Debit Cards V Credit Cards
When you’re under 18, you’re lucky! You can’t get into trouble with credit cards as you are under the legal age! But a lot of young people are encouraged to get credit cards when they turn 18! Beware as misuse of a credit card is one of the easiest ways to get into debt.
Let’s first look at the differences between the two. A debit card gives you access to your own money, so you are limited to withdraw or spend only as much as is in your account. When you turn 18...
Compound Interest
To see the real gains associated with compound interest we need to look at a longer period. Say there are two friends, Dan and Lisa.
Dan starts saving $100 month in a compounding account with a rate of 5% p.a. from the time he turns 15 until he turns 30. Then he stops saving and but still lets the interest compound by itself for a further 20 years. So he has contributed 18,000 over 15 years.
Lisa starts later. In fact she doesn't get around to saving until she's 25. She puts $100 a month into the same type of account for the next 25 years. So she will have contributed 30,000 of her own money – nearly double the amount that Dan put in – and was actively saving for 25 years. Who will be ahead when they reach 50?
| Dan | ||
|---|---|---|
| Timeframe | Amount saved | Compounded total |
|
10 years
|
$12 000
|
$15 592.93
|
|
15 years
|
$18 000
|
$26 840.26
|
|
20 years
|
–
|
$34 445.68
|
|
25 years
|
–
|
$44 206.16
|
|
30 years
|
–
|
$56 732.36
|
|
35 years
(50 years old)
|
–
|
$72 807.97
|
| Lisa | ||
|---|---|---|
| Timeframe | Amount saved | Compounded total |
|
10 years
|
–
|
–
|
|
15 years
|
$6 000
|
$6 828.94
|
|
20 years
|
$12 000
|
$15 592.93
|
|
25 years
|
$18 000
|
$26 840.26
|
|
30 years
|
$24 000
|
$41 274.63
|
|
35 years
(50 years old)
|
$30 000
|
$59 799.10
|
It doesn't seem right, does it? But just by starting early and taking advantage of compound interest, Dan has contributed less to his savings and over a shorter period of time than Lisa, but come out $13,000 ahead. Get your head around that one!
And the moral of the story is…? Be disciplined, start saving regularly and early – and you'll have the last laugh.
