I'm reading through Berkshire Hathaway Letters to Shareholders and I'm confused by the following quote:

In the last few years, Illinois National's mix of deposits has moved considerably more than the industry average away from demand money to much more expensive time money. For example, interest paid on deposits has gone from under $1.7 million in 1969 to over $2.7 million in 1971.

I'm getting stuck on "demand money to time money". Anyone have any interesting input on this?

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    Parsewise, "demand money" and "time money" are two distinct things, and the deposits are shifting from one toward the other. I assume what you're stuck on is what those two things mean...? – cHao May 16 '18 at 17:30
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    Demand money is money in a savings account that can be withdrawn at any time. Time money is things like CDs and other instruments that lock up the deposit for a fixed amount of time. CDs pay a higher rate to compensate you for the loss of flexibility. – zeta-band May 16 '18 at 17:39

demand money: In this case, money that the depositor can demand back, but is expecting negligible interest or returns on (such as a checking account, or a low yield savings account).

time money: Money that a depositor is expecting non-negligible interest or returns on (such as a high yield savings account, or a CD).

Buffett is saying that the depositors, in general, are expecting more returns on their deposits, and that the depositors to Illinois National are doing so even more. He shows this by giving the raising cost of interest from $1.7 million per year to $2.7 million per year in only 2 years.

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    Here's a source for time money: merriam-webster.com/dictionary/time%20money – Nosrac May 16 '18 at 17:51
  • That is a definition, but it is not the one that Buffett is using in the quote. Money already loaned would not be considered "expensive", it would be generating a return, and would not be relevant to interest paid on deposits. – Magua May 16 '18 at 17:59
  • You're thinking of it from the bank's perspective. This definition fits from the consumer POV. A CD, for example, if money that a consumer has loaned a bank for a period of time. This would be "expensive" from the bank's POV. – Nosrac May 16 '18 at 18:27
  • Is that not synonymous with what I wrote? – Magua May 16 '18 at 18:43
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    So, in effect, what I think WB is saying is that because Illinois National's customers (or at least those that have savings with them) are getting more "savvy", and using more CDs than ordinary savings accounts, the profits IN get from loaning-out those deposits is being eaten-into by a larger amount (although the flip-side is, presumably, because there are more fixed-time-deposits, they can lend those deposits with more certainty at, presumably, higher rates). – TripeHound May 17 '18 at 8:20

Buffett seems to be using the term money instead of deposit. If you replace that, you then get demand deposit and time deposit which are common banking terms where a demand deposit is a deposit that the depositor can withdraw at any time without prior notice and where time deposits are locked in a longer time horizon and where penalties may apply for early withdrawal.

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