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Surveys show that in many cases financial literacy is not taught either because teachers don’t feel qualified to teach it — or that they haven’t found a curriculum they like, so hopefully we are eliminating both of those problems with this curriculum and podcasts!
Don’t forget — all of the lesson extras, links, The Financial Literacy Teacher newsletter, and all sorts of other goodies like classroom instructional slides and eflashcards can be accessed on our website at www.financialliteracylessons.com
In this podcast, we cover Lesson 8: Supersize Your Savings. This is the 2nd lesson within our Unit 2 theme of Building Wealth. In this lesson, we explore saving money, why to save, saving vs. investing, and the magic of compound interest, or just compounding in general.
This lesson begins on Page 132 of Instructor’s Guide so let’s go there now.
In this lesson, you’re going to demonstrate simple interest vs. compound interest, so the Instructional Resource is a compounding calculator. We can use the one at investor.gov. It’s an easy-to-use calculator for demonstrating the power of compounding. If you have a compounding calculator you prefer to use, that’s fine.
Another Instructional Resource is calculator.net. This, like the investor.gov calculator, enables you to demonstrate the power of compounding within a specific parameter or I guess scenario. It’s fun for students to practice creating financial goals such as I want have $25,000 in savings 8 years, or I want have saved $100,000 by the time I’m 35. They can easily figure out how much they have to save, at what rate, and for how long, in order to meet their goals.
The reason I’m always bringing up these calculator sites is because they enable students to make realistic and concrete plans for meeting a particular financial goal, whether it’s saving money or paying down a debt. Part of being financially literate is not just setting financial goals, but planning exactly how you will reach those goals within your time frame — knowing How much you have to save or invest weekly or monthly to meet your goal within your timeframe. These calculators provide down-to-the-dime planning which makes a financial goal achievable. That transforms dreams into realistic and achievable goals.
Our other Supplemental Resource for this lesson is inequality.org. Wealth inequality is one of the most important political and economic issues of our time. This site is an excellent resource for learning all about income and wealth inequality, and policies, and groups and movements that are addressing these issues here in the U.S. and around the world. Knowing about wealth & income inequality is a part of 21st century financial literacy, although again, this particular topic is outside the National Standards of Financial Literacy. Inequality.org is a good place to plan some more advanced or diferentiated activities if you have students who are interested in exploring this topic.
Moving over to Page 133, What Does That Mean? you’ll note that there isn’t a lot of vocabulary in this lesson. While we compare saving and investing, most of the terms related to investing are contained in a later lesson where we examine that concept more closely.
Let’s move over to Gaining Attention. This is a brief discussion to start students thinking about money emergencies. Everyone has them. At this stage in their lives, most students have an emergency expense safety net — in the form of their parents. Some students’ safety nets are, obviously, bigger and stronger than others, and some of your students will already have seen, first-hand, the problems that come with a family having no emergency savings. You can expand on this discussion to ask students to imagine they’re 30 or so, and the economy has a downturn, and they lose their job. Have students walk through the progression of consequences of having no income, but they still have to pay their rent, make their car payment, and pay their student loans and credit cards. And what if they aren’t able to find another job for months? Oh, it happens. Where will they end up? How will they survive this personal financial crisis?
Moving to the Presentation of Content, students learn that 76% of Americans are living paycheck to paycheck. Much of this is due to the high levels of consumer debt in America and because people are simply not doing what I call in earlier lessons “their 2nd job”, in other words, they are not diverting a part of their income to build wealth.
Let’s look at Roman Numerals II and III on Pages 134 and 135. Having a savings account seems like a small deal but it’s an essential first step on the journey to building financial wealth and security. Part of that job — of building wealth — is going to the bank, opening up a savings account, and methodically funding that account until you have enough money. Enough money for what? The primary goal of a savings account is an emergency cash fund. You can read about that on Page 134 but there are 2 things students should understand about savings accounts. One is that a savings account is important because it’s liquid. Liquidity is a vocabulary word. Liquidity means that it’s easy to convert to cash. It is already cash so it’s very liquid. Liquidity is important for financial emergencies because emergencies are always time-sensitive. You have to have that cash fast! Some accounts are more liquid than others and a straight savings account, which is not a timed deposit like a CD, is the most liquid.
Secondly, most experts recommend 3-6 months living expenses as cash in the account. This is a good place to engage students in a discussion about necessary vs. discretionary living expenses. We cover those in a later lesson on budgeting but you can introduce them to the kinds of expenses that are need- based so they can get an idea of how to calculate the amount that would go into an emergency savings fund. Depending on your particular lifestyle and life changes, there are emergency fund variables. If you’re a freelancer, for example, or if you live on commission, or you have a not very secure job, you’ll need to save more. And once those kids come along, you need to increase your savings to account for their expenses too. You can read about that on Page 135.
In Roman Numeral III, we compare Saving vs. Investing. Since this unit is about building wealth, it should be stressed that while a savings account is fundamental to building wealth, it is not an really an investment. Savings accounts are super safe, so they pay a very low rate of interest. They are not an efective way to build wealth. Experts recommend that once you have your emergency savings, which is a top priority, you can start focusing on other financial goals. Urge students to start thinking about their financial goals. They really are not too young. Starting early is important! Even if they, as yet, have no income to speak of, there’s a lot they can be doing to increase their potential to build wealth. In an earlier lesson we discussed getting educated. They can also contemplate their financial goals and learn about money and investing. Many people forget that reducing expenses is another means of increasing wealth. They should be ready to build wealth when they have the opportunity and a little income to do it.
Another objective of this lesson is that students come away with an understanding that, at most times in their life, they will have multiple financial goals with diferent timelines. Experts advise splitting goals into short-term goals and long-term goals. For the most part, a savings account is sufcient for a short-term goal while long-term financial goals are better achieved through investing which we’ll cover in a later lesson. Some recommend a medium timeline too — whatever works best.
On Page 136, there’s a section on simple vs. compound interest. I don’t think your students will have any trouble understanding the diference. There are examples provided in the Instructor’s Guide and in the student workbook. Most bank accounts pay compound interest. You can tell your students that It’s hard to make the point of the super-sizing powers of compounding interest with the $1 example in the instructor’s guide and student workbook. So this is where you’ll want to whip out your compounding calculator. I suggest assigning one group of students to a simple interest calculator and another group of students to a compounding calculator, and play with some financial goals. For example, Ellie puts $100 per month earning in a simple interest account earning 3%, and Annie puts $100 per month in a compound interest account earning 3%, and how much more does Annie have than Ellie in 10 years? Then keep increasing the amounts they save, increasing the time period, and bumping up the compounding rate. The higher the rate and longer the term really demonstrates the super-sizing powers of compounding.
You can also review the Rule of 72 with students. This is included in the NSFL — oddly. It’s just a way to estimate your time to double your money at a given compounding rate – or you could have students download a compounding calculator and instead of estimating get an accurate number…
Sometimes compounding is only associated with bank accounts but this is wrong. Compounding is a universal power. It’s important for students to make this leap. Whether you’re saving money in a savings account or whether you’re investing it, compounding — adding the earnings on to the original investment to the principal — is a way to supersize your savings or your investment, and it gets you to your financial goal much faster. Warren Bufet tells us so right there on page 139 of the student workbook!
On Page 137, Roman Numeral V, are some suggestions for developing a savings habit. And yes, students are young and they probably aren’t even earning an income yet, but they should know that becoming a successful saver is part- money, part-discipline. They should know that the earlier they start, the more successful they will ultimately be. Compounding is time-sensitive and that automating savings is the way to go. Many employers have an automated savings plan where a portion of their paycheck is automatically diverted into savings. This is a good way of building and maintaining that emergency savings fund. There are some other suggestions on Page 137 which you can read about on your own. They are not hard to understand.
Now let’s go over to Page 138. The Big Picture reflects on the major points of the lesson. Let’s Practice, Activity A is Sweet Savings Solutions.This can be completed in class, but if you have enough time, it’s really fun for students to share their financial goals. Use some of their long-term financial goals as case studies. For example, say a student’s long-term financial goal is to start their own business in 10 years and they figured they’ll need about $50,000 to do this. The class can use their compounding calculators to help the student come up with a savings plan. Or if a student wants to have $5,000 for a trip around the world in 6 years when they graduate from college, the students can figure out how much they’ll have to save and at what compounding rate, etc.
Activity B is My Personal Savings Habit Pledge, which is self-explanatory. Activity C is our Debate-Persuade-Inform Activity which is Income & Wealth Disparity in America. This is where the Inequality.Org website will come in handy for your students. There’s a lot of good information on that site that can help them create their presentation for this activity.
The curated tech for this is Glogster.com or ThinkLink.com because income and wealth inequality is a topic that lends itself to a presentation in some format other than as essay. A photo collage or infographic could be very efective.
In the next lesson’s Ponder & Predict, we ask students to ponder that in the future, they are going to be responsible for putting their own roof over their head. Have they ever thought about housing. Is housing an investment or just an expense, or can it be both?
The Blog Q asks students to name their top 3 savings goals and whether they’re mature enough to take a pass on spending for something that they really want but don’t need, in the interest of reaching their goal.
So again, thank you for joining me on Lesson 8, and I’ll see you next time on Lesson 9: Home Is Where The Mortgage Or Lease Is.