LESSON 4 BACK TO SCHOOL LESSON 4 BACK

LESSON 4 BACK TO SCHOOL

LESSON 4: BACK TO SCHOOL LESSON OBJECTIVES STUDENTS WILL: 1. ANALYZE GRAPHS AND CHARTS RELATED TO SAVING. 2. ARTICULATE REASONS AND GOALS FOR SAVING. 3. EXPLAIN AND USE THE VOCABULARY ASSOCIATED WITH SAVING. 4. PERFORM CALCULATIONS FOR GROWTH OF FUNDS. 5. RECOGNIZE THE NEED FOR FINANCIAL PREPAREDNESS IN THE FACE OF A DISASTER. 2

SAVING 3

Lesson 4: Back to School SAVING VERSUS INVESTING WHAT IS SAVING? • Savings = Disposable income – Consumption. • It is the preservation and protection of money from loss. • It helps you meet short-term goals and needs. • It helps you prepare for the unexpected. WHAT IS INVESTING? • It is a long-term commitment to put money away and let it grow. • You are taking a risk with a portion of your savings, such as by buying stocks or bonds, in hopes of realizing higher long-term returns. 4

Lesson 4: Back to School REASONS FOR SAVING • To build an emergency fund • To cover budget shortfalls • To meet future needs • To achieve personal and financial goals • To keep funds secure while increasing them 5

Lesson 4: Back to School YOUR GOALS FOR SAVING • List three things you want that may require you to save money in order to buy them. • How much will each item cost? • How long do you estimate it will take you to save for each item? • How much per week/month will you need to save? • How will this impact your budget? • What might you have to give up to attain these items? 6

Lesson 4: Back to School TOOLS FOR SAVING • Savings account • Money market account • Certificate of deposit • Savings bond 7

Lesson 4: Back to School COMPOUND INTEREST: DAILY VS. MONTHLY VS. YEARLY Principal = $1, 000 (year 1 only) ~ Interest Rate = 5% ~ Term = 5 Years Growth of $1, 000 Deposit at Varying Compounding Intervals $1, 284 $1, 283 $1, 276 Year 5 $1, 221 $1, 216 Year 4 $1, 000 Compounded Yearly (Total Interest = $276) $1, 105 $1, 103 Year 2 Year 1 Compounded Monthly (Total Interest = $283) $1, 162 $1, 161 $1, 158 Year 3 Compounded Daily (Total Interest = $284) $1, 051 $1, 050 $1, 100 $1, 200 $1, 300 8

Lesson 4: Back to School WATCH IT GROW: RULE OF 72 With the rule of 72, you can estimate the growth of funds over time with compound interest. You calculate the length of time (in years) for a principal deposit to double. You divide 72 by the rate of return. EXAMPLE: • Say you deposit $5, 000 today at an 8% interest rate. • Apply the rule: 72 ÷ 8 = 9 • The principal will double every 9 years. 9

Lesson 4: Back to School RULE OF 72 CALCULATIONS: PROBLEM #1 If you deposit $50, 000, how many years will it take for it to grow to $100, 000? At 4% annual interest • 72 ÷ 4 = 18 years At 6% annual interest • 72 ÷ 6 = 12 years At 9% annual interest • 72 ÷ 9 = 8 years At 12% annual interest • 72 ÷ 12 = 6 years 10

Lesson 4: Back to School RULE OF 72 CALCULATIONS: PROBLEM #2 What interest rate do you need to grow $50, 000 to $100, 000? IN 2 YEARS? • 72 ÷ 2 = 36% IN 5 YEARS? • 72 ÷ 5 = 14. 4% IN 10 YEARS? • 72 ÷ 10 = 7. 2% IN 20 YEARS? • 72 ÷ 20 = 3. 6% 11

Lesson 4: Back to School VOCABULARY REVIEW WORD DESCRIPTION WORD BANK Compound Interest Rate Principal Rule of 72 Simple Interest Term Principal 1. The original amount of money deposited Interest 2. Money an institution pays you for use of your funds Interest Rate 3. Expressed as a percentage, what an account will earn if funds are kept on deposit for an agreed-upon term Simple Interest 4. Interest paid only on the principal amount deposited into the account Compound Interest 5. The method of computing interest where the interest rate is applied to the principal and any earned interest; often referred to as “interest on interest” Term 6. Length of time money left on deposit in account Rule of 72 7. A calculation that estimates growth of funds over time with compound interest 12

Lesson 4: Back to School IN SUMMARY Saving allows you to meet short-term goals and to prepare for the unexpected. 13

Katrina’s Classroom was developed by a team of Senior Economic and Financial Education Specialists at the Federal Reserve Bank of Atlanta. Claire Loup, New Orleans Branch Julie Kornegay, Birmingham Branch Jackie Morgan, Nashville Branch For additional classroom resources and professional development opportunities, please visit www. frbatlanta. org/education 14