(adapted from http://www.themint.org/kids/determining-your-budget.html)

Suggested Target Age: Grades 5-8

Topics Covered:         budgeting

Time Required: 30-40 minutes

What Will the Students Learn?

• The difference between gross and net pay
• The components of a budget (fixed and variable expenses)
• What a Certificate of Deposit is
• What a “deductible” is

State Content Standards Key
California: Math grade 5- 1.2, 2.0, 2.1, 2.2, grade 6- 1.4, grade 7 (Career/Business finance) 1.2,
      1.6, 1.7
Florida: SS.D.1.2 (subpoints 1,2,5); MA.A.3.3
Indiana: Math 5.1.1, 5.1.4, 6.1.4, 6.2.3,6.2.8, 6.2.9, 6.3.2, 7.2.1,  8.2.3, 8.2.4; Social Sciences
  5.4.8, 6.4.11
Virginia: Economics/Financial Literacy Objectives 1,4,6,7; Math 5.4, 5.6, 6.1, 6.6, 6.7, 6.8, 7.1,
   7.4, 8.3; CE.1, CE.10

NOTE: Complete Budgeting Lesson 1 with the students first. You can download that lesson from the Ele:Vate website.

Materials:

• Printed personal paychecks for thestudents from their Economis accounts.
• Chalkboard or marker-board
• Calculator

Lesson Plan:

1. Tell the students that they’ve just gotten hired in their new job and they are going to be paid an annual salary of $25,000. Write “Annual Salary” on the board and write “$25,000” next to it. Now tell the class that you are going to divide that yearly salary into twelve months. Have someone in the classroom divide $25,000 by 12. They should get a quotient of $2,083.33. Write this number on the board.    

2. Now ask the class if that number is how much their paycheck will be for each month (they may say yes or no), and then ask them why or why not (their reasons may vary). Tell them that they will not see $2083.33 on their paycheck each month because the government automatically takes out taxes. Now write the number $1354.17 on the board, and tell them that after taxes, this is the amount that a person who earns an annual salary of $25,000 will earn each month.

3. Tell the class that these two numbers are called “gross pay” and “net pay,” or “gross income” and “net income.” Ask them which number is gross pay, and then write “gross pay” next to $2,083. Then ask them which number is net pay and write “net pay” next to $1,354.17. Tell them that a good way to remember which is which is to remember that taxes and deductions catch your money in a “net” before you get your paycheck. So the “net pay” is the money that you receive after taxes and deductions have been taken out.

 (In the following steps you will be making decisions as a class about budgeting. It would be easiest to make the decisions from a majority vote).

4. Tell the class that you will now decide how much to put into savings. Talk about the importance of savings – so that they have something available “for a rainy day.” They might face an unexpected health care or an auto repair bill, and they will want to have some money available. Ask them how much of their $25,000 they want to save. If they need a hint, you could suggest they think about saving 5-10% of their monthly pay (10% of their net pay would be about $135; 5% would be about $67). Write that percentage and number on the board.

5. Write the three savings options below on the board and ask them what they know about each of them. Explain that a savings account at a bank is the safest option, and they will be able to get at their money at any time, but that they will get the smallest interest rate. A Certificate of Deposit will pay them a higher interest rate, but they won’t have immediate access to their money. This is because CDs are sold in different “maturation terms.” Remind them that in Economis, they can buy CDs for terms of 30, 60, or 90 days. In the real world economy, CDs usually have terms of 1 year or more, although sometimes you can find a 6-month CD. Tell them that later on in the year you will discuss money market accounts. Have them select which savings instrument they want to choose. Once they decide, erase the other two.

Savings Account: 3%
CDs – 4.94%
Money Market Account – 4.48%

6. Tell the class that they are now to determine their fixed expenses. Read these three options, and write the option that students select on the board below the savings option:

Share a 2-bedroom apartment with a roommate: $400
One bedroom, all on your own: $600
One bedroom, in a choice location: $700

6. Now they will make decisions about communications services (cell phone, land line, etc.) Read the following options cell phone service, land-line telephone, television, and internet, and write the options that the students select on the board (Note: students are not obligated to select any of the options.):

Cell Phone:
Basic Package: $29
Unlimited Minutes and Long Distance: $79
You Text Message a Lot: $99

Land-line telephone: $29

Cable TV
Basic: $49
Ultimate Package $75

Broad Band Internet: $45

7. Read the following transportation options and write the option that students select on the board:

Public Transportation: $100
Old Ford Escort: $200
New Mazda A3: $300
New Honda Element: $400
Go for Luxury! $500

8. Next they will pick their insurance options. Explain that if they selected to have their own car, they will need to purchase car insurance. Generally, car insurances policies can be divided into two general types. Write the following definitions on the board:

High deductible – a policy that is cheaper in terms of the monthly fee, but if you get in an accident, you will have to pay a higher deductible.

Low deductible – this policy costs more each month, but means that you will have a lower deductible (or “out of pocket”) expense in the event of an accident.

Ask the kids if they know what a deductible is. Most probably won’t – so you’ll need to explain that it is the first part of the cost of the repairs. If the deductible is $1000, for example, that means if the person is in an accident and has $2000 of car repairs, they will have to pay the first $1000 and then their car insurance company will pay the rest.

9. Tell the students that they also have the option of purchasing renters’ insurance. Explain to them that renters insurance covers their possessions that are in their apartment – like their clothes and stereo and furniture. If their possessions are stolen from the apartment or damaged by some problem such as a fire or roof leaking water onto their stuff, then they will get money from the insurance company to replace their possessions. Ask them if they want to purchase renter’s insurance for $9, and write it on the board if they say yes.

Fixed and Variable Expenses

10. Write “fixed expenses” and “variable expenses” on the board. Tell the students that they just decided on their fixed expenses and now they will be determining their variable expenses. Ask the students if they can explain the difference between fixed and variable expenses (fixed are those set expenses that happen every month, like your rent; variable expenses are expenses that will change—going up or down, depending on your decisions. At this point, you could get the kids thinking by calling out various kinds of expenses and having the students tell you whether those are fixed or variable expenses – then write the answers down on the board.

11. Read the list below and have the kids select their variable expenses:

Food
Buy groceries and eat out once a week: $100/month
Buy groceries but eat out fairly often: $300/month
Eat out all the time: $600/month

Miscellaneous
Movie and snacks: $20/month
Books: $15/month
Clothing: $30/month
Concert Tickets: $30/month
Other:

12. Once you have finished the variable expenses add up all the expenses on the board to determine how much you will spend in one month. Compare that number with your monthly salary of $1354.17 to determine whether or not you went over.  (In some ways, you almost hope they will be over – so that they will learn that living within a budget is not easy, and that it requires discipline and careful planning.) If you stayed within your budget, ask the class what some of the decisions were that helped make this possible. If you did not stay within your budget, talk about how you might cut down on spending in order to make sure you’re not going into debt each month.

OPTIONAL CLOSING ACTIVITY

Pass out the students’ Economis paychecks and remind them that in Economis, they do get money for taxes taken out of their paychecks. Have the students circle the net income and put a box around the gross income.