Education Resources

Part 1

Content Standards and Benchmarks

Voluntary National Standards Covered:

• National Council on Economic Education (NCEE) Standard 12: Role of Interest Rates
• Jump$tart Standard 4: Compound Growth, Time Value of Money
• Jump$tart Standard 5: Rule of 72 and Dollar Cost Averaging

Related Links Banking Basics Building Wealth: A Beginner's Guide to Securing Your Financial Future Pathways to Getting Ahead

Lesson Description
The purpose of this activity is to help students understand the difference between simple and compound interest. The concepts learned in part one will be applied during Part 2.

Time Required:
1 (55 minutes) class period

Lesson

1. Assign students to define the following terms as they apply to savings and investing:

• Principal
• Interest
• Interest rate
• Simple interest
• Compound interest
• Rule of 72

Discuss their answers. Suggested responses include:

• Principal: the original amount of money deposited or invested.



• Interest: money an institution pays you for its use of your funds.



• Interest rate: the rate of interest, expressed as a percentage, that an account will earn if funds are kept on deposit for an agreed-upon term. It does not reflect the effect of compounding interest.



• Simple interest: interest paid only on the principal amount deposited into the account.



• Compound interest: the method of computing interest where the interest rate is applied to the principal and any earned interest. This method is often referred to as “interest on interest.” The more often interest is compounded, the greater the annual percentage yield.



• Rule of 72: the length of time, in years, it takes an amount of money saved to double when it receives compound interest. This length of time can be found by dividing the interest rate (expressed as a whole number) into 72.

2. Show the following example to illustrate the difference between simple and compound interest:

Ask students to identify some benefits of compound interest. (Possible answers: better return on investment, smarter use of money, etc.) Ask students to identify the benefits of simple interest. (Possible answer: some return on investment is better than no return at all.) Compare both types of interest.

3. Have students calculate simple and compound interest at varying principal amounts, interest rates, and length of time (e.g., $500 at 4% for 5 years, $2,000 at 7.56% for 20 years, etc.).

4. Ask students to identify reasons why savers would want to invest for different periods of time. (Possible answers: students might want to save for a shorter term if they plan for a purchase such as a car; their parents might choose to leave their money in for a longer time period for, say, their retirement.)

5. Referring back to the chart in step 2, discuss the concept of Rule of 72 and ask the students to calculate how long it would take to double the $100 principal amount saved if it earned interest at a 10% rate. (To illustrate this, you will apply the Rule of 72 as follows: 72 / 10 = 7.2, thus, it will take a little over 7 years for the $100 to grow to $200.) Have the students apply the rule of 72 with the principal amounts and interest rates they were assigned in step 3.

6. Recap the activity with your students, emphasizing the importance of interest rates in increasing their savings and investments over time.

Part 2

Content Standards and Benchmarks

Voluntary National Standards Covered:

• NCEE Standard 12: Role of Interest Rates
• Jump$tart Standard 1: Reasons for Saving and Investing
• Jump$tart Standard 2: Saving and Investing Products
• Jump$tart Standard 3: Risk, Return, and Liquidity
• Jump$tart Standard 4: Compound Growth, Time Value of Money

Lesson Description
The purpose of this activity is to help students develop a better understanding of some basic types of products available for saving and investing and the impact of interest rates.

Time Required
2 (55 minutes) class periods

Lesson

1. Explain that the students are going to use the information that they learned about interest rates to explore ways they can manage their money.

2. Depending upon class size, you may choose to do this as an individual or group activity. Assign each student (or group) a particular financial institution in your area. Their assignment is to research information about the various products available for saving and basic investing. Most of the research can be completed online; however, it may be necessary to contact the financial institution.

For their assigned financial institution, the students will investigate these four basic product types: (1) checking accounts, (2) savings accounts, (3) money market accounts, and (4) certificates of deposit (CDs). For each product type, the students will gather and list the following information:

• Are there any associated monthly or annual fees?



• What is the current interest rate earned, if any?



• Is the interest earned simple or compound interest?



• If the interest earned is compounding, how often is it calculated (daily, monthly, quarterly, or annually)?



• How often is interest paid (daily, monthly, quarterly, or annually)?



• Is there a specified time commitment to leave money in the account?



• Are there penalties for early withdrawal? If so, what are they?

3. Have the students report on their findings. Use the following questions to generate discussion:

• Was the information difficult to gather?



• Were they surprised with the different rates of return?



• Do the rates seem fair?



• What do they think affects the rate of return on each account?

4. Next, provide the students with the following scenarios and have them determine how they would invest their money based on what they learned about each of the products. Indicate that they must decide how to invest and be able to explain why they made their decision. Provide all the scenarios to each student or group of students.

• Scenario 1: You received $100 as a birthday gift from a relative.
  
  
• Scenario 2: You are 30 years old with a steady job. After paying your bills and leaving out other budgeted funds, you have $500 left over.
  
  
• Scenario 3: You are in college and holding down a job. Money is tight, but you know the value of saving and have managed to pull together $1,000.
  
  
• Scenario 4: Your retired grandparents are looking for a safe way to keep $5,000 and have ready access to it if they need it.

5. Review each scenario and have each student or group report the option they chose and why they chose it. Compare and discuss the different responses. Discuss how the amount of money, length of investment, rate of return, and access to the funds might affect their investment choice.

6. Based on the investment choice, have the students calculate the interest gained on their account over 10 years using the information they gathered from their assigned financial institution.

7. Finish the lesson by reviewing the different types of interest and accounts, emphasizing the importance of understanding the various ways to save and invest money.

By Jackie Morgan, economic and financial education representative, Nashville Branch