1. Lesson 4
Back to School

2. Lesson Objectives Lesson 4: Back to School Students will:
Analyze graphs and charts related to saving.
Articulate reasons and goals for saving.
Explain and use the vocabulary associated with saving.
Perform calculations for growth of funds.
Recognize the need for financial preparedness in the face of a disaster. 2

3. SAVing 3

4. Saving versus Investing
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

5. Reasons for Saving To build an emergency fund
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

6. 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

7. Tools for Saving Savings account Money market account
Lesson 4: Back to School
Tools for Saving
Savings account
Money market account
Certificate of deposit
Savings bond 7

8. Compound Interest: Daily vs. Monthly vs. Yearly
Lesson 4: Back to School
Compound Interest: Daily vs. Monthly vs. Yearly
Principal = $1,000 (year 1 only) ~ Interest Rate = 5% ~ Term = 5 Years 8

9. 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

10. Rule of 72 Calculations: Problem #1
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

11. Rule of 72 Calculations: Problem #2
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

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

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

14. 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