Suggested Target Age: Grades 5-8
Topics Covered: saving, interest rates, simple and compound interest
Time Required: 25-30 minutes
What Will the Students Learn?
- That the discipline of saving helps us achieve our goals, such as saving toward a special purchase
- The importance of starting to save early on in life
- What “inflation” is
- The “miracle” of compound interest
State Content Standards Key
California: Math grade 6-1.4, grade 7 (Career & Math) 1.2, 1.6, 1.7
Florida: SS.D.2.2 (subpoints 2,3); MA.A.3.3
Indiana: Math 5.1.1, 5.1.4, 6.1.4, 6.2.3, 6.2.8, 6.3.2, 7.2.1, 7.2.3, 8.1.1, 8.2.1, 8.2.2, 8.2.3, 8.2.4,
8.3.4; Social Sciences 5.4.8, 6.4.6, 6.4.11, 8.4.10
Virginia: Economics/Financial Literacy Objectives 1,4,5,6,14; Math 5.4, 6.1, 6.6, 6.7, 6.8, 6.22,
7.1, 7.4, 7.6, 8.3, 8.4, A.10; CE.10
Materials:
Teacher Preparation:
- Label one of the cups “jobs and money” and poke holes in the sides of it.
- Label the large, wide container “Prices.”
- Fill two of the cups to the top with vinegar only.
- Fill ¼ of one of the cups with baking soda only, and label it “compound interest.” Leave one of the cups completely empty, and label it “simple interest.”
- Make sure the pitcher is filled with water.
Lesson Plan:
Introduction: Explain that today’s class is going to be about money, and specifically about saving.
1. Tell the story of Shawn Wright and Ana Gutierrez (below) and ask the students which person will have the most money at retirement, Shawn or Ana?
The Shawn and Ana Story
Ana decides to start saving seriously just as soon as she can. At age 21, she decides that every year, she is going to put aside $2000 of her annual income into a savings account. (For the purpose of this story, we’re going to suppose that Ana makes 10% interest.) Ana does well; for twelve years she faithfully puts aside $2000 into savings. But when she reaches age 33, she gets tired of making the sacrifices required by this plan, and decides to stop saving. So Ana doesn’t save anything from age 33 to age 65. But she does commit herself to leave all the money she has already put into her savings alone-she won’t touch it until she retires at age 65.
Shawn knows that it is important to save, and part of him wants to, but when he turns 21, he feels like there are a lot of things he wants and needs to buy—like a car, and furniture for his apartment. He also feels like while he is young, he should enjoy himself. So instead of saving, he spends his money on a great stereo system, cool vacations, eating out, and a top quality mountain bike. When Shawn reaches age 33, he realizes that he really ought to make some changes. He’s in his thirties now, and he should be more responsible with his money and start saving for retirement. So he decides that from now on, he’s going to put $2000 every year into savings. (For the purpose of this exercise, we’re going to assume that Shawn makes 10% interest.) And Shawn sticks to it. He starts putting $2000 a year, every year, into his savings account and does that faithfully for the next 32 years until he turns 65.
When Ana and Shawn reach age 65, who will have more money in their savings account?
Answer: Ana. She will have $993,306.59 while Shawn will have $442,503.09.
Pass out the “Shawn vs. Ana Savings Chart” PDF document and go over it with the students.
2. Explain that the main reason Ana had more money in the end is that her money was invested over a longer time frame. Kids need to start saving as soon as possible!
3. Another good reason to start saving is inflation. Before you explain what inflation is, go through the following demonstration with the class:
a. First, ask one of the students to leave the classroom. While that student is outside the classroom, call another student to the front of the room. Give that student the “check” that is written for $20.00 and say that it is birthday money. The next time he/she will get money is probably in three months on Christmas.
b. Tell this student that one of his/her favorite music artists – not his/her very favorite, but one of the artists that he or she listens to – just came out with a new album, and it costs $17.99 at the record store. Then ask the student if he or she wants to buy the album (the student will likely say no, but it is OK if he or she doesn’t).
c. Now ask the student who has been standing in the hallway to come in the classroom and hand him/her a “check” for $500. Tell this student that he/she has a good job, and will be receiving another $500 check in two weeks.
d. Repeat step B for this student. Say that one of his/her favorite music artists – not his/her very favorite, but one of the artists that he or she enjoys – just came out with a new album, and it costs $17.99 at the record store. Then ask the student if he or she wants to buy the album (the student will likely say yes).
4. Write the definition of inflation on the board:
Inflation: Inflation occurs when prices increase as time goes by. Inflation means that you can buy less with the same amount of money from one year to the next.
4. Have the students read the Inflation section of the “Concepts” page. Talk about the demonstration, and point out that usually when people have more money and jobs, they are willing to pay more for items they buy. Of course it depends on the person, but this is the typical pattern in an economy.
Alternative or additional activity: Set the large container labeled “prices” on a table or desk in front of the class. Have one person hold the small container labeled “jobs and money” above the “prices” container, and have another person pour water from the pitcher into the small container. The water will spill out of the holes in the sides of the “jobs and money” container and into the “prices” container. This will demonstrate that when people have jobs and money, prices go up. That is the principle behind inflation.
5. So it’s important to start saving – because the sooner you start, the more time your money has to make money, and because saving can help you keep up with inflation. Once you decide to save, it’s important to choose the best savings “vehicles” or “instruments.” Two common savings vehicles are savings accounts and CDs (Certificates of Deposit).
5. Savings accounts may pay “simple” interest rates or “compound” interest rates. Explain the difference and write these definitions on the board:
Simple interest: When you earn simple interest in a bank account or on an investment, it is paid only on the money that you have deposited into your account, and not on your account’s earnings.
Compound interest: When your money earns compound interest in a bank or investment account, you’re paid a percentage of the balance in your account, including what you’ve deposited, plus any interest you have earned in the past. So not only does your money earn interest, your interest earns interest, too.
5. Have the students read the Simple and Compound Interest section of the “Concepts” page. Then put the two clear cups labeled “simple interest” and “compound interest” on the table in front of the class. Make sure there is baking soda in the “compound interest” cup. Then take the two cups of vinegar and simultaneously pour vinegar in each of the cups at the same speed. Explain that the same amount of vinegar was put into each cup, but the baking soda made it fill the cup to the top. Similarly, if two accounts have the same interest rate, but one has simple interest and the other has compound interest, the one with compound interest will grow more.
8. Have the students minimize the window that their Economis account is in and open a new window with Internet Explorer.
9. As a class, read the Short-Term Saving and Long-Term Range sections in the “Concepts for Saving and Investing” document.
10. When everyone is done with #9, remind students that through Economis they can purchase a “long-term” savings vehicle known as a Certificate of Deposit. Review the concept of a CD and write this definition on the board:
Certificate of deposit (CD). A CD is an insured time deposit with a bank. When you buy a CD you agree not to use the money in you deposit for a specific period of time of usually 6 months to 5 years. And, you earn the interest the CD pays.
11. Remind the students that they can purchase CDs through Economis. Review the three choices: 30- day, 60-day, and 90-day CDs. Explain that the longer the term, the higher the interest rate. But also warn them that a key rule of CDs is that you are not supposed to try to get the money out of them until the term comes due. They will face a financial penalty if they take the money out BEFORE the CD has matured.
Concluding Activity
Have the students take the quiz on the “Concepts” page.
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