(Describer) A title: Beginning Balance: How to Start out Your Financial Future.

(speaker) Our world is rapidly changing. The concept of being a cashless society is looking more plausible every day. So as a young adult learning how to manage your money, get your first credit card, and start applying for your first loan, what are the basics you need to know? One important term is "interest." Interest can be both a cost and a profit when referring to finances. For it to be a profit, you have to be the one loaning the money. However, just starting out, it's more likely you'll be the one borrowing. So when discussing interest as a cost, it refers to the additional money you have to pay back on top of the amount you borrowed. Interest can be calculated in a number of different ways. But the most common formulas are compound interest and simple interest. Let's break them down with an example. Say you want to buy a car for $10,000 and you don't currently have the cash for it. You decide to apply for a three-year car loan. Your options are a three year 10% simple interest loan with a $100 fee, or a three year 10% compound loan with no fee. Your first instinct would most likely be to pick the loan without a fee since it's $100 cheaper. Let's take a look at how much of a difference an interest rate can really make. The first important term to understand when calculating an interest rate is what a "principle amount" is. In this scenario, your principle is $10,000. Put simply, it is the original amount of money you borrowed. So when you're calculating simple interest, you multiply three factors: the principle amount, the interest rate, and the duration of your loan-using periods. For this example, your $10,000 principle times your 10% interest rate times your three-year period would equal $3,000 of interest at the end of your loan. However, if you choose the compound interest loan with no fee, you would end up owing $13,310. That's $210 more. So in the end, even though the simple interest loan has a fee, it still ends up being the cheaper option. So how did we get to that $13,310 amount? When calculating compound interest, the first period is calculated the same way as simple interest. You multiply the same three factors: the principle amount, the interest rate, and the duration of your loan-using periods. The difference between the two is that after the first period, you add the accrued interest on top of the principle amount and the sum of those two replaces the principle amount for the following period. So if your compound interest periods were calculated annually, you would owe $11,000 for the first year, $12,000 for the second, and year three, which is the end of your loan, you would owe $13,310. So in review, interest is the money you have to pay back on top of the principle amount, which is the original amount you borrowed. Secondly, when choosing between a simple interest or compound interest loan, calculate the difference based on the length of the loan and adding in any fees to make the best choice. And lastly, interest isn't always a cost. It can work in your favor when investing in stocks, bonds, and saving accounts, and even just knowing the difference between the two types of interest can save you money, which in turn, will make you more financially prepared for your bright future. So what are you waiting for?

(Describer) Accessibility provided by the U.S. Department of Education.

(announcer) This financial literacy video was brought to you by a grant from the Ohio Broadcast Educational Media Commission and WBGU-PBS, in consultation with the Ohio Department of Education. For more videos in our Financial Literacy series, please go to WBGU.org or visit WBGU-PBS on YouTube.