Lesson 2: Saving for Now and the Future

Lead a class discussion on the importance of saving and how a savings account can grow with interest.

OBJECTIVE:
Students will use fractions, percents, and decimals to calculate interest rates.

MATERIALS:

Saving For Now and the Future Student Worksheet 2 .(pdf,858.40 kb).

DIRECTIONS:
1. Ask: Is there an item that you want to buy but you have to save for it? What is something you would like to use your money to buy this week, this month or this year?. On the board make a list of student wants.

2. Explain that it's important to have goals, and it is equally important to save money for the unexpected. ( For example, you audition for the school play and you need to buy your own costume.)

3. Ask: Where do you keep money you are saving? Explain that the best and safest way to save money is by opening a savings account.

4. Ask: What are the benefits of using a savings account? (It pays interest, is insured by the FDIC, and is safe.) The Federal Deposit Insurance Corporation provides insurance protection for up to $250,000 in your accounts. If a bank fails, your money is protected. Review the definitions of “interest” and “interest rate” on the worksheet.

5. Distribute Saving for Now and the Future Student Worksheet 2. Separate students into groups of two. Appoint one student as the depositor and give him/her the $100 bill. Appoint the second student as the banker and give him/her the three $5 bills and .76¢.

6. Read the directions for Part 1 aloud. Explain that to determine how much interest $100 will earn in one year, students will need to multiply the deposit amount ($100) by the interest rate (5% or .05). Note that 5% means 5 out of 100. Ask: How much money is 5% of $100? Write the answer on the board: $100 x .05 = $5. Have the banker give the depositor $5. Explain: After one year, your balance will be the original savings amount, plus the interest earned ($100 + $5 = $105).

7. Explain: In year 2, instead of earning 5% interest on your $100, you will earn interest on $105. Interest earned on interest is called compound interest. Ask: How much interest will you earn in year two? Write the answer on the board: $105 x .05 = $5.25. Have the banker give the depositor $5.25. Students will add year 1 interest to year 2 interest to figure two years of interest ($10.25). Ask: What is the account balance after two years? ($110.25)

8. Finally, have students figure the year 3 interest ($110.25 x .05 = $5.51) and the bank balance after three years ($110.25 + $5.51 = $115.76). Explain to students that without compound interest, $100 in savings would earn $5 every year. With compound interest, deposits earn more interest every year.

9. Provide time for students to complete the worksheet.

[Answers:] OSB (7%): $7.00, $14.49, $22.50; RSB (10%): $10.00, $21.00, $33.10.]

CONSIDER THIS:
Ask: How does a bank earn money? Explain that banks loan people money for cars, houses, and other expensive items. Banks charge interest on those loans. So when a person borrows $10,000 to pay for a car, they will pay back $10,000 plus interest.