# Lesson 1: Saving Money for Your Future

Essential Question: What is the value of saving money?

Objective: Students will explore saving money as a way to achieve their own financial goals. They will explore the difference between simple and compound interest and will be able to identify and discuss key terms and concepts associated with saving money.

Materials: SAVING WITH A PURPOSE! student worksheet, index cards, 100 large paper clips, 100 small paper clips, calculator, 4 small boxes or baskets, 1 die (number cube)

Time required: 45 minutes

PART I—ENGAGING THE LEARNER

STARTER QUESTIONS:

• What reasons do people have for saving money rather than spending it immediately? (Saving for college, a new car, or a vacation)
• How do people save their money? (Answers might include putting money in a bank.)
• Can the money in a savings account make more money while in the account?

PART II—ACTIVITY: SIMPLE INTEREST VS. COMPOUND INTEREST

Provide students with a visual representation that contrasts the yield of simple interest vs. the yield of compound interest. Review the SAVING MONEY—WORDS TO KNOW section of this lesson plan with students.

Materials (based on 20 students): 20 index cards, 100 large paper clips, 100 small paper clips

Give each student an index card. Have them label the cards "\$100." This represents their initial deposit of money (principal) into a savings account. Divide the class in half. Tell one half of the class that they will receive simple interest on their principal, and tell the other half of the class that they will receive compound interest (compounded annually) on their principal. This activity will simulate approximate interest growth over a period of five years at an interest rate of 5%. Tell the students that they will receive paper clips at the end of each year to represent the interest earned on their principal; large paper clips represent \$5 and small paper clips represent \$0.25. Please also explain to students that the interest rates used in these exercises are for illustrative purposes only and are not representative of current market rates.

To represent the interest at the end of Year 1, give every student a large paper clip. Students receiving simple interest should keep the paper clips separate from their index cards. Students receiving compound interest should attach the paper clips to their cards. This combined amount represents the new principal going into Year 2. For Years 2–5, the simple interest students should receive one large paper clip for each year, always keeping the “interest” paper clips separate from their index card (principal). For students receiving compound interest, give students paper clips as follows:

Year 2: 1 large and 1 small paper clip (The small paper clips are representing interest that is being earned on previous interest which has become a part of the principal.); Year 3: 1 large and 2 small paper clips; Year 4: 1 large and 3 small paper clips; Year 5: 1 large and 4 small paper clips.

After the distribution of the Year 5 interest, have students find the total value of their accounts.

Ask the students to contrast the amount of interest earned with a simple interest account compared to an account receiving compounded interest. Ask them to explain how compounding yields a greater account value.

As a class, calculate the actual compound interest earned in this exercise, and then do the same using \$10,000 as the principal so that students can see how compound interest can accumulate.

Compound interest earned with \$100 beginning principal and 5% annual interest (rounded to the nearest penny):

Beginning principal = \$100

Year 1 interest earned: \$100 x 0.05 = \$5

New balance = \$105

Year 2 interest earned: \$105 x 0.05 = \$5.25

New balance = \$110.25

Year 3 interest earned: \$110.25 x 0.05 = \$5.51

New balance = \$115.76

Year 4 interest earned: \$115.76 x 0.05 = \$5.79

New balance = \$121.55

Year 5 interest earned: \$121.55 x 0.05 = \$6.08

Final balance = \$127.63 (Interest earned over five years = \$27.63)

Simple interest earned on \$100 at 5% interest for five years is \$25.

Compound interest earned with \$10,000 beginning principal and 5% annual interest (rounded to the nearest penny):

Beginning principal = \$10,000

Year 1 interest earned: \$10,000 x 0.05 = \$500

New balance = \$10,500

Year 2 interest earned: \$10,500 x 0.05 = \$525

New balance = \$11,025

Year 3 interest earned: \$11,025 x 0.05 = \$551.25

New balance = \$11,576.25

Year 4 interest earned: \$11,576.25 x 0.05 = \$578.81

New balance = \$12,155.06

Year 5 interest earned: \$12,155.06 x 0.05 = \$607.75

Final balance = \$12,762.81 (Interest earned over five years = \$2,762.81)

Simple interest earned on \$10,000 at 5% interest for five years is \$2,500.

PART III—ACTIVITY: SAVINGS CLUB

SAVING WITH A PURPOSE! is a simulation game that joins students together into "saving clubs" to pool their money to help fund new equipment for a local playground, ballpark, or recreation center.

Materials: SAVING WITH A PURPOSE! student worksheet, calculator, and 4 index cards or small pieces of paper for each student; 4 small boxes or baskets; 1 die (number cube)

Tell students that they will be "donating" imaginary money to fund a theoretical project that will benefit your community's playground, ballpark, or other recreation center.

1. Have the students identify four projects that would benefit your community playground, ballpark, or recreation center, such as a new backstop for the baseball field or a new sliding board for the playground. Write the names of the four projects on the board. Label each small box or basket with the name of the project.

2. Tell the students that they will have the opportunity to contribute to any or all of the projects with an "imaginary" \$20. The donated money will be used to open a savings account where it will earn compounded interest for six months before the money is donated to the imaginary community projects.

3. Have one volunteer for each project present a short speech about why students should contribute their money to that project.

4. Give each student four index cards or small pieces of paper. Have them label each card with "\$5." Have students deposit their \$5 bills into the boxes for the projects they would like to support. They may put all of their money into one project or spread their money out among all four projects.

5. Divide the class into four groups; one for each project. The groups will monitor the growth of their savings account for six months.

6. Review the instructions for the activity from the worksheet. Explain to students that interest rates vary at times depending on many factors in the economy. Therefore, a die will be used to determine the interest rate for the activity to simulate the impact of various interest rates on savings accounts. Again, remind students that the interest rates used in these exercises are for illustrative purposes only and are not representative of current market rates.

7. As students begin to near the third month of interest calculations, announce that there has been a major improvement in the economy and all interest rates have been raised 1%. Have students complete the calculations for months 46 using the higher interest rate (e.g., a group has been using a 2% interest rate for months 13. Beginning with month 4, the interest rate is raised to 3%.).

PART IV—INVESTMENT WRAP-UP QUESTIONS

What factors influence how much money can be earned when saving money? (Interest rates, the amount invested, and/or the amount of time the money is invested)

Do you think saving and investing money is wise? Why?

Bonus: How can inflation impact the value of the money you save?

SAVING MONEY—WORDS TO KNOW

Savings—money that is put into accounts, such as savings accounts and checking accounts. Money can usually be deposited and/or withdrawn at any time.

Principal—the initial amount of money that is put into a savings account.

Simple Interest—money earned for "loaning" money to a bank (putting your money in a savings account).

Compound interest—arises when interest is added to the principal, so that, from that moment on, the interest that has been added also earns interest. This addition of interest to the principal is called compounding.

Fun Fact: "Rule of 72" If you divide the number 72 by the interest rate of your savings account, you will be able to determine the approximate number of years that it will take to double your principal investment, e.g., you invest \$1,000 in an account with an 8% interest rate (compounded annually). The account will be worth \$2,000 in nine years. 72 ÷ 8 = 9.

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