I wonder how excited you became when you explored the links that I gave you last week, especially the Basic Compound Interest Calculator. Like I said then, if stuff like this doesn't excite you, then you're not ready for financial responsibility. On the other hand, if you began to imagine how your weekly or monthly income (like your allowance) could grow with compound interest, then you're ready to tackle this week's information.

You might earn anywhere from just a few dollars a week to $20.00 per week or more depending on how old you are. You might make more money if you're older, as parents usually don't like to give a lot of money to kids who don't know how to handle cash. If you can show that you know how much that money is worth, and if you show that you're willing to save part of that money, you'll have better success at increasing your savings when birthdays and other holidays come around. Let me show you how:

Say that you decide to save 1/2 of your weekly allowance in a bank's savings account. If you make $5 per week, you'll save $2.50 per week, or $10.00 per month. Within one year (by next holiday season), you will have saved $133.24. In other words, you would have deposited $130.00 ($2.50 x 52 weeks in a year), and the bank pays you $3.24 for keeping that money in the bank.

Now, $3.24 doesn't sound like a lot of money, especially if you're older. You can make more money with one babysitting job or when you mow a neighbor's lawn. So, what you need to do now is to begin to save ? of that money that you make with those other jobs, and if you're older you might want to negotiate a raise in your allowance - especially if you increase your help around the house. Tell your folks what you want to do and they might help you save even more money by this time next year.

Say that you increase your allowance so that you can put $5 per week in that savings account and you put another $5 per week from odd jobs that you do during the weekend. You'll now save $10 per week, and by this time next year you will have saved $532.96. You would have deposited $520.00 and the bank pays you $12.96. That sounds a lot better, doesn't it?

Better yet, you can begin to ask for money rather than for toys or gadgets for your birthday and for holidays. Last week I mentioned that you might have asked for $1,000 worth of clothes, toys, and gadgets this year. Say that you only expect to receive half that amount (you always throw in more than you think you'll get, right?). If you ask, instead, for half that amount in cash instead, you might receive enough to make a $200.00 to $250.00 deposit. What happens to that savings account if you put that money in the bank for one year?

$200.00 lump sum + $10.00 per week + 5% interest = $795.96 at the end of one year.

Over the year you saved a total of $720.00, and for that effort, the bank would pay you $75.96. If your dad ever told you "it takes money to make money," you now know what he meant. The more you save, the more you'll make on those savings.

Now, if someone gets the idea that you might need a credit card and you agree wholeheartedly, I want to show you how that credit card will eat away at your savings. The bank is paying you 5% compound interest, right? Well, a credit card charges an average of 18% compound interest, only they don't pay you - you pay them every time you use that card - UNLESS - you pay off every cent that you spend on that card every month. Even then, you might be charged a "usage fee," or a few dollars for the use of that card each month.

Let's say that you spend $120.00 on that card to buy an iPod and you decide to pay off that amount over twelve months. You might think that all you'll pay is $10.00 per month for 12 months to wipe out that $120.00 debt. If that credit card charges 18% interest, you'll still owe $11.00 at the end of the year. So your iPod will really cost $131.00 instead of $120.00. Let's look at this problem another way. If you want to save $10.00 per month and you need to pay that credit card company $10.00 per month, you need to make $20.00 per month. But, to pay off that credit card charge, you really need to make $21.00 per month so that you can pay the interest on that credit card. If you decide to pay the credit card company out of your savings so that you don't have to pay that interest, then you need to add $1.00 per month to your savings account to equal what you hoped you would make at $10.00 per month.

Don't get me wrong - I'm not saying that credit cards are bad. But, their interest rates are monsters. So, if you think that you can use a credit card and pay off that amount within a month, you have the right start to learning how to use this financial tool. If you don't think you can pay off the full amount within a month, then you're not ready to spend that money and you're not ready for a credit card. It's that easy.

You're probably not very happy with me right now, but I'm going to change my tone next week. I'll show you and your folks how to increase your savings with other gifts from your family - gifts that will pave your way into the world of investments like the stock market.

Until Then,
Linda Goin

The securities markets are subject to the risks of fluctuating prices and the uncertainty of rates of return and yields inherent in investing and past performance is no guarantee of future results. Savings Accounts are insured by FDIC and offer a fixed rate of return.