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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.
Full Transcript
- 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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