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Video: How Does Compound Interest Work?

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Watch this video to learn about how compound interest works and why's it's so important for your finances.

Video Transcript

TURTLE: Hey kid. Do you want to play a game?

JEN: Yeah, okay!

TURTLE: Real quick before we start, what do the words compound Interest mean to you?

JEN: Um…

TURTLE: Perfect. Let's get started. It's 10 bucks to play. I'm gonna give you two options. All you got to do is choose the one that makes you the most money.

JEN: Okay.

TURTLE: We're talking savings and investments, here. Big picture stuff. What will be worth more when you hit 65. Option one. You're 25 years old and you put away five grand a year until you're 35. Then hands off, you let the investment sit, you don't add any more money to it and when you're 65 you check to see how much it's worth.

JEN: Alright.

TURTLE: Option two. You're 35 years old. Again, you put away five grand every year but this time you keep doing that for 30 years. By then, you're 65, and you check to see how much it's worth. Let's say in both cases your total investment is getting an average seven percent annual return. Make your choice. You have 10 seconds.

JEN: Let's do this. Over here I'm saving five grand a year for 10 years, that's $50,000 total. Over here I'm saving five grand a year for 30 years, that's a $150,000 total. Math, math. Seven percent does something. But I'm putting way more money into that one, so option two! I choose that one. 

TURTLE: I'm sorry.

JEN: Hold it. Explain this.

TURTLE: It's not the right answer. When you're working with compound interest, $50,000 invested earlier in your life will make you more money than $150,000 invested later in your life.

JEN: But in option two I'm putting in $100,000 more.

TURTLE: Right. But option one will still outperform it by 60 Gs.

JEN: That's crazy.

TURTLE: That's compound interest, baby. The more time you have for your investment to grow, the more free money you get.

JEN: What if I don't have five grand a year to put away?

TURTLE: Doesn't matter, start smaller. A thousand bucks, five hundred bucks, it's never too soon to start. Putting it off just means you get less in the end.

JEN: Then I'm going to stop putting it off. Thank you, street turtle. To the credit union!

TURTLE: Man, people not knowing about compound interest sure keeps us in business. Come on kids, let's get some lunch.

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