Introduction to interest Video

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Introduction to interest

Introduction to interest Well, now you’d learned what I think is quite possibly one of the useful concepts in life and then you might already be familiar with it but if you’re not will hopefully like keep you from one-day filling for bankruptcy. So anyway, I will talk about interest and then simple versus compound interest. So what’s interest? We all have heard of it interest rate or interest on your mortgage or how much interest do I owe on my credit card. So interest—I don’t what the actual form of definition maybe I should look it up on Wikipedia but it’s essentially rent on money. So it’s the money that you pay in order to keep money for some period of time and that’s probably not the most obvious definition but let me put it this way. Let’s say that, I want to borrow $100 from you, this is now and let’s say that this is one year from now, one year and this is you and this is me. So now, you give me $100 and then I have the $100 and the year goes by and I have a $100 here. And if were to just give you that $100 back, you’d have collected no rent. You would have just got your money back; you would have collected no interest. But if you said so I’m willing to give you a $100 now, if you give me—I don’t know if you give a $110 a year later. So in this situation, how much did I pay you to keep that $100 for a year? Well, I’m paying $10 more, right? I’m returning the $100 and I’m returning another $10. And so this $10, this extra $10 that I’m returning to you is essentially the fee that I paid to be able to keep that money and do whatever I wanted with that money and maybe save it and maybe invested do whatever for a year. And that $10 is essentially the interest. And awaited this often calculated is a percentage of the original amount that I borrowed. And the original amount that I borrowed in fancy banker or finance dromologist is called principal. So in this case, the rent on the money or the interest was $10 and if I wanted to do that in the percentage I would say 10 over the principal, which over a 100 which is equal to 10%. So you might have said, hey Sal, I’m willing to lend you a $100 if you pay me 10% interest on it. So 10% of a $100 was $10 so after a year, I pay a $100 plus the 10% and likewise. So for any amount of money, you’re willing to borrow any amount of money for a 10% interest. Well then, if you were to lend me a $1,000 then the interest would be 10% of that which should be a $100 so then after a year, I would owe you $1,000 plus 10% times the 1,000 and that’s equal to $1100 that is 03156 in this year and everything. In this case, a $100 would be the interest but it would still be 10%. So let me now make a distinction between simple interest and compound interest. So we just did a fairly simple example where you lend money for me for a year at 10%. So let’s say that someone where to say that my interest rate that they charged or the interest they charged other people is 10% is a good number, 10% per year. And let’s say, I’m going to borrow the principal that I’m going to borrow from this person. The principal I’m going to borrow is a $100. So my question to you and maybe you want to pass it after I post it is how much do I owe in 10 years? So there are really two ways to think about it. You could say, okay, I start to see in years at time zero, like if I just bought them in I just paid it back immediately, I just pay the $100, right? I’m not going to do that, I’m going to keep it for at least a year. So after a year, just based on the example that we just did, I could add 10% of that amount to the $100 and I would them owe a $110 and then after two years, I could add another 10% of the original principal. So every year, I’m just adding $10, so in this case it would be $120 and year three 0504 a $130. Essentially, my rent per year to borrow this $100 is $10 because I’m always taking 10% of the original amount. And after 10 years, because each year I would have to pay the extra $10 an interest after 10 years I would owe $200, right? And that $200 is you go to a $100 of principal plus $100 of interest, it could be $10 a year of interest. And this notion which I adjusted here, this is actually called simple interest which is essentially you take the original amount you borrowed, the interest rate, the fee that you pay every year is the interest rate times that original amount and you just inclemently pay that every year. But if you think about it, you’re actually paying a small and smaller percentage of what you owe going into the year. And maybe I want to show you compound interests settle make sense. So this is one way to interpret 10% interest a year. Another way to interpret it is, here is your― right you still—that’s $100 that you’re borrowing or if you just—I don’t know I don’t want it and you just pay it back you owe a $100 after a year, you would essentially pay the $100 plus 10% of a $100 which is a $110. So that’s 100 plus 10 % of a 100 let me switch colors because it’s similar on this, right? But I think this makes sense to you and this where simple and compound interest starts to divert. And the last situation we just kept adding 10% of the original $100. And the compound interest, in compound interest now, we don’t take 10% of the original amount. We now take 10% of this amount. And so what we’re doing—so now we’re going to take a $110 is going to be our new—you can almost view this as our new principal. This is how much we owe after a year and then we would reborrow it. So now, we’ve got a $110 plus 10% times a 110, right? And that is equal to, you can actually undistribute the 110 out and that’s equal to 110 times a 110, actually a 110 times 1.1, right? And so that equals and actually I could rewrite in this as a 100 times 1.1 squared and that equals a $121. And then in year two, this is my new principal, it’s a $121. this is my new principal and now I have to—in year three, so this s year two, I’, taking more space so this is year two. And now in year three, I’m going to have to pay the $121 that I owe at the end of the year two plus 10% times the amount of money I owed going into the year $121. And if we—so that’s the same thing we could profound the ― around here. So that’s the same thing as one times 121 plus 0.1 times 121 so that’s the same thing as 1.1 times 121 or another way of doing it that’s equal to our original principal times 1.1 to the third power. And if you keep doing this and I encourage you do it because it will really give you a hands-on -847 at the end of 10 years, we will owe—or you I forgot who’s borrowing form whom a $100 times 1.1 to the 10th power? And what is that equal? Let me get spreadsheet out. Let’s pick up random cell plus 100 times 1.1 to the 10th power. So $259 and some changed. So it might seem like a very saddle distinction but ends up being a very big difference when I compounded at 10% for 10 years using compound interest I owe $259 when I did using simple interest I only owed $200 so that $59 was kind of the increment of how much more compound interest cost me. I’m about to run out of time so I’ll do couple of more examples in the next video just you really get a deep understanding of how do you compound interest, how do you explain its work and what really is the difference. I’ll see you in the next video.

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Introduction to interest

Well, now you’d learned what I think is quite possibly one of the useful concepts in life and then you might already be familiar with it but if you’re not will hopefully like keep you from one-day filling for bankruptcy. So anyway, I will talk about interest and then simple versus compound interest. So what’s interest? We all have heard of it interest rate or interest on your mortgage or how much interest do I owe on my credit card. So interest—I don’t what the actual form of definition maybe I should look it up on Wikipedia but it’s essentially rent on money. So it’s the money that you pay in order to keep money for some period of time and that’s probably not the most obvious definition but let me put it this way. Let’s say that, I want to borrow $100 from you, this is now and let’s say that this is one year from now, one year and this is you and this is me.

So now, you give me $100 and then I have the $100 and the year goes by and I have a $100 here. And if were to just give you that $100 back, you’d have collected no rent. You would have just got your money back; you would have collected no interest. But if you said so I’m willing to give you a $100 now, if you give me—I don’t know if you give a $110 a year later. So in this situation, how much did I pay you to keep that $100 for a year? Well, I’m paying $10 more, right? I’m returning the $100 and I’m returning another $10. And so this $10, this extra $10 that I’m returning to you is essentially the fee that I paid to be able to keep that money and do whatever I wanted with that money and maybe save it and maybe invested do whatever for a year. And that $10 is essentially the interest. And awaited this often calculated is a percentage of the original amount that I borrowed. And the original amount that I borrowed in fancy banker or finance dromologist is called principal. So in this case, the rent on the money or the interest was $10 and if I wanted to do that in the percentage I would say 10 over the principal, which over a 100 which is equal to 10%.

So you might have said, hey Sal, I’m willing to lend you a $100 if you pay me 10% interest on it. So 10% of a $100 was $10 so after a year, I pay a $100 plus the 10% and likewise. So for any amount of money, you’re willing to borrow any amount of money for a 10% interest. Well then, if you were to lend me a $1,000 then the interest would be 10% of that which should be a $100 so then after a year, I would owe you $1,000 plus 10% times the 1,000 and that’s equal to $1100 that is 03156 in this year and everything. In this case, a $100 would be the interest but it would still be 10%.

So let me now make a distinction between simple interest and compound interest. So we just did a fairly simple example where you lend money for me for a year at 10%. So let’s say that someone where to say that my interest rate that they charged or the interest they charged other people is 10% is a good number, 10% per year. And let’s say, I’m going to borrow the principal that I’m going to borrow from this person. The principal I’m going to borrow is a $100. So my question to you and maybe you want to pass it after I post it is how much do I owe in 10 years? So there are really two ways to think about it. You could say, okay, I start to see in years at time zero, like if I just bought them in I just paid it back immediately, I just pay the $100, right? I’m not going to do that, I’m going to keep it for at least a year. So after a year, just based on the example that we just did, I could add 10% of that amount to the $100 and I would them owe a $110 and then after two years, I could add another 10% of the original principal. So every year, I’m just adding $10, so in this case it would be $120 and year three 0504 a $130. Essentially, my rent per year to borrow this $100 is $10 because I’m always taking 10% of the original amount. And after 10 years, because each year I would have to pay the extra $10 an interest after 10 years I would owe $200, right? And that $200 is you go to a $100 of principal plus $100 of interest, it could be $10 a year of interest.

And this notion which I adjusted here, this is actually called simple interest which is essentially you take the original amount you borrowed, the interest rate, the fee that you pay every year is the interest rate times that original amount and you just inclemently pay that every year. But if you think about it, you’re actually paying a small and smaller percentage of what you owe going into the year. And maybe I want to show you compound interests settle make sense.

So this is one way to interpret 10% interest a year. Another way to interpret it is, here is your― right you still—that’s $100 that you’re borrowing or if you just—I don’t know I don’t want it and you just pay it back you owe a $100 after a year, you would essentially pay the $100 plus 10% of a $100 which is a $110. So that’s 100 plus 10 % of a 100 let me switch colors because it’s similar on this, right? But I think this makes sense to you and this where simple and compound interest starts to divert. And the last situation we just kept adding 10% of the original $100. And the compound interest, in compound interest now, we don’t take 10% of the original amount.

We now take 10% of this amount. And so what we’re doing—so now we’re going to take a $110 is going to be our new—you can almost view this as our new principal. This is how much we owe after a year and then we would reborrow it. So now, we’ve got a $110 plus 10% times a 110, right? And that is equal to, you can actually undistribute the 110 out and that’s equal to 110 times a 110, actually a 110 times 1.1, right? And so that equals and actually I could rewrite in this as a 100 times 1.1 squared and that equals a $121. And then in year two, this is my new principal, it’s a $121. this is my new principal and now I have to—in year three, so this s year two, I’, taking more space so this is year two.

And now in year three, I’m going to have to pay the $121 that I owe at the end of the year two plus 10% times the amount of money I owed going into the year $121. And if we—so that’s the same thing we could profound the ― around here. So that’s the same thing as one times 121 plus 0.1 times 121 so that’s the same thing as 1.1 times 121 or another way of doing it that’s equal to our original principal times 1.1 to the third power. And if you keep doing this and I encourage you do it because it will really give you a hands-on -847 at the end of 10 years, we will owe—or you I forgot who’s borrowing form whom a $100 times 1.1 to the 10th power? And what is that equal? Let me get spreadsheet out.

Let’s pick up random cell plus 100 times 1.1 to the 10th power. So $259 and some changed. So it might seem like a very saddle distinction but ends up being a very big difference when I compounded at 10% for 10 years using compound interest I owe $259 when I did using simple interest I only owed $200 so that $59 was kind of the increment of how much more compound interest cost me. I’m about to run out of time so I’ll do couple of more examples in the next video just you really get a deep understanding of how do you compound interest, how do you explain its work and what really is the difference. I’ll see you in the next video.

Transcription by: Scribe4you Transcription Services