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Personal Finance 101 Part 3: Banking on the Banks 549 Views


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Transcript

00:01

We speak student!

00:05

Personal Finance 101

00:08

Banking on the Banks

00:10

a la Shmoop

00:12

So now we've talked a lot about abstract bigger picture stuff.

00:17

Let's bring it back to

00:19

some practical advice for students.

00:21

Let's say I get a hundred dollars,

00:23

combination birthday money, allowance, et cetera.

00:26

Why is it better, so I hear, to put it in a bank account

00:31

then to put it under my mattress?

00:34

There are a whole bunch of reasons

00:36

that you'd want to set up a bank account in high school.

00:38

[ snort ]

00:39

The biggest is that you begin to establish a discipline of saving.

00:44

So the idea of someone saving a hundred bucks a month

00:48

or some period of time...

00:50

If you do the math, over time, at a young age,

00:52

if you start, it compounds to a very big number.

00:57

So if we go back to the rule of 72...

00:59

Let's say you put it in the bank

01:01

for a hundred bucks a month

01:03

and it compounds in a bank account

01:05

at two percent a year.

01:07

Well, you're not gonna make that much money in interest over time.

01:10

But at least you will have saved money.

01:13

By a different token, if you put it in the stock market...

01:15

You bought a hundred dollars' worth of an index fund every month,

01:18

so that you were saving 1200 bucks a year,

01:21

and each year you mowed the lawn

01:23

and you babysat and you, I don't know,

01:25

whatever else you do to make money.

01:27

Over time it ends up being a lot of money.

01:31

Because over long periods of time, the stock market goes up

01:34

about ten percent a year.

01:36

A little bit less depending on when you do the starting point,

01:40

but if you start in about 1880

01:41

when - Maybe the DOW is probably a good example

01:43

of when things really started to get tracked -

01:46

and you reinvest your dividends,

01:48

and for now, you ignore taxes,

01:49

because the tax rate for people not earning much money is very low,

01:52

you'd end up with an enormous amount of dough.

01:56

Just that initial 1200 dollars that you put in,

02:00

if you apply the rule of 72 and ten percent,

02:02

it would double in 7.2 years.

02:05

So that's on that one year,

02:07

but if then the next year and the next year

02:09

and the next year and the next year,

02:10

you're putting in 1200 bucks,

02:12

it compounds to some huge numbers.

02:14

And take a look at what a hundred bucks a month

02:17

gets you at ten percent of your return.

02:20

If you do it every month

02:22

for five years, from age 16 to 21,

02:25

which a lot of people can probably shake out,

02:29

by the time you're 60,

02:30

that's a lot of money.

02:31

It means you get to buy your Porsche or whatever

02:34

dream things that you wanted to do.

02:36

So the hundred bucks on its own doesn't mean that much per se,

02:40

but the hundred bucks as a compounded thing

02:43

that you would disciplinedly do every month,

02:46

boy, that can get you easy wealth.

02:49

[ whoop ]

02:50

Why is it better to put a hundred dollars in a bank account than under a mattress?

02:56

[ yeah! ]

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