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LESSON 2: TIMING IS EVERYTHING
Teacher Version
Introduction
Income
after taxes is used for two purposes: spending and saving. The benefit
of consuming things today versus the benefit of consuming some things
later through saving depends upon the student's understanding of opportunity
cost. Most students do not save because they perceive that the opportunity
cost is too great. However, when they begin to understand the power of
compound interest over time, they may decide that the benefits of saving
are, in fact, greater than the benefits of spending the money today.
Financial success is rarely achieved unless individuals choose to postpone some current spending on present wants by saving some income. Many young people think they don't have enough income to save and, as a result, they postpone a regular saving program. Young adults who choose to start saving early and regularly to take advantage of the magic of compound interest can build their personal saving into a comfortable nest egg.
Content Standard 12
Interest rates, adjusted for inflation, rise and fall to balance the amount saved with the amount borrowed, thus affecting the allocation of scarce resources between present and future uses.
Concepts
- Compound interest
- Incentives
- Interest rate
- Opportunity cost
- Saving
Objectives
- Identify the opportunity cost of and incentives for spending and saving.
- Analyze and explain the relationship among time, amount saved, and the interest rate and its impact on savings growth.
Lesson Description
In the first part of the lesson students examine the incentives and opportunity costs of spending and saving in a teacher directed lesson. The remainder of the lesson is an interactive web site. Students work through problems that demonstrate the power of compound interest. Students will also be able to listen to an interview with Harvey Greenberg on the importance of saving often.
Time Required
One to two class periods
Materials
Access to computers and the internet
Procedures
- Explain that this lesson focuses on a decision to spend versus save.
- Explain that income after taxes can be used in two ways. It can be spent or saved. Saving is income not spent on consumption.
- Explain that sometimes it makes sense to spend today rather than save for the future. At other times, giving up current spending to save for the future yields greater benefits.
- Discuss some ways high school students earn income, how much income they received, and how they spend or save that income.
- Explain that the opportunity cost of a decision is the highest valued forgone alternative. For example, if you choose to buy new athletic shoes, you give up the opportunity to buy something else with your income today or you give up the opportunity to save your income to buy something in the future.
- Divide the class in half. Divide each half into small groups.
- Instruct half of the groups to discuss the incentives for and opportunity cost of spending their income. Ask the other half to discuss the incentives for and opportunity cost of saving their income. (Incentives to spend include immediate gratification and peer acceptance, but spending now means giving up something you might want to buy in the future. Incentives to save include reaching a future goal as well as receiving interest that generates more income, but saving means giving up the opportunity to buy the thing you desire now.)
- Explain that young adults often don't recognize the value of saving because the perceived opportunity cost (present day purchase) seems too great.
- Point out that when
students begin to understand the power of compound interest over time,
they may make different saving choices because the opportunity cost
of spending may be too great.
- Instruct students to use the interactive web pages to complete the lesson. Please note: These activitities are best accessed using Netscape or Internet Explorer for the PC platform or Netscape for MacIntosh. They will not perform using Internet Explorer for MacIntosh.
Activity 1
Activity 2
