ShmoopTube

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We speak student!

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Personal Finance 101

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Banking on the Banks

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a la Shmoop

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

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Let's bring it back to

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some practical advice for students.

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Let's say I get a hundred dollars,

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combination birthday money, allowance, et cetera.

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

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then to put it under my mattress?

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There are a whole bunch of reasons

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

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[ snort ]

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

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So the idea of someone saving a hundred bucks a month

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or some period of time...

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

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

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

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Let's say you put it in the bank

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for a hundred bucks a month

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and it compounds in a bank account

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at two percent a year.

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

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But at least you will have saved money.

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

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

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so that you were saving 1200 bucks a year,

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and each year you mowed the lawn

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

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whatever else you do to make money.

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Over time it ends up being a lot of money.

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

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about ten percent a year.

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

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but if you start in about 1880

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when - Maybe the DOW is probably a good example

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of when things really started to get tracked -

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and you reinvest your dividends,

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and for now, you ignore taxes,

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

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

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Just that initial 1200 dollars that you put in,

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if you apply the rule of 72 and ten percent,

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it would double in 7.2 years.

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So that's on that one year,

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but if then the next year and the next year

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and the next year and the next year,

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you're putting in 1200 bucks,

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it compounds to some huge numbers.

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And take a look at what a hundred bucks a month

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gets you at ten percent of your return.

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If you do it every month

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for five years, from age 16 to 21,

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which a lot of people can probably shake out,

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by the time you're 60,

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that's a lot of money.

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It means you get to buy your Porsche or whatever

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dream things that you wanted to do.

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

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but the hundred bucks as a compounded thing

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that you would disciplinedly do every month,

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boy, that can get you easy wealth.

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[ whoop ]

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

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[ yeah! ]

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