[Script Info]
Title: 
[Events]
Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:00.65,0:00:04.50,Default,,0000,0000,0000,,Well now you've learned what I\Nthink is quite possibly one of
Dialogue: 0,0:00:04.50,0:00:07.01,Default,,0000,0000,0000,,the most useful concepts in\Nlife, and you might already be
Dialogue: 0,0:00:07.01,0:00:11.92,Default,,0000,0000,0000,,familiar with it, but if you're\Nnot this will hopefully keep
Dialogue: 0,0:00:11.92,0:00:16.33,Default,,0000,0000,0000,,you from one day filing\Nfor bankruptcy.
Dialogue: 0,0:00:16.33,0:00:20.83,Default,,0000,0000,0000,,So anyway, I will talk about\Ninterest, and then simple
Dialogue: 0,0:00:20.83,0:00:21.86,Default,,0000,0000,0000,,versus compound interest.
Dialogue: 0,0:00:21.86,0:00:23.77,Default,,0000,0000,0000,,So what's interest?
Dialogue: 0,0:00:23.77,0:00:24.84,Default,,0000,0000,0000,,We all have heard of it.
Dialogue: 0,0:00:24.84,0:00:29.03,Default,,0000,0000,0000,,Interest rates, or interest\Non your mortgage, or how
Dialogue: 0,0:00:29.03,0:00:31.24,Default,,0000,0000,0000,,much interest do I owe\Non my credit card.
Dialogue: 0,0:00:31.24,0:00:34.14,Default,,0000,0000,0000,,So interest-- I don't know what\Nthe actual formal definition,
Dialogue: 0,0:00:34.14,0:00:35.61,Default,,0000,0000,0000,,maybe I should look it up\Non Wikipedia-- but it's
Dialogue: 0,0:00:35.61,0:00:37.85,Default,,0000,0000,0000,,essentially rent on money.
Dialogue: 0,0:00:37.85,0:00:41.35,Default,,0000,0000,0000,,So it's money that you pay\Nin order to keep money
Dialogue: 0,0:00:41.35,0:00:42.52,Default,,0000,0000,0000,,for some period of time.
Dialogue: 0,0:00:42.52,0:00:45.42,Default,,0000,0000,0000,,That's probably not the most\Nobvious definition, but
Dialogue: 0,0:00:45.42,0:00:46.92,Default,,0000,0000,0000,,let me put it this way.
Dialogue: 0,0:00:46.92,0:00:52.64,Default,,0000,0000,0000,,Let's say that I want to\Nborrow $100 from you.
Dialogue: 0,0:00:52.64,0:00:54.76,Default,,0000,0000,0000,,So this is now.
Dialogue: 0,0:00:54.76,0:00:59.12,Default,,0000,0000,0000,,And let's say that this\Nis one year from now.
Dialogue: 0,0:00:59.12,0:01:00.08,Default,,0000,0000,0000,,One year.
Dialogue: 0,0:01:00.08,0:01:04.83,Default,,0000,0000,0000,,And this is you,\Nand this is me.
Dialogue: 0,0:01:04.83,0:01:07.58,Default,,0000,0000,0000,,So now you give me $100.
Dialogue: 0,0:01:07.58,0:01:09.92,Default,,0000,0000,0000,,And then I have the $100\Nand a year goes by,
Dialogue: 0,0:01:09.92,0:01:12.57,Default,,0000,0000,0000,,and I have $100 here.
Dialogue: 0,0:01:12.57,0:01:15.98,Default,,0000,0000,0000,,And if I were to just give you\Nthat $100 back, you would
Dialogue: 0,0:01:15.98,0:01:17.51,Default,,0000,0000,0000,,have collected no rent.
Dialogue: 0,0:01:17.51,0:01:19.47,Default,,0000,0000,0000,,You would have just\Ngot your money back.
Dialogue: 0,0:01:19.47,0:01:20.88,Default,,0000,0000,0000,,You would have\Ncollected no interest.
Dialogue: 0,0:01:20.88,0:01:24.47,Default,,0000,0000,0000,,But if you said, Sal I'm\Nwilling to give you $100 now if
Dialogue: 0,0:01:24.47,0:01:30.86,Default,,0000,0000,0000,,you give me $110 a year later.
Dialogue: 0,0:01:30.86,0:01:34.62,Default,,0000,0000,0000,,So in this situation, how\Nmuch did I pay you to keep
Dialogue: 0,0:01:34.62,0:01:36.62,Default,,0000,0000,0000,,that $100 for a year?
Dialogue: 0,0:01:36.62,0:01:38.20,Default,,0000,0000,0000,,Well I'm paying you\N$10 more, right?
Dialogue: 0,0:01:38.20,0:01:45.61,Default,,0000,0000,0000,,I'm returning the $100, and\NI'm returning another $10.
Dialogue: 0,0:01:45.61,0:01:51.51,Default,,0000,0000,0000,,And so this extra $10 that I'm\Nreturning to you is essentially
Dialogue: 0,0:01:51.51,0:01:54.57,Default,,0000,0000,0000,,the fee that I paid to be able\Nto keep that money and do
Dialogue: 0,0:01:54.57,0:01:56.79,Default,,0000,0000,0000,,whatever I wanted with that\Nmoney, and maybe save
Dialogue: 0,0:01:56.79,0:01:59.63,Default,,0000,0000,0000,,it, maybe invest it, do\Nwhatever for a year.
Dialogue: 0,0:01:59.63,0:02:02.20,Default,,0000,0000,0000,,And that $10 is\Nessentially the interest.
Dialogue: 0,0:02:02.20,0:02:05.53,Default,,0000,0000,0000,,And a way that it's often\Ncalculated is a percentage
Dialogue: 0,0:02:05.53,0:02:07.85,Default,,0000,0000,0000,,of the original amount\Nthat I borrowed.
Dialogue: 0,0:02:07.85,0:02:11.14,Default,,0000,0000,0000,,And the original amount that I\Nborrowed in fancy banker or
Dialogue: 0,0:02:11.14,0:02:12.98,Default,,0000,0000,0000,,finance terminology is\Njust called principal.
Dialogue: 0,0:02:19.20,0:02:23.63,Default,,0000,0000,0000,,So in this case the rent on the\Nmoney or the interest was $10.
Dialogue: 0,0:02:23.63,0:02:27.92,Default,,0000,0000,0000,,And if I wanted to do it as a\Npercentage, I would say 10 over
Dialogue: 0,0:02:27.92,0:02:34.24,Default,,0000,0000,0000,,the principal-- over 100--\Nwhich is equal to 10%.
Dialogue: 0,0:02:34.24,0:02:39.48,Default,,0000,0000,0000,,So you might have said, hey Sal\NI'm willing to lend you $100 if
Dialogue: 0,0:02:39.48,0:02:41.42,Default,,0000,0000,0000,,you pay me 10% interest on it.
Dialogue: 0,0:02:41.42,0:02:44.77,Default,,0000,0000,0000,,So 10% of $100 was $10, so\Nafter a year I pay you
Dialogue: 0,0:02:44.77,0:02:46.81,Default,,0000,0000,0000,,$100, plus the 10%.
Dialogue: 0,0:02:46.81,0:02:47.56,Default,,0000,0000,0000,,And likewise.
Dialogue: 0,0:02:47.56,0:02:51.22,Default,,0000,0000,0000,,So for any amount of money, say\Nyou're willing to lend me any
Dialogue: 0,0:02:51.22,0:02:53.54,Default,,0000,0000,0000,,amount of money for\Na 10% interest.
Dialogue: 0,0:02:53.54,0:02:58.68,Default,,0000,0000,0000,,Well then if you were to lend\Nme $1,000, then the interest
Dialogue: 0,0:02:58.68,0:03:00.95,Default,,0000,0000,0000,,would be 10% of that,\Nwhich would be $100.
Dialogue: 0,0:03:00.95,0:03:11.02,Default,,0000,0000,0000,,So then after a year I would\Nowe you $1,000 plus 10% times
Dialogue: 0,0:03:11.02,0:03:14.56,Default,,0000,0000,0000,,$1,000, and that's\Nequal to $1,100.
Dialogue: 0,0:03:14.56,0:03:17.78,Default,,0000,0000,0000,,All right, I just added\Na zero to everything.
Dialogue: 0,0:03:17.78,0:03:20.09,Default,,0000,0000,0000,,In this case $100 would\Nbe the interest, but
Dialogue: 0,0:03:20.09,0:03:22.13,Default,,0000,0000,0000,,it would still be 10%.
Dialogue: 0,0:03:22.13,0:03:25.17,Default,,0000,0000,0000,,So let me now make a\Ndistinction between simple
Dialogue: 0,0:03:25.17,0:03:27.00,Default,,0000,0000,0000,,interest and compound interest.
Dialogue: 0,0:03:30.43,0:03:33.22,Default,,0000,0000,0000,,So we just did a fairly simple\Nexample where you lent money
Dialogue: 0,0:03:33.22,0:03:36.54,Default,,0000,0000,0000,,for me for a year at\N10% percent, right?
Dialogue: 0,0:03:36.54,0:03:42.28,Default,,0000,0000,0000,,So let's say that someone were\Nto say that my interest rate
Dialogue: 0,0:03:42.28,0:03:43.93,Default,,0000,0000,0000,,that they charge-- or the\Ninterest rate they charge to
Dialogue: 0,0:03:43.93,0:03:51.00,Default,,0000,0000,0000,,other people-- is-- well 10% is\Na good number-- 10% per year.
Dialogue: 0,0:03:51.00,0:03:55.70,Default,,0000,0000,0000,,And let's say the principal\Nthat I'm going to borrow
Dialogue: 0,0:03:55.70,0:04:01.90,Default,,0000,0000,0000,,from this person is $100.
Dialogue: 0,0:04:01.90,0:04:03.98,Default,,0000,0000,0000,,So my question to you-- and\Nmaybe you want to pause it
Dialogue: 0,0:04:03.98,0:04:18.57,Default,,0000,0000,0000,,after I pose it-- is how\Nmuch do I owe in 10 years?
Dialogue: 0,0:04:18.57,0:04:21.14,Default,,0000,0000,0000,,How much do I owe in 10 years?
Dialogue: 0,0:04:21.14,0:04:23.08,Default,,0000,0000,0000,,So there's really two ways\Nof thinking about it.
Dialogue: 0,0:04:23.08,0:04:30.35,Default,,0000,0000,0000,,You could say, OK in years at\Ntimes zero-- like if I just
Dialogue: 0,0:04:30.35,0:04:32.43,Default,,0000,0000,0000,,borrowed the money, I just\Npaid it back immediately,
Dialogue: 0,0:04:32.43,0:04:33.73,Default,,0000,0000,0000,,it'd be $100, right?
Dialogue: 0,0:04:33.73,0:04:35.21,Default,,0000,0000,0000,,I'm not going to do that,\NI'm going to keep it
Dialogue: 0,0:04:35.21,0:04:36.57,Default,,0000,0000,0000,,for at least a year.
Dialogue: 0,0:04:36.57,0:04:40.27,Default,,0000,0000,0000,,So after a year, just based on\Nthe example that we just did, I
Dialogue: 0,0:04:40.27,0:04:48.87,Default,,0000,0000,0000,,could add 10% of that amount to\Nthe $100, and I would
Dialogue: 0,0:04:48.87,0:04:51.05,Default,,0000,0000,0000,,then owe $110.
Dialogue: 0,0:04:51.05,0:04:55.42,Default,,0000,0000,0000,,And then after two years, I\Ncould add another 10% of the
Dialogue: 0,0:04:55.42,0:04:57.80,Default,,0000,0000,0000,,original principal, right?
Dialogue: 0,0:04:57.80,0:04:59.61,Default,,0000,0000,0000,,So every year I'm\Njust adding $10.
Dialogue: 0,0:04:59.61,0:05:03.78,Default,,0000,0000,0000,,So in this case it would be\N$120, and in year three,
Dialogue: 0,0:05:03.78,0:05:05.31,Default,,0000,0000,0000,,I would owe $130.
Dialogue: 0,0:05:05.31,0:05:09.77,Default,,0000,0000,0000,,Essentially my rent per year to\Nborrow this $100 is $10, right?
Dialogue: 0,0:05:09.77,0:05:12.58,Default,,0000,0000,0000,,Because I'm always taking\N10% of the original amount.
Dialogue: 0,0:05:12.58,0:05:17.09,Default,,0000,0000,0000,,And after 10 years-- because\Neach year I would have had to
Dialogue: 0,0:05:17.09,0:05:20.12,Default,,0000,0000,0000,,pay an extra $10 in interest--\Nafter 10 years I
Dialogue: 0,0:05:20.12,0:05:22.63,Default,,0000,0000,0000,,would owe $200.
Dialogue: 0,0:05:22.63,0:05:23.20,Default,,0000,0000,0000,,Right?
Dialogue: 0,0:05:23.20,0:05:33.52,Default,,0000,0000,0000,,And that $200 is equal to $100\Nof principal, plus $100 of
Dialogue: 0,0:05:33.52,0:05:36.58,Default,,0000,0000,0000,,interest, because I paid\N$10 a year of interest.
Dialogue: 0,0:05:36.58,0:05:39.26,Default,,0000,0000,0000,,And this notion which I just\Ndid here, this is actually
Dialogue: 0,0:05:39.26,0:05:43.02,Default,,0000,0000,0000,,called simple interest.
Dialogue: 0,0:05:43.02,0:05:45.26,Default,,0000,0000,0000,,Which is essentially you take\Nthe original amount you
Dialogue: 0,0:05:45.26,0:05:48.84,Default,,0000,0000,0000,,borrowed, the interest rate,\Nthe amount, the fee that you
Dialogue: 0,0:05:48.84,0:05:51.14,Default,,0000,0000,0000,,pay every year is the interest\Nrate times that original
Dialogue: 0,0:05:51.14,0:05:53.09,Default,,0000,0000,0000,,amount, and you just\Nincrementally pay
Dialogue: 0,0:05:53.09,0:05:54.38,Default,,0000,0000,0000,,that every year.
Dialogue: 0,0:05:54.38,0:05:55.98,Default,,0000,0000,0000,,But if you think about it,\Nyou're actually paying a
Dialogue: 0,0:05:55.98,0:05:58.39,Default,,0000,0000,0000,,smaller and smaller percentage\Nof what you owe going
Dialogue: 0,0:05:58.39,0:05:59.17,Default,,0000,0000,0000,,into that year.
Dialogue: 0,0:05:59.17,0:06:00.95,Default,,0000,0000,0000,,And maybe when I show\Nyou compound interest
Dialogue: 0,0:06:00.95,0:06:01.69,Default,,0000,0000,0000,,that will make sense.
Dialogue: 0,0:06:01.69,0:06:05.53,Default,,0000,0000,0000,,So this is one way to interpret\N10% interest a year.
Dialogue: 0,0:06:05.53,0:06:10.96,Default,,0000,0000,0000,,Another way to interpret it is,\NOK, so in year zero it's $100
Dialogue: 0,0:06:10.96,0:06:13.84,Default,,0000,0000,0000,,that you're borrowing, or if\Nthey handed the money, you say
Dialogue: 0,0:06:13.84,0:06:15.23,Default,,0000,0000,0000,,oh no, no, I don't want it and\Nyou just paid it back,
Dialogue: 0,0:06:15.23,0:06:16.55,Default,,0000,0000,0000,,you'd owe $100.
Dialogue: 0,0:06:16.55,0:06:21.63,Default,,0000,0000,0000,,After a year, you would\Nessentially pay the
Dialogue: 0,0:06:21.63,0:06:27.45,Default,,0000,0000,0000,,$100 plus 10% of $100,\Nright, which is $110.
Dialogue: 0,0:06:27.45,0:06:32.83,Default,,0000,0000,0000,,So that's $100,\Nplus 10% of $100.
Dialogue: 0,0:06:32.83,0:06:35.18,Default,,0000,0000,0000,,Let me switch colors,\Nbecause it's monotonous.
Dialogue: 0,0:06:35.18,0:06:36.97,Default,,0000,0000,0000,,Right, but I think this\Nmake sense to you.
Dialogue: 0,0:06:36.97,0:06:39.03,Default,,0000,0000,0000,,And this is where simple\Nand compound interest
Dialogue: 0,0:06:39.03,0:06:40.22,Default,,0000,0000,0000,,starts to diverge.
Dialogue: 0,0:06:40.22,0:06:42.93,Default,,0000,0000,0000,,In the last situation we\Njust kept adding 10%
Dialogue: 0,0:06:42.93,0:06:44.48,Default,,0000,0000,0000,,of the original $100.
Dialogue: 0,0:06:44.48,0:06:49.31,Default,,0000,0000,0000,,In compound interest now,\Nwe don't take 10% of
Dialogue: 0,0:06:49.31,0:06:50.31,Default,,0000,0000,0000,,the original amount.
Dialogue: 0,0:06:50.31,0:06:52.31,Default,,0000,0000,0000,,We now take 10% of this amount.
Dialogue: 0,0:06:56.34,0:07:02.44,Default,,0000,0000,0000,,So now we're going\Nto take $110.
Dialogue: 0,0:07:02.44,0:07:05.47,Default,,0000,0000,0000,,You can almost view it\Nas our new principal.
Dialogue: 0,0:07:05.47,0:07:06.84,Default,,0000,0000,0000,,This is how much we offer\Na year, and then we
Dialogue: 0,0:07:06.84,0:07:09.11,Default,,0000,0000,0000,,would reborrow it.
Dialogue: 0,0:07:09.11,0:07:19.81,Default,,0000,0000,0000,,So now we're going to owe\N$110 plus 10% times 110.
Dialogue: 0,0:07:19.81,0:07:23.22,Default,,0000,0000,0000,,You could actually undistribute\Nthe 110 out, and that's
Dialogue: 0,0:07:23.22,0:07:32.95,Default,,0000,0000,0000,,equal to 110 times 110.
Dialogue: 0,0:07:32.95,0:07:34.44,Default,,0000,0000,0000,,Actually 110 times 1.1.
Dialogue: 0,0:07:39.73,0:07:41.28,Default,,0000,0000,0000,,And actually I could\Nrewrite it this way too.
Dialogue: 0,0:07:41.28,0:07:45.85,Default,,0000,0000,0000,,I could rewrite it as\N100 times 1.1 squared,
Dialogue: 0,0:07:45.85,0:07:49.92,Default,,0000,0000,0000,,and that equals $121.
Dialogue: 0,0:07:49.92,0:07:52.79,Default,,0000,0000,0000,,And then in year two, this is\Nmy new principal-- this is
Dialogue: 0,0:07:52.79,0:07:55.11,Default,,0000,0000,0000,,$121-- this is my\Nnew principal.
Dialogue: 0,0:07:55.11,0:07:57.99,Default,,0000,0000,0000,,And now I have to in year\Nthree-- so this is year two.
Dialogue: 0,0:07:57.99,0:08:01.71,Default,,0000,0000,0000,,I'm taking more space,\Nso this is year two.
Dialogue: 0,0:08:01.71,0:08:06.45,Default,,0000,0000,0000,,And now in year three, I'm\Ngoing to have to pay the $121
Dialogue: 0,0:08:06.45,0:08:14.82,Default,,0000,0000,0000,,that I owed at the end of year\Ntwo, plus 10% times the amount
Dialogue: 0,0:08:14.82,0:08:20.45,Default,,0000,0000,0000,,of money I owed going\Ninto the year, $121.
Dialogue: 0,0:08:20.45,0:08:22.95,Default,,0000,0000,0000,,And so that's the same thing--\Nwe could put parentheses around
Dialogue: 0,0:08:22.95,0:08:29.27,Default,,0000,0000,0000,,here-- so that's the same thing\Nas 1 times 121 plus 0.1 times
Dialogue: 0,0:08:29.27,0:08:35.65,Default,,0000,0000,0000,,121, so that's the same\Nthing as 1.1 times 121.
Dialogue: 0,0:08:35.65,0:08:38.80,Default,,0000,0000,0000,,Or another way of viewing it,\Nthat's equal to our original
Dialogue: 0,0:08:38.80,0:08:44.18,Default,,0000,0000,0000,,principal times 1.1\Nto the third power.
Dialogue: 0,0:08:44.18,0:08:46.06,Default,,0000,0000,0000,,And if you keep doing this--\Nand I encourage you do it,
Dialogue: 0,0:08:46.06,0:08:48.66,Default,,0000,0000,0000,,because it'll really give you a\Nhands-on sense-- at the end of
Dialogue: 0,0:08:48.66,0:08:52.03,Default,,0000,0000,0000,,10 years, we will owe-- or you,\NI forgot who's borrowing from
Dialogue: 0,0:08:52.03,0:08:57.96,Default,,0000,0000,0000,,whom-- $100 times 1.1\Nto the 10th power.
Dialogue: 0,0:08:57.96,0:08:59.05,Default,,0000,0000,0000,,And what does that equal?
Dialogue: 0,0:08:59.05,0:09:01.32,Default,,0000,0000,0000,,Let me get my spreadsheet out.
Dialogue: 0,0:09:01.32,0:09:02.69,Default,,0000,0000,0000,,Let me just pick a random cell.
Dialogue: 0,0:09:02.69,0:09:10.98,Default,,0000,0000,0000,,So plus 100 times 1.1\Nto the 10th power.
Dialogue: 0,0:09:10.98,0:09:14.16,Default,,0000,0000,0000,,So $259 and some change.
Dialogue: 0,0:09:19.89,0:09:22.73,Default,,0000,0000,0000,,So it might seem like a very\Nsubtle distinction, but it ends
Dialogue: 0,0:09:22.73,0:09:24.58,Default,,0000,0000,0000,,up being a very big difference.
Dialogue: 0,0:09:24.58,0:09:30.61,Default,,0000,0000,0000,,When I compounded it 10% for\N10 years using compound
Dialogue: 0,0:09:30.61,0:09:33.10,Default,,0000,0000,0000,,interest, I owe $259.
Dialogue: 0,0:09:33.10,0:09:37.29,Default,,0000,0000,0000,,When I did it using simple\Ninterest, I only owe $200.
Dialogue: 0,0:09:37.29,0:09:40.77,Default,,0000,0000,0000,,So that $59 was kind of the\Nincrement of how much more
Dialogue: 0,0:09:40.77,0:09:43.36,Default,,0000,0000,0000,,compound interest cost me.
Dialogue: 0,0:09:43.36,0:09:45.61,Default,,0000,0000,0000,,I'm about to run out of time,\Nso I'll do a couple more
Dialogue: 0,0:09:45.61,0:09:47.56,Default,,0000,0000,0000,,examples in the next video,\Njust you really get a deep
Dialogue: 0,0:09:47.56,0:09:50.46,Default,,0000,0000,0000,,understanding of how to do\Ncompound interest, how the
Dialogue: 0,0:09:50.46,0:09:53.68,Default,,0000,0000,0000,,exponents work, and what\Nreally is the difference.
Dialogue: 0,0:09:53.68,0:09:54.06,Default,,0000,0000,0000,,I'll see you in the next video.