Invest in Yourself Savvy Savers Credit Focus on Finance

Transcription

1 Invest in Yourself Savvy Savers Credit Focus on Finance

2 Invest In Yourself

3 Invest In Yourself Financial Fundamentals from the Fed Lesson Description Concepts Objectives Students are divided into groups to produce name tents. Each of four groups in the classroom produce name tents in a different way to highlight different levels of human capital. They identify ways in which people invest in their human capital. Students analyze unemployment, educational attainment, and median weekly income data for They work with a partner to analyze the data and write sentences to describe relationships among the variables. As an assessment, students create graphs or charts to illustrate the unemployment, educational attainment and income data. They also use the Occupational Outlook Handbook to identify a possible career and the type of investments in human capital required to obtain that occupation. Human capital Investment in human capital Students will: Define human capital and investment in human capital. Give examples of investment in human capital. Describe the relationship between a person s level of education and incomeearning potential. Describe the relationship between educational attainment and percent unemployment. Common Core Standards Grades 6-12 Literacy in History/Social Studies & Technical Subjects English Language Arts Standards, History/Social Studies, Grades 6-8 and 9-12 Craft and Structure Integration of Knowledge and Ideas Craft and Structure Content Standards National Standards in Personal Financial Literacy Standard 1: Earning Income National Standards in Economics Standard 13: Income Standard 15: Economic Federal Reserve Bank of St. Louis: Permission is granted to reprint or photocopy this lesson in its entirety for education purposes, provided the user credits the Federal Reserve Bank of St. Louis, 2

4 Invest In Yourself Financial Fundamentals from the Fed Time Required Materials 45 minutes One sheet of chart paper for each pair of students Two sheets of light-colored construction paper per student plus one sheet for the teacher One dark-colored marker per student One copy of Handout 1 for each student One sheet of chart paper for each pair of students Procedures 1. Tell students that they will create name tents for display on their desks for the day. 2. Demonstrate how to produce a name tent as follows. Fold the piece of construction paper in half, shorter edges (8 ) together. Crease the center fold. The folded paper should measure 8 x 5.5. Open the paper to 8 x 11. Fold the bottom 8 edge to the middle crease. Crease the fold. Open the paper to 8 x 11. Fold the top 8 edge to the middle crease. Crease the fold. The paper should now have four sections each measuring approximately 2.75 x 8. Starting from one end of the paper, count down three rectangles. Print your first name in large letters in the rectangle. Turn the paper upside-down. Again count down three rectangles and print your first name in large letters in the rectangle. Fold the paper to create a tent with the name displayed on both sides. 3. Divide the students into four groups. Explain that each group will have different rules for folding name tents. Describe the rules for each group as follows. Group 1: Each of you will remain seated to produce your own name tent, using only one hand, your nondominant hand that is, the hand with which you do not write to produce the name tent. You must keep your dominant hand behind your Federal Reserve Bank of St. Louis: Permission is granted to reprint or photocopy this lesson in its entirety for education purposes, provided the user credits the Federal Reserve Bank of St. Louis, 3

5 Invest In Yourself Financial Fundamentals from the Fed Group 2: Each of you will remain seated to produce your own name tent, using only one hand, your dominant hand that is, the hand with which you write to produce the name tent. You must keep your nondominant hand behind your back. Group 3: Each of you will remain seated to produce your own name tent, using both hands. Group 4: Each of you will produce your own name tent while standing and using only one hand the nondominant hand to produce the name tent. You must keep your dominant hand behind your back. You may not use the desk, table or chair. None of the groups may begin producing name tents until the class is told to begin. When each student finishes folding his or her name tent, he or she should raise a hand. Students will be timed and will have a maximum of two minutes to make the name tent. 4. Draw the following table on the board and use this to tally students who raise their hands upon completing the name tent. Time Group 1 Group 2 Group 3 Group 4 30 seconds 60 seconds 90 seconds 120 seconds 5. Distribute a piece of construction paper to each student. Remind them that students in each group must fold name tents according to the rules described and that they are to raise their hands individually when they have finished their name tents. Tell students they may begin. As students raise their hands, record tallies on the board next to the appropriate group number and time segment. If students raise their hands at a time beyond 30 seconds, place the tally mark in the 60- seconds row. If they raise their hand beyond 60 seconds, place the tally mark in the 90-seconds row and so on. 6. After two minutes, ask everyone to stop producing name tents and discuss the following: Did any students find it very difficult to produce name tents? (students in Group 4) Why? (Standing and folding with one hand the nondominant hand made it nearly Federal Reserve Bank of St. Louis: Permission is granted to reprint or photocopy this lesson in its entirety for education purposes, provided the user credits the Federal Reserve Bank of St. Louis, 4

6 Invest In Yourself Financial Fundamentals from the Fed Ask students in each group what difficulties they encountered making the name tents? (Group 1: hard to fold with one hand, very hard to fold using only nondominant hand, difficult to write with nondominant hand; Group 2: hard to fold with one hand; Group 3: few difficulties; Group 4: hard to fold with one hand, very hard to fold with nondominant hand, very, very hard to fold standing up and difficult to write with nondominant hand) In general, which group of students finished most quickly? (Group 3) Why? (Students in this group were able to use both hands and were able to remain seated.) In general, which group of students took the longest time to finish? (Group 4) Why? (Students in this group had to use only the nondominant hand and had to stand.) 7. Explain that this activity can be used to introduce the concept of human capital. Human capital is the knowledge, talent, experience, and skills that people possess. Point out that people are able to invest in their human capital by going to school,pursuing additional training and developing skills. 8. Explain that the process of managing income includes saving and investing for the future. An important investment that students make in their future is their investment in human capital their efforts to acquire and improve their knowledge, talent, experience, and skills. 9. Ask the students how finishing name tents more quickly and producing name tents that are of higher quality might relate to investment in human capital. (Answers will vary, but students might recognize that people with more skills, education and training tend to be more productive.) 10. Explain that people with more skills, education and training tend to be more productive, and, as a result, earn higher incomes. In the name tent activity, Group 4 represents those with the smallest investment in human capital high school dropouts. Thus, they are constrained the most in completing the task representing the reduced amount of education and skills. Group 1 represents those who graduate from high school. Group 2 represents those who pursue additional training following high school associate s degrees, bachelor s degrees or trade school. Group 3 represents those who pursue advanced degrees. They had the fewest constraints in pursuing the task to represent having more skills and education. 11. Explain that people develop human capital throughout life. Learning to read and compute are examples. Discuss the following and record student examples on the board: Give examples of the human capital you possess that is, the skills, talents and education that you have now. (read, write, compute, play piano, play chess, draw, use various woodworking tools, ability to use a computer, ability to work with others, and so Federal Reserve Bank of St. Louis: Permission is granted to reprint or photocopy this lesson in its entirety for education purposes, provided the user credits the Federal Reserve Bank of St. Louis, 5

7 Invest In Yourself Financial Fundamentals from the Fed What investments did/do you make to develop and maintain this human capital? (practiced reading, completed math homework, practiced piano, joined the chess club, attended a special art class, attended a computer class, made furniture and other wood items, and so on) If you want to own your own business in the future, what human capital might you need? (management skills, accounting skills, computer skills, communication skills, etc.) What investments might you make to develop this human capital? (pursue a college degree in business or accounting, read professional journals, shadow someone who owns a business, etc.) 12. Distribute a copy of Handout 1: Educational Attainment, Income and Unemployment Data to each student. Ask students to work in pairs. Each pair should write two sentences one describing the relationship between median income and educational attainment. The other sentence should describe the relationship between unemployment and educational attainment. Ask pairs of students to share their statements. (Answers might include: There is a direct relationship between educational attainment and income. The more education people acquire, the higher their weekly income. There is an indirect relationship between unemployment and educational attainment. The higher the level of educational attainment the lower the percent of unemployment.) 13. Using a computer and projector, display the Occupational Outlook Handbook at (Note: If computers are available have pairs of students look up the OOH.) 14. Point out that due to a variety of supply and demand factors, the type of post-secondary education you pursue matters as well. Some types of degrees or programs may make it easier for someone to find a job and may translate to higher salaries. For example, engineers are likely to earn high salaries and find employment more readily than some others. Those who pursue training as plumbers and electricians may also find work more easily and may earn higher incomes. Ask the students for evidence of this from the Occupational Outlook Handbook. 15. Point out that the income data are given as median income rather than average or mean income. Discuss the following: What is the difference between median and mean? (Students should explain that mean is an average. All terms are added and the sum is divided by the number of terms. Median is the middle number. It is found by placing the terms on a scale from lowest value to highest value, then finding the middle value.) Why does it matter? (Average income can be skewed by one outlier number in a very dramatic way. The median income would not be dramatically affected by a single outlier number and is generally favored by economists when looking at groups of numbers, particularly income, where a small number of high earners can skew the number upward.) Note: Clarification is provided Federal Reserve Bank of St. Louis: Permission is granted to reprint or photocopy this lesson in its entirety for education purposes, provided the user credits the Federal Reserve Bank of St. Louis, 6

8 Invest In Yourself Financial Fundamentals from the Fed -- Assume that you were calculating the average and median incomes for full time students who have not graduated from high school yet and whose incomes are not very high and vary. -- Assume that there are seven students in the group with incomes ranging in $1,000 increments from $1,000 to $7,000. To calculate the average or mean you must add the income of all the people and divide by the number of people in the group. ($1,000 + $2,000 + $3,000 + $4,000 + $5,000 + $6,000 + $7,000) 7 = $4, To find the median, you should put the numbers in order of value from lowest to highest and pick the middle number. $1,000, $2,000, $3,000, $4,000, $5,000, $6,000, $7, In this case $4,000 is the middle number. In our example $4,000 is both the mean and median, so why should we care which number gets used? Let s add one person to the group. A father of one of the students who is a doctor earning $150,000 per year. -- The calculation for average or mean income now looks like this: ($1,000 + $2,000 + $3,000 + $4,000 + $5,000 + $6,000 + $7, ,000) 8 = $22, When we recalculate the average or mean, the average income of the group increased from $4,000 to $22,250. While the number is mathematically correct, it might seem misleading to say that the average income of people in the group is $22,250 because nearly everyone in the group earns far less than that amount. -- The calculation for median income looks like this: $1,000, $2,000, $3,000, $4,000, $5,000, $6,000, $7,000, $150, To calculate the median when you have two middle numbers, you find the number half-way between them by adding them together and dividing by two. Here the median income is $4,500. The median income increased from $4,000 to $4,500. To say that the median income for this group is $4,500 seems to be a more accurate reflection of the people in the group than the mean. 16. Explain that part of the art of planning for your financial future includes making a strong investment in your own human capital. Learning about earning and managing income is an investment in human capital. 17. Optional: Distribute new pieces of construction paper to students who were not able to complete their name tents or to students whose name tents were Federal Reserve Bank of St. Louis: Permission is granted to reprint or photocopy this lesson in its entirety for education purposes, provided the user credits the Federal Reserve Bank of St. Louis, 7

9 Invest In Yourself Financial Fundamentals from the Fed Closure Assessment 18. Review the key points of this lesson by discussing the following: What is human capital? (the knowledge, talent, experience, and skills that people have) What is investment in human capital? (efforts to acquire and improve human capital) How do people invest in human capital? (education, training and practice) In general, how does investment in human capital through education affect income? (The more education, the greater income people earn.) 19. Ask students to work with a partner to create a chart/graph that represents that data from Handout 1. Distribute chart paper and markers to each pair. Have pairs draw their chart or graph on the chart paper. Beneath the graph ask students to write an explanation of the importance of investment in human capital using the data in the table. Have pairs of students display their charts and share them with the class. 20. Have students review the Occupational Outlook Handbook at gov/ooh/. Have them select an occupation in which they are interested, identify the human capital that they currently possess that would be important for this occupation (reading, mathematics, people skills, writing, etc.), and identify investments in human capital that they must make to attain this occupation (additional training and education, computer skills and so Federal Reserve Bank of St. Louis: Permission is granted to reprint or photocopy this lesson in its entirety for education purposes, provided the user credits the Federal Reserve Bank of St. Louis, 8

10 Invest In Yourself Financial Fundamentals from the Fed Handout 1: Unemployment Rate, Educational Attainment and Median Weekly Earnings in 2012 Directions: Working with a partner, write two sentences one describing the relationship between median income and educational attainment. The other sentence should describe the relationship between the rate of unemployment and educational attainment. Unemployment rate in 2012 (Percent) Educational attainment Median weekly earnings in 2012 (Dollars) 2.5 Doctoral degree $1, Professional degree 1, Master s degree 1, Bachelor s degree 1, Associate degree Some college, no degree High-school diploma Less than a high school diploma 471 Note: Data are for persons age 25 and over. Earnings are for full-time wage and salary workers. Source: Bureau of Labor Statistics, Current Population Federal Reserve Bank of St. Louis: Permission is granted to reprint or photocopy this lesson in its entirety for education purposes, provided the user credits the Federal Reserve Bank of St. Louis, 9

11 Savvy Savers

12 Savvy Savers Financial Fundamentals from the Fed Lesson Description Concepts Objectives Students calculate compound interest to identify benefits of saving in interest-bearing accounts. They learn the rule of 72 and apply it to both investments and debt. They learn that there is a relationship between the level of risk for an investment and the potential reward or return on that investment. Compound interest Interest Non-interest bearing account Principal Risk-reward relationship Rule of 72 Saving Students will: Explain the difference between a non-interest bearing account and an interest-bearing account. Calculate interest compounded semiannually. Explain and demonstrate the Rule of 72. Describe the risk-reward relationship. Common Core Standards Gr English Language arts Standards, Literacy in History/Social Studies and Technical Studies Craft and Structure Integration of Knowledge and Ideas Craft and Structure Content Standards National Standards in Personal Financial Literacy Saving and Investing: Implement a diversified investment strategy that is compatible with personal goals. Standard 3: Saving Standard 5: Financial Investing Standard 4: Using Credit National Standards in Economics Standard 12: Interest Federal Reserve Bank of St. Louis: Permission is granted to reprint or photocopy this lesson in its entirety for education purposes, provided the user credits the Federal Reserve Bank of St. Louis, 2

13 Savvy Savers Financial Fundamentals from the Fed Time Required 45 minutes Grade Level 9 12 Materials Procedures A copy of Handouts 5.1, 5.2 and 5.3 for each student Visuals of Handout 5.1 Answer Key, Handout 5.2 Answer Key and Handout 5.3 Answer Key A calculator for each student 1. Begin by asking students the following: What does it mean to be a saver? (Answers may vary but may include not spending all of one s income, having money left after paying expenses, income greater than expenses, etc.) What do you suppose it means to be a savvy saver? (Answers may vary but may include being a smart saver, knowing about places to save one s money, knowing about different savings accounts, etc.) 2. Explain that saving is income not spent. Distribute Handout 1: Maria s Saving Decision to all students and explain that they may see the difference between a saver and a savvy saver when they examine Maria s story. Call on a student to read aloud the first paragraph of Handout Explain the following: A non-interest bearing account, or zero-interest account, is one in which no interest is paid on the principal that is, the amount of deposit or account balance. Interest is the price of using someone else s money. When people place their money in a bank, the bank uses the money to make loans to others. In return, the bank pays the account holder interest. There are various types of interestbearing accounts depending on the amount of interest and how often the interest is Federal Reserve Bank of St. Louis: Permission is granted to reprint or photocopy this lesson in its entirety for education purposes, provided the user credits the Federal Reserve Bank of St. Louis, 3

14 Savvy Savers Financial Fundamentals from the Fed Compound interest means that interest is computed on the sum of the original principal and any accrued (accumulated or earned) interest. For example, an account that pays 5 percent interest compounded semiannually means that every six months H of 5 percent, i.e., 2.5 percent, interest is paid on the principal and any accrued interest. 4. Show students how to calculate 5 percent interest compounded semiannually by demonstrating the answers to problems #1 through #3 on Handout 1. (Refer to Handout 1: Maria s Savings Decision Answer Key for answers.) 5. Distribute a calculator to each student and instruct students to complete Handout 5.1 (problem #4) on their own. 6. Display a visual of Handout 1 and go over answer #4 on the handout. After reviewing all of the questions on Handout 1, ask students the following: What is a non-interest bearing account? (an account or deposit that does not pay interest on the principal) What could Maria have bought with the $50.62 of interest she might have earned on her savings? (Answers may vary.) Would you classify Maria as a saver or a savvy saver? (saver) Why? (She didn t invest her money in a way that would give her a return on her investment, i.e. an account that pays interest on the principal.) Why would anyone leave the $1,000 in a non-interest bearing account rather than putting it in an interest-bearing account? (Answers may vary but may include that she was financially lazy not proactive or that she may not have understood the importance of compound interest.) Imagine that instead of $1,000, Maria s grandmother had given her $10,000. After three years, how much interest would $10,000 have earned on a 5 percent compounded semiannually account? ($1,597.10) Why is time i.e., the number of months you have your money in an interestbearing account a very important factor in accumulating savings? (Answers may vary but may include that the sooner you start saving, the sooner you start earning interest not only on your principal but also on accrued interest. Your money works for you over time.) 7. Ask students the following questions: How many of you would like for the amount of your savings to double over a period of years? (Answers may vary, but most students will likely want their amount of savings to double.) How long would it take for Maria s $1,000 to double if she kept the money in a non-interest bearing account? (It would never double.) How long do you think it will take for Maria s $1,000 to double if she puts the money in a savings account that pays compounded interest? (Answers will Federal Reserve Bank of St. Louis: Permission is granted to reprint or photocopy this lesson in its entirety for education purposes, provided the user credits the Federal Reserve Bank of St. Louis, 4

15 Savvy Savers Financial Fundamentals from the Fed 8. Tell students that you are going to show them the Rule of 72, which is an easy way to estimate how long it will take their money to double at a certain interest rate. Tell students that in order to determine how long it will take their money to double at a certain interest rate, they should divide 72 by the interest rate. For example, 72 5 = Therefore the principal in a savings account that pays 5 percent interest will double in a little over 14 years. Explain that the Rule of 72 assumes people leave their money in an account without taking away from it or adding to it. It isn t an exact number, but it s close enough to serve as an estimate. 9. Distribute Handout 2: The Rule of 72 to all students and ask them to complete the handout by following the instructions. 10. When students have completed Handout 2, display a visual of Handout 2: The Rule of 72 Answer Key to review the answers. Discuss the following: Does the amount of interest an account pays have much of an impact on how long it will take for your money to double? (Yes.) Interest rates vary over time, but savings accounts are considered to be a safe way to save your money because for most savings accounts your principal is guaranteed. Interest rates for savings accounts generally pay in the 2 percent to 4 percent range, depending on current financial conditions in the economy. This reflects the risk-reward relationship. The risk-reward relationship is based on the concept that the higher the risk of loss of principal for an investment, the greater the potential reward of an increase in the principal or higher yield on the principal. And the lower the risk of loss of principal for an investment, the lower the potential reward of increased principal or higher yield on the principal. Therefore, savings accounts are considered very low risk; so, their reward, as compared with other investment options, is a relatively low yield, or interest rate. The Rule of 72 applies not only to investments but also to debt, because it shows approximately how fast your debt will double at a certain rate of interest. What rate of interest do credit cards charge? (Answers will vary.) Credit card rates of interest vary over time and under different financial conditions in the economy, but generally credit cards charge a relatively high rate of interest. Credit cards can charge a high rate because the card companies bear a risk to loan funds to their cardholders. If a credit card charges an interest rate of 18 percent, approximately how long would it take for your debt to double if you made no payment on the debt? (4 Federal Reserve Bank of St. Louis: Permission is granted to reprint or photocopy this lesson in its entirety for education purposes, provided the user credits the Federal Reserve Bank of St. Louis, 5

16 Savvy Savers Financial Fundamentals from the Fed Closure 11. Review the key points of this lesson by discussing the following: What is a non-interest bearing account? (an account that pays zero interest on the principal) What is interest? (the price of using someone else s money) What is compound interest? (Interest is paid on the principal and also on the accrued interest at specific time intervals.) What level of interest would you expect a safe account or investment that is low risk to pay low, medium or high and why? (low because of the riskreward principal) What does the Rule of 72 indicate? (The rule shows how long it takes to double your money or your debt given a specified rate of interest.) Assessment 12. Give each student a copy of Handout 3: Charlie s Financial Goal and tell them to follow the instructions on the handout. Display a visual of Handout 3: Charlie s Financial Goal Answer Key to review student Federal Reserve Bank of St. Louis: Permission is granted to reprint or photocopy this lesson in its entirety for education purposes, provided the user credits the Federal Reserve Bank of St. Louis, 6

17 Savvy Savers Financial Fundamentals from the Fed Handout 1: Maria s Savings Decision One year ago, Maria received $1,000 from her grandmother with instructions to save it for college two years from now. She deposited the money in her checking account for which she was paid no interest. She had considered putting the $1,000 in a savings account that paid 5 percent interest compounded semiannually, but she never got around to it. How much money did Maria lose by leaving her $1,000 in a non-interest bearing account for 12 months? Follow the steps below to find the answer. 1. Because the interest on the account is compounded semiannually, the interest is added to the principal every six months. Therefore, divide the annual amount of interest 5 percent by two to determine interest paid at the end of each six-month period. Every six months, the saver would receive.025 (.05 2) interest on the principal plus any accumulated interest. Multiply the principal (plus any accrued interest) by the interest rate. Round to the nearest hundredth. (For example, $25.625=$25.63.) Note that the principal will change each time interest accrues. Months Principal (p) Interest (i) p + i 6 $1, $ $ 12 $ $ $ 2. Fill in the following chart, which shows these two savings options. Type of account Zero-interest checking account 5% compounded semiannually Original Principal Interest after 12 months $1, $ $ $1, $ $ Total principal and interest after 12 months 3. Maria lost $ by keeping her money in a non-interest bearing account rather than putting it in an account that paid 5 percent compounded Federal Reserve Bank of St. Louis: Permission is granted to reprint or photocopy this lesson in its entirety for education purposes, provided the user credits the Federal Reserve Bank of St. Louis, 7

18 Savvy Savers Financial Fundamentals from the Fed Handout 1: Maria s Savings Decision, cont. 4. Now, complete the chart below by using the information from question one for months six and 12, and calculate the interest paid for years two and three in the account that pays 5 percent compounded semiannually. Round to the nearest hundredth. Remember that the principal will change each time interest accrues. Months Principal (p) Interest (i) p + i 6 $1, $ $ 12 $ $25.63 $ 18 $ $ $ 24 $ 1, $ $ 30 $ $27.60 $ 36 $ $ Federal Reserve Bank of St. Louis: Permission is granted to reprint or photocopy this lesson in its entirety for education purposes, provided the user credits the Federal Reserve Bank of St. Louis, 8

19 Savvy Savers Financial Fundamentals from the Fed Handout 1: Maria s Savings Decision Answer Key One year ago Maria received $1,000 from her grandmother with instructions to save it for college two years from now. She deposited the money in her checking account, for which she was paid no interest. She had considered putting the $1,000 in a savings account that paid 5 percent interest compounded semiannually, but she never got around to it. How much money did Maria lose by leaving her $1,000 in a non-interest bearing account for 12 months? Follow the steps below to find the answer. 1. Because the interest on the account is compounded semiannually, the interest is added to the principal every six months. Therefore, divide the annual amount of interest 5 percent by two to determine interest paid at the end of each six-month period. Every six months, the saver would receive.025 (.05 2) interest on the principal plus any accumulated interest. Multiply the principal (plus any accrued interest) by the interest rate. Round to the nearest hundredth. (For example, $25.625=$25.63.) Note that the principal will change each time interest accrues. Months Principal (p) Interest (i) p + i 6 $1, $25.00 $1, $1, $25.63 $1, Fill in the following chart, which shows these two savings options. Type of account Zero-interest checking account 5% compounded semiannually Original Principal Interest after 12 months Total principal and interest after 12 months $1, $0 $1, $1, $50.63 $1, Maria lost $ by keeping her money in a non-interest bearing account rather than putting it in an account that paid 5 percent compounded Federal Reserve Bank of St. Louis: Permission is granted to reprint or photocopy this lesson in its entirety for education purposes, provided the user credits the Federal Reserve Bank of St. Louis, 9

20 Savvy Savers Financial Fundamentals from the Fed Handout 1: Maria s Savings Decision Answer Key, cont. 4. Now, complete the chart below by using the information from question one for months six and 12, and calculate the interest paid for year two and three in the account that pays 5 percent compounded semiannually. Round to the nearest hundredth. Remember that the principal will change each time interest accrues. Months Principal (p) Interest (i) p + i 6 $1, $25.00 $1, $1, $25.63 $1, $1, $26.27 $1, $1, $26.92 $1, $1, $27.60 $1, $1, $28.29 Federal Reserve Bank of St. Louis: Permission is granted to reprint or photocopy this lesson in its entirety for education purposes, provided the user credits the Federal Reserve Bank of St. Louis, 10

21 Savvy Savers Financial Fundamentals from the Fed Handout 2: The Rule of 72 The Rule of 72 is a method to determine the number of years it will take for your savings to double in value. Complete the following chart by shading in the bars in chart below. Begin at 0 years, and shade horizontally to the number of years it will take for an amount of money to double for each interest rate. Please use pencil. Your money will double in... 0 years 10 years 20 years 30 years 40 years 50 years If your interest rate is... 2% (72 2) 4% (72 4) 6% (72 6) 8% (72 8) 12% (72 Federal Reserve Bank of St. Louis: Permission is granted to reprint or photocopy this lesson in its entirety for education purposes, provided the user credits the Federal Reserve Bank of St. Louis, 11

22 Savvy Savers Financial Fundamentals from the Fed Handout 2: The Rule of 72 Answer Key The Rule of 72 is a method to determine the number of years it will take for your savings to double in value. Complete the following chart by shading in the bars in chart below. Begin at 0 years, and shade horizontally to the number of years it will take for an amount of money to double for each interest rate. Please use pencil. Your money will double in... 0 years 10 years 20 years 30 years 40 years 50 years If your interest rate is... 2% (72 2) 36 years 4% (72 4) 6% (72 6) 8% (72 8) 12% (72 12) 18 years 12 years 9 years 6 Federal Reserve Bank of St. Louis: Permission is granted to reprint or photocopy this lesson in its entirety for education purposes, provided the user credits the Federal Reserve Bank of St. Louis, 12

23 Savvy Savers Financial Fundamentals from the Fed Handout 3: Charlie s Financial Goal 1. Charlie is saving to buy a car a year and a half from today. He has $12,000 in a savings account with an interest rate of 4 percent compounded quarterly. How much will Charlie have in his savings account after 18 months? Calculate and fill in the chart below. Round to the nearest hundredth. Months Principal (p) Interest (i) p + i 3 $12, $ $ 6 $ $ $ 9 $ $ $ 12 $ $ $ 15 $ $ $ 18 $ $ $ 2. How long will it take Charlie s money to double at an interest rate of 4 percent? 3. Charlie wants to explain the risk-reward relationship to his nephew, who is a sophomore in high school. If you were Charlie, how would you explain the principal of Federal Reserve Bank of St. Louis: Permission is granted to reprint or photocopy this lesson in its entirety for education purposes, provided the user credits the Federal Reserve Bank of St. Louis, 13

24 Savvy Savers Financial Fundamentals from the Fed Handout 3: Charlie s Financial Goal Answer Key 1. Charlie is saving to buy a car a year and a half from today. He has $12,000 in a savings account with an interest rate of 4 percent compounded quarterly. How much will Charlie have in his savings account after 18 months? Calculate and fill in the chart below. Round to the nearest hundredth. Months Principal (p) Interest (i) p + i 3 $ 12, $ $ 12, $ 12, $ $ 12, $ 12, $ $ 12, $ 12, $ $ 12, $ 12, $ $ 12, $ 12, $ $ 12, How long will it take Charlie s money to double at an interest rate of 4 percent? (18 years) 3. Charlie wants to explain the risk-reward relationship to his nephew, who is a sophomore in high school. If you were Charlie, how would you explain the principal of risk-reward? (When you are investing your money, the higher the risk of loss of principal for an investment, the higher the potential reward. So, relatively safe places to put your money in a savings account at a bank, for example yield a relatively low reward because the risk of losing your principal is very Federal Reserve Bank of St. Louis: Permission is granted to reprint or photocopy this lesson in its entirety for education purposes, provided the user credits the Federal Reserve Bank of St. Louis, 14

25 Credit

26 Credit Financial Fundamentals from the Fed Lesson Description Concepts In this lesson, students, through a series of interactive and group activities, will explore the concept of credit and the impact of liabilities on an individual s net worth, monthly budget and balance sheet. Working in groups, students analyze a borrowing scenario and evaluate the advantages and disadvantages of using credit. Assets Budget Credit Liabilities Net Worth Objectives Students will: Analyze the impact of purchases financed with credit on a balance sheet. Analyze the effects of debt payments on a budget. Evaluate the advantages and disadvantages of financing various purchases. Common Core Standards Gr English Language arts Standards, Literacy in History/Social Studies and Technical Studies Key Ideas and Details Integration of Knowledge and Ideas Content Standards National Standards in Economics Standard 2: Effective Decision-Making National Personal Financial Literacy Standard 1: Buying Goods and Services Standard 4: Using Credit Grade Level 9-12 Time Required 50 Federal Reserve Bank of Dallas: Permission is granted to reprint or photocopy this lesson in its entirety for educational purposes, provided the user credits the Federal Reserve Bank of Dallas, 2

27 Credit Financial Fundamentals from the Fed Materials Procedures A copy of Handouts 1 and 3 for each student A copy of Handout 2, one scenario for each group A copy of Handouts 1, 2, and 3 Answer Keys Visuals 1 and 2 1. Display Visual 1: Net Worth. Use the visual and the information below to discuss net worth. Assets anything an individual or business owns that has commercial or exchange value. Examples include land, buildings, stocks and vehicles. Liabilities money an individual or organization owes; same as debt. Examples include mortgages, car loans, credit card balances and student loans. Net Worth the difference between total assets and total liabilities. Net worth is a way to measure a person s wealth. Ask students how a person could increase his or her net worth. Answers should include: By increasing total assets By decreasing total liabilities Emphasize that people often use credit to purchase new assets, such as a house or a car, though credit also increases an individual s liabilities; new liabilities decrease net worth. Credit involves a promise to repay in the future. 2. Distribute Handout 1: Sandra s Balance Sheet. Have the students complete the worksheet by sorting the items into assets and liabilities. Use Handout 1: Sandra s Balance Sheet Answer Key to discuss the suggested answers. Extend the discussion by asking students the following questions. How would the balance sheet and net worth be affected if Sandra borrowed $3800 to buy a new car? (The car would be listed as a new asset, even though it will begin to decline in value over time. The loan is a new liability.) How would the balance sheet and net worth be affected if Sandra took out $12,000 in student loans to pay for college? (Even though a college degree can increase future earning potential, a college education does not have a market (or resale) value, so it is not considered an asset on her balance sheet. However, the student loan is a new Federal Reserve Bank of Dallas: Permission is granted to reprint or photocopy this lesson in its entirety for educational purposes, provided the user credits the Federal Reserve Bank of Dallas, 3

28 Credit Financial Fundamentals from the Fed How would the balance sheet and net worth be affected if Sandra charged $450 on a credit card to pay for spring break trip with her friends? (Because many of the expenses of the trip are consumed [lodging, food and transportation], they do not add new assets. The credit card balance is a new liability.) Remind students that net worth is a measure of wealth and that every additional loan or liability decreases wealth, whereas increasing assets increases net worth. 3. Display Visual 2: Monthly Budget. Use the visual and the information below to discuss how a budget allows a person to accurately track income and expenses. Budgets allow people to account for all sources of income, including jobs, investments and other regular income. Budgets help people track and categorize expenses, including food, clothes, entertainment, transportation and gas, etc. Budgets allow people to plan for regular (or monthly) expenses, such as loan payments, utility bills and rent, as well as allocate money to savings. 4. Remind students that Sandra added three loans to her balance sheet. In addition to affecting her net worth, each loan will have an impact on her monthly budget. Use Visual 2 and the information below to discuss the impact of borrowing decisions on a budget. How would her budget be affected if Sandra borrowed $3800 to buy a car a loan that adds a $120 monthly car payment for 48 months? (She must add that expense to her monthly budget. For the entire term of the loan, Sandra has to increase income or reduce other expenses to offset the $120 payment.) How would her budget be affected if she took out $12,000 in student loans to pay for college, therefore adding a $125 monthly loan payment for 120 months? (She must add that expense to her monthly budget. For the entire term of the loan, Sandra has to increase income or reduce other expenses to offset the $125 payment.) How would her budget be affected if Sandra charged $450 on a credit card to pay for a spring break trip and pays off the balance in 10 months with a $50 monthly payment? (For 10 months, Sandra must add the expense to her monthly budget. She must increase income or reduce other expenses to offset the $50 payment.) 5. Divide students into four groups. Give each group one scenario from Handout 2: Use Credit Wisely, and ask students to read the scenario and consider the advantages and disadvantages of borrowing. After discussing the advantages and disadvantages, as well as the impact on the person s balance sheet and budget, each group should make a recommendation and select a spokesperson to explain the recommendation to the class. (For larger classes, assign scenarios to more than one group and solicit responses from each Federal Reserve Bank of Dallas: Permission is granted to reprint or photocopy this lesson in its entirety for educational purposes, provided the user credits the Federal Reserve Bank of Dallas, 4

29 Credit Financial Fundamentals from the Fed Closure Assessment 6. Ask the spokesperson from each group to read the group s scenario, explain some of the advantages and disadvantages of borrowing and make a recommendation. Use the Handout 2 Answer Key suggested discussion points to assist students if necessary. Allow all four groups to present. 7. Review the important content by asking the following question. How does the use of credit a loan affect a borrower s balance sheet? (Debt increases the person s liabilities, which reduces their net worth, or wealth.) How does the use of credit a loan affect a borrower s budget? (Loans require repayment. A borrower must decide if the payments are currently and in the future affordable considering all other obligations.) 8. Distribute a copy of Handout 2: Assessment to each student, and ask them to complete it. Use Handout 2: Assessment Answer Key to discuss student Federal Reserve Bank of Dallas: Permission is granted to reprint or photocopy this lesson in its entirety for educational purposes, provided the user credits the Federal Reserve Bank of Dallas, 5

30 Credit Financial Fundamentals from the Fed Visual 1: Net Worth Assets Liabilities = Net Worth Assets Anything an individual, business, or organization owns that has commercial or exchange value Liabilities Money an individual, business, or organization owes; same as debt Net Worth The difference between the total assets and total liabilities of an individual, business, or Federal Reserve Bank of Dallas: Permission is granted to reprint or photocopy this lesson in its entirety for educational purposes, provided the user credits the Federal Reserve Bank of Dallas, 6

31 Credit Financial Fundamentals from the Fed Visual 2: Monthly Budget Sources of Income Current Income Total Income Spending Categories Current Expenses Total Expenses Current Savings Available to Save (Income - Federal Reserve Bank of Dallas: Permission is granted to reprint or photocopy this lesson in its entirety for educational purposes, provided the user credits the Federal Reserve Bank of Dallas, 7

32 Credit Financial Fundamentals from the Fed Handout 1: Sandra s Balance Sheet Sandra is a high school senior. By paying off her car and starting a savings account, Sandra believes that she is well on the way to wealth creation. Use the balance sheet below to calculate Sandra s net worth. Put the items below in the appropriate section of the chart and use the formula Assets Liabilities = Net Worth to calculate her wealth. Description Amount Owed to her mother for extra cell phone charges $250 Current value of a savings bond that her uncle gave her $150 Balance on a car loan $1,500 Savings account from summer job $750 DVD collection $200 Car $3,500 Balance on prom dress $200 Assets Amount Liabilities Amount Total assets Total liabilities Assets Liabilities = Net Worth Federal Reserve Bank of Dallas: Permission is granted to reprint or photocopy this lesson in its entirety for educational purposes, provided the user credits the Federal Reserve Bank of Dallas,

33 Credit Financial Fundamentals from the Fed Handout 1: Sandra s Balance Sheet Answer Key Description Amount Assets Amount Current value of a savings bond that her uncle gave her $150 Savings account from summer job $750 DVD collection $200 Car $3,500 Liabilities Amount Owed to her mother for extra cell phone charges $250 Balance on a car loan $1,500 Balance on prom dress $200 Total assets $4,600 Total liabilities $1,950 Assets Liabilities = Net Worth Federal Reserve Bank of Dallas: Permission is granted to reprint or photocopy this lesson in its entirety for educational purposes, provided the user credits the Federal Reserve Bank of Dallas, 9

34 Credit Financial Fundamentals from the Fed Handout 2: Use Credit Wisely Patrick s Prom Problem Patrick is planning for his senior prom. He is taking the girl he has been dating since homecoming. He would like to take her to a nice restaurant before the dance, but he only has enough money in savings to rent his tux and buy the tickets to the dance. Dinner at the dance is included in the price of the prom tickets, but he really wants to go to a fancy dinner. He recently got a credit card to use for emergencies. Should he use the credit card to buy dinner? If he uses the credit card he will have to pay the amount he charges in the future with interest. Think about Patrick s balance sheet and budget. What are some advantages and disadvantages to borrowing? Should Patrick Federal Reserve Bank of Dallas: Permission is granted to reprint or photocopy this lesson in its entirety for educational purposes, provided the user credits the Federal Reserve Bank of Dallas, 10

35 Credit Financial Fundamentals from the Fed Handout 2: Use Credit Wisely, cont. Debra s Degree Dilemma Debra graduated from high school and is halfway through a program to become a dental hygienist. She expects to earn about $55,000 after she graduates, but there are no guarantees. Right now she needs a student loan to finish the last year of her associate s degree. She is confident that her summer internship in a dentist s office will lead to a full-time job. Think about Debra s balance sheet and budget. What are some advantages and disadvantages to borrowing? Should Debra Federal Reserve Bank of Dallas: Permission is granted to reprint or photocopy this lesson in its entirety for educational purposes, provided the user credits the Federal Reserve Bank of Dallas, 11

36 Credit Financial Fundamentals from the Fed Handout 2: Use Credit Wisely, cont. Carlos Comic Conundrum Carlos has collected comic books for years. He regularly attends conventions and trade shows and is knowledgeable about the books values on the open market. At the latest show, a dealer that he knows well showed him a particularly rare edition comic that is in mint condition. The dealer has offered him a fair price, and Carlos expects the value of the comic to increase steadily over the next several years. Carlos does not have the money right now, but if he charges the purchase, he can pay off the balance in three months and pay less than $5.00 in finance charges. Think about Carlos s balance sheet and budget. What are some advantages and disadvantages to borrowing? Should he Federal Reserve Bank of Dallas: Permission is granted to reprint or photocopy this lesson in its entirety for educational purposes, provided the user credits the Federal Reserve Bank of Dallas, 12