so you might think that when you put your money in a bank they take your money and they put it in the vault and they keep it safe until you come back for it but that's not true at all and so to talk about compound interest we really need to talk about what banks do and to do that we're going to do a little bit of a history lesson all right so this is your house and this is someone else's house and it's obviously a little bigger and a little more secure than your house is way back in the day your house probably didn't have a lock on it this one's probably got a moat around it and like a fire breathing dragon or something now let's think about who you are you're a baker let's say but you're like the best baker in town and everyone knows it everyone goes to your bakery maybe you've got multiple bakeries you're baking some fantastic bread and everyone knows that you must be making a lot of money now obviously this is a good situation to find yourself in but it's also a dangerous situation to find yourself in because you've got a lot of money you've got a house without a lock on it and there's probably a bunch of bad people that want to take that money away from you now luckily there is a handy solution to this problem and that is say this rich guy and the rich guy has a house with a lock and a moat and a dragon and he says i'll look after your money for you but in return you're going to have to give me a little bit so we take all of this money and we take say this much of that money and we put it in the bank and then the last little bit um he gets to keep all right so this goes in the vault and it sits in the vault nice and safe surrounded by the mode guarded by the dragon and you do that right this means that you lose a little bit of money but a bunch of money is also safe from these bad people who are trying to take it away now wait a minute this doesn't make sense because a bank paying compound interest this isn't the bank paying you this is you paying the bank for security so how did we get to a point where the bank pays you instead well for that we need another rich guy now this rich guy makes you a proposition he says look stop putting your money in this rich guy's thing who's charging you money and instead put your money in my safe remote dragon place and i'll keep it safe from the bad guys and not only will i keep it safe from the bad guys but i'll also pay you a little bit of extra money as well so you take all the money out of here and you put it here and not only does your four dollar signs move from here to the vault nice and safe but also the rich guy true to his word adds in one of his own extra dollar signs so now you have five dollar signs not four dollar signs you're the rich guy's giving you money to keep your money safe why is he doing that well you think that the money is sitting in the vault but it's not sitting in the vault there happens to be another person in town who desperately wants to become a butcher but they've got no money to open up a butcher shop so what do they do they ask rich guy 2 for a loan and rich guy 2 says yeah no worries i've got plenty of money i'll give you some money but when i give you that money you're going to have to give it back to me eventually plus an extra dollar sign so then rich guy 2 takes the money that you he's keeping safe for you and gives it to the butcher and now the butcher has your dollar signs and so you might be thinking to yourself wait my money's not very safe here is it because rich guy 2's not keeping it in his fault he's handing it off to other people now he's handing it off to other people because once he gets his butcher shop up and running he's going to start repaying that loan with an extra dollar sign and the extra dollar sign is going to end up in that vault as well now rich guy 2 understands that you are keeping your money safe and you might come back for it eventually or you might come back for small parts of it but you're not going to pull all of it out at once so he doesn't have to keep all of your money in the vault and if he's lending if he's keeping 10 people's money safe he doesn't need to keep all 10 people's money safe because the probability is that only one or two of them at any given time are going to want it back all right so this is a pretty good business bottle because when we break it down it looks like this you have money that you put into the rich guys bank the rich guy takes that money and gives it to the butcher once the butcher has a good business and he's making some money he gives that money back to the rich guy plus a little bit of extra interest now notice that he gave them the four original dollar signs back plus two more now the rich guy is now let's say you come along you say actually i want all my money back please the rich guy says yeah no worries you can have the original four dollar signs that you gave me plus one extra one that's the interest that you get and now everyone's happy you had four dollar signs and now you have five dollar signs rich guy started with like zero dollar signs even though he's rich and he's got an extra one and this guy got a loan and while he doesn't have any dollar signs floating under him he does have a thriving butcher shop that is starting to make dollar signs fantastic so why do banks pay compound interest because they're not sitting on your money like a dragon they're taking your money they're giving it to people charging them interest that money comes back into the bank and then they give you a little bit of interest because you've been nice enough to choose this rich guy instead of that other rich guy and that's pretty much how bank works now obviously this is a bit of a simplification but this is essentially how it works and this was the birth of banking keeping people's money safe lending it to people getting some interest and then giving that money back and keeping a little bit for yourself okay that's why banks pay compound interest and we're just getting started on learning all about how compound interest works