ECONnections: Lesson 2: Timing is Everything

Lessons:

Trade in Colonial America / NAFTA

Timing is Everything

Developing a Financial Investment Portfolio

Widgets: Producing More, Using Less

How E-Commerce Influences Consumer Choice

The Great Depression Mystery

Lowell Workers and Producers Respond to Incentives

LESSON 2: TIMING IS EVERYTHING
Click here for the Teacher Version

Introduction

Money 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 your understanding of opportunity cost. 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.

Most students do not save because they perceive that the opportunity cost is too great. However, when you begin to understand the power of compound interest over time, you 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.

To illustrate what we are talking about complete the following exercises. (Please note: These activities 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

First Name

Last Name

Age

Select the number of hours you wish to work during a month. You will earn $6.00 an hour.
At $6.00 per hour, your monthly income will be

In this lesson, you have learned about saving and spending. Now that you know your monthly income, you must determine how much of your income you wish to save each month.
Select what percentage you wish to save each month?
Your total savings each month will be

At this rate, use the calculator below to figure how much you will have saved after:

A check mark will appear when your answer is correct.

1 year
5 years
10 years

Activity 2

You have determined that with the income you receive and the percentage you are saving, that after 10 years you will have saved a total of So, , do you have a plan for future savings? Consider the following two options.

Plan 1
You decided in Activity 1 to save of your monthly income. You continue to save this amount for 10 years in an account that has an interest rate of 7% per year. Interest rate is interest expressed as a percentage. After 10 years, at the age of , you no longer contribute money to your savings and leave it in the account until the age of 65.

Plan 2
You decided in Activity 1 to save of your monthly income. You periodically make withdrawals from your savings. At the end of 10 years, you have no savings. You do not save any money until you reach the age of 35. When you become 35 years old, you decide to begin saving again. You decide to save the same amount each year as you did when you were You continue to save this amount each month until you reach 65.

Which plan will provide you with more value at retirement?

	Deposit	Interest	Total Savings
Plan 1	$	$	$
Plan 2	$	$	$

Use the information from the chart to answer the following:

How much will you have contributed to your retirement in
Plan 1
Plan 2
What is the value at retirement and your net earnings at age 65 in
Plan 1
Plan 2
In plan 2 you contributed much more to your retirement than in plan 1. Yet, you never caught up with the value of your net earnings in plan 1 at retirement.

Activity 3 >>