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Science of Compound Interest
March 21, 2018
Whether you just started babysitting, mowing lawns or got a job at the local ice cream parlor, you have MONEY! You could just use the money to go out with your friends, buy clothes and put gas in your car, if you have one. Some of that is fine and even necessary to be a well-rounded human, but saving is also necessary. Say you want to someday own a car or go to college or even move out of your parent’s home, you will need money, that’s where saving comes in handy. Let’s pretend for a minute. You have a job scooping ice cream and, just to make the math easy, you earn $10 an hour. Between school, homework, extracurricular activities, and spending time with your friends, you are able to work 15 hours per week. Your gross salary is $150 per week or $600 in four weeks. Gross salary means how much you make before Uncle Sam takes his cut or FICA or unemployment Insurance or anyone else for that matter. What you see as the total on your paystub is your net pay, the leftover money. That is the amount you have to live on until your next payday. Now is a good time to tell your parents “thank you” for giving you a roof over your head, buying groceries and everything else they do.
The typical advice is to save 10 percent of your gross earnings. In this scenario, that’s $15 per week or $60 per four weeks. You could just hide it in a shoe in your closet and in five years it will total exactly what you put in there each month. The better option is a savings account that earns interest. While the interest rate on a regular savings account is low, it is still better than shoes. Savings rates do vary, so check at the credit union to see what their rate is, but .25 percent is common. Additionally, they typically start with a minimum opening deposit. For our scenario, we are going to use a minimum deposit of $5. So you go with a parent or guardian and open your account with your $5. Then each month you deposit $60, or $720 a year. At the end of 5 years, you will have $3,628. Here’s how:
As you can see, a small savings can mean results. You made $28 doing nothing, or you have made the equivalent of almost 3 hours you didn’t have to work. Start now, you’ll thank yourself later. Oh, and the shoe option for savings would leave you with $3,600. To ramp up your savings, talk to the credit union about transferring some of your savings to a CD or share certificate. It will more than double your interest, but the minimum initial investment is higher.
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