Compound Interest

1.         Explain that many financial firms provide online resource for savers and investors.  One common resource is a “savings calculator.”  Clients or the public can use the calculator to determine how much they must save over some period of time t reach a specific savings goal.

2.         Explain that to reach a specific goal, such as $1,000,000 dollars saved at the time of your retirement, is determined by several factors:

a.         Current savings balance (how much you have now).

b.         Your future amount desired (your goal)

c.         The number of years you have to save.

d.         How much you can increase the amount saved each year.

e.         Expected annual return.

f.          Your marginal income tax rate.

These factors are explained on the NASDAQ web page.

3.         Go to: http://www.nasdaq.com/calculators/goal-savings-calculator.aspx

4.         Demonstrate how to use the calculator.  If you have access to a computer lab or  individual computers, students can individually use the calculator.

When you or the students click on the “Submit” button, the calculator will determine the required amount of saving over the time period.

5.         Discuss the three key factors influencing your return

a.         interest rate

b.         time

c.         amount saved (periodically)

Ask:  What is the key to achieving a long-term savings goal?

a.         higher interest rate (return)

b.         begin saving early

c.         save more (periodically)

6.         Introduce the concept of “compounding.”

Compound interest results when interest is added to the principal amount, so that added interest also earns interest. This addition of interest to the principal is called compounding.  If, for example, a balance of $100 earns $1 of interest during the first interest period (1%), it will earn interest on $101 during the next interest period (adding $1.01).  It will earn interest on $102.01 during the next period.  Beginning to save early with compound interest, increases the return over time.

7.         Students can see the impact of compounding by increasing the original amount saved or the time period of saving (saving early) on the savings calculator.

8.         Conclude: Review the three key factors influencing total return.   

a.         higher interest rate (return)

b.         begin saving early

c.         save more (periodically)

Activity 

Students work through the real cost of purchasing a DVD player with a credit card to determine the total paid with interest over a period of time.

So you want to buy that great new DVD Player and Surround Sound System with your new credit card?  It seems so easy?  Let’s see if it’s worth it.  Unfortunately, you do not have enough money to pay off the entire balance.  You decide to make payments of $50.00 per month.  Determine how much it will finally cost for the new DVD Surround Sound System.  It sounds great!

After you make a payment of $50.00, what will be your balance next month?  The next month, you again make a payment of $50.  Now what do you owe?  The next month, you again make a payment of $50.  Now what do you owe?  About how much do you think your total of all interest payments will be after you finally pay off the total balance with $50 payments each month? 

How long do you think it will take you to pay off the total balance (original purchase price and accumulated interest) with payments of just $50 per month? 

Procedures

1. Review the reasons for using forms of credit, especially credit cards.

2. Use the chart in “Choosing the Right Card” to illustrate the ways credit card offers differ and the advantages of each.  If possible, collect credit card application forms or make copies for students.  Review the application process and the required information.

3. Discuss the responsibilities and rights of credit users.  Contact the local office of the Consumer Credit Counseling Service, a non-profit agency, to talk to the class about credit use, problems and solutions.

Activity 

Students read a modern version of the fable, “The Grasshopper and the Ant.”           They answer questions and complete a writing activity to help the grasshopper make better decisions to achieve his financial goals.

Answer these questions about the fable.

1. What was the ant’s advice to the grasshopper the first time they met.

2. Why do you think the grasshopper ignored the ant’s advice?

3.  What would you have done if you were the grasshopper?

4.  Write a new ending for the fable after the ant and grasshopper meet again a year later.

 Procedures

 1. Introduce the purposes of saving, short-term and long-term goals, and various reasons to save.  Students can discuss the ways they currently save and their future savings plans.  Discuss the benefits of saving to achieve financial goals, including the various ways to save.

2. Review the “Rule of 72” and the benefits of compound interest.  Use the web page to compare a plan to save early versus saving later in life.  Stress the value of time when setting saving goals.    

Source: “What is the Rule of 72,”Investopedia, http://www.investopedia.com/ask/answers/04/040104.asp

3. After students complete the “Grasshopper and the Ant” activity, one additional activity is to have students write a new ending for the story, as if the grasshopper took the ant’s advice.

Module 2: Strength Training – Savings and Interest

In football, strength is something that you can’t develop all at once. Players need a consistent and focused work-out regiment to reach their peak performance. And even then, it takes a long time. As a matter of fact, top players never let up on their strength training. 

 In finances, a consistent and focused savings plan will allow you to develop your financial strength.  Saving small amounts over a long period of time is much more effective than trying to save all at once.  The reason for this is interest.

 Interest is the money you earn on savings. In time, the interest you earn becomes a part of your savings, and earns more interest. It creates a very powerful financial cycle: the more interest you earn, the more money you have saved, and the more interest you earn. This is what people mean when they say, “Let your money work for you.” Unlike your muscles, you could get to a point when your savings bulks up without you doing anything.

• Discuss savings account information
• Show video
• Guide Students through examples and assign homework