Saving Money (Compound Interest)

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Video Transcript: 

Take just a minute, and think about the future you'd like to have. To get there, you need to be responsible and save your money so that it grows over time.

Meet Jasmine. She's 20 years old, and her goal is to buy a home in the future. Jasmine is already saving for that future home purchase and recently learned how to save responsibly.

When she was younger, she had a piggy bank and often added money to it. The problem with a piggy bank was that her money just sat there. She got out the same amount she put in.

Instead of using a piggy bank, Jasmine found a way to help her money grow over time by saving it in a bank or credit union, where she can easily get it back when she needs it.

While it's there, the bank uses her money to help other customers who need to borrow money. It's like Jasmine is loaning her money to the bank. Because she's helping the bank, they add a little extra money to her account automatically.

It's these payments from the bank that help her money grow over time. This extra money is called "interest", and it's paid to Jasmine over the course of a year. The amount of interest she earns is based on two things:  The amount she has in the bank, and the Annual Percentage Yield or APY, which is a rate set by the bank. Here's how they work together.

Let's say you deposit $100 in a savings account with a 3% APY. That $100 will earn $3 in interest over the course of a year. Now, you could take that $3 in interest and buy a latte. But you decide to leave it in the bank.

This way you have more money in the bank, and earn interest on $103 instead of $100. As long as you leave it alone, your money will grow even faster because the interest adds up year after year. It's called "compound interest" and this simple idea will help Jasmine buy a home. Here's how.

In her piggy bank, Jasmine has saved $5,000. But for the home she wants, she knows she'll need more, and realizes that smart saving is all about thinking long term. If she deposits this in a bank, and earn 3% APY, that $5,000 would become $9,000 in 20 years. That's $4,000 more thanks to compound interest. $9,000 is good, but it may not be enough.

To help her money grow even faster, Jasmine decides that she can add $100 to her savings each month.  That's $1,200 a year - even more money to earn interest! This will be a huge help. Jasmine can see she's getting close.

With the $5,000 she has saved, plus the money she adds monthly, she can save $29,000 over 20 years, if she saved it in a piggy bank. But with compound interest from her bank, that $29,000 could become over $42,000 in 20 years. A nice start on buying her dream home! All she had to do was add money to her savings regularly, and watch it grow! Yay!

If you're ready to save responsibly, visit a bank or credit union and talk with a financial professional about APYs and savings.

The keys to smart saving are to start today, add money regularly, and watch how compound interest can help your money grow and grow.

What it teaches: 

This video introduces the basics of using a bank or credit union to earn money from compound interest. It tells the story of Jasmine, who saves money to buy a home, including:

  • How money earns interest in banks
  • Interest rates
  • How compound interest works over time
  • Saving for a future goal

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