow short-term from depositors at low rates and lend long-term to borrowers at higher rates. This system is magnificent for economic growth but has an inherent vulnerability. If all depositors were to demand their money back at once—an event known as a bank run—the bank wouldn't have enough cash on hand to pay everyone, causing it to fail. This is why modern economies have robust regulatory systems and deposit insurance in place to maintain confidence and prevent such panics.

For an individual, a deposit account is a foundational financial tool, offering a mix of pros and cons that every investor must weigh.

The primary virtues of bank deposits are safety and liquidity. They are, by design, the safest place to park your cash for short-term needs. This safety is massively enhanced by government-backed deposit insurance.

• In the United States: The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 per depositor, per insured bank, for each account ownership category.
• In the European Union: A harmonized system of national Deposit Guarantee Schemes (DGS) ensures that deposits are protected up to €100,000 per depositor, per bank.

This protection means that even if your bank goes under, your insured money is safe. Furthermore, the high liquidity of most deposit accounts means you can access your funds instantly, which is perfect for an emergency fund or for saving for a near-term goal.

The biggest drawback of deposits is their low return. The interest, or yield, paid on a typical savings account is almost always modest. This becomes a serious problem when you consider the impact of inflation. Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. Imagine your savings account pays 2% interest for the year. If inflation is running at 4%, the real return on your money is actually negative 2% (2% - 4%). Your account balance is growing, but your ability to buy things with that money is shrinking. This “inflation dragon” silently eats away at the value of your cash over time, making deposits a poor choice for long-term wealth creation.

Not all deposits are created equal. They generally fall into a few key categories, each offering a different balance between access and return.

These are your everyday checking or current accounts. You can withdraw money “on demand” without any notice.

• Pros: Maximum liquidity. Perfect for daily expenses.
• Cons: Usually pay zero or negligible interest.

These are designed for setting money aside. While still very liquid, they may have limits on the number of monthly withdrawals. This category includes standard savings accounts and money market accounts, which sometimes offer slightly better rates.

• Pros: Very safe and liquid. Pays some interest.
• Cons: Returns are low and often fail to beat inflation.

Known as Certificates of Deposit (CDs) in the US or simply 'fixed-term deposits' in Europe, these accounts require you to lock your money away for a specific period, from a few months to several years.

• Pros: Offer a higher, fixed interest rate than a standard savings account.
• Cons: Your money is tied up. Withdrawing early typically incurs a penalty, killing your returns.

For a value investing practitioner, cash is a strategic asset, but a deposit account is just a parking lot—not the final destination. While absolutely essential for an emergency fund (typically 3-6 months of living expenses), deposits are not an investment. An investment is the purchase of an asset with the goal of generating income or appreciation. Deposits do a poor job of this over the long run. The goal of a value investor is to move cash from the low-return safety of a deposit account into a productive asset—like a wonderful business (stocks) purchased at a fair price—that can grow its value far faster than inflation. Great investors hold large cash deposits not as a permanent state, but as “dry powder,” waiting patiently for the perfect opportunity to strike. In short: Use deposits for safety and short-term goals. But for building real wealth, you must eventually deploy that cash into the world of investing.