Building Wealth
Lesson Description Through simulations, students generate a balance sheet, set financial goals and analyze individuals’ ability to operate within a budget. Students are introduced to the concepts of compound interest and the rule of 72. In addition, students learn tips to avoid credit card debt and wealth-building tips. Concepts Budget Compound interest Financial goal-setting Net worth Rule of 72 Wealth
Content Standard National Standards in K-12 Personal Finance Education Financial Responsibility and Decision Making Standard 4: Make financial decisions by systematically considering alternatives and consequences. 12th Grade Expectation: Set measurable short-, medium- and long-term financial goals. Use a financial or online calculator to determine the cost of achieving a long-term goal. Planning and Money Management Standard 1: Develop a plan for spending and saving. 12th Grade Expectation: Explain how to use a budget to manage spending and achieve financial goals. Identify changes in personal spending behavior that contribute to wealth-building. Credit and Debt Standard 1: Identify the costs and benefits of various types of credit. 8th Grade Expectation: Explain how interest rate and loan length affect the cost of credit. Using a financial or online calculator, determine the total cost of repaying a loan under various rates of interest and over different periods. Credit and Debt Standard 3: Describe ways to avoid or correct debt problems. 12th Grade Expectation: List actions that a consumer could take to reduce or better manage excessive debt. Saving and Investing Standard 1: Discuss how saving contributes to financial well-being. 12th Grade Expectation: Describe the advantages and disadvantages of saving for short-, medium- and long-term goals. Develop a definition of wealth based on personal values, priorities and goals.
Objectives Students will: categorize goals as short-term or long-term. analyze the relationship between net worth and wealth-creation strategies. identify ways to control credit card debt. Time Required 90 minutes Materials Building Wealth CD (FRB Dallas) A copy of Building Wealth booklet (FRB Dallas) for each student Handout 1.1 Leslie’s Story– one copy for every two students Handout 1.2 Planners, Strugglers, Deniers, Impulsives – one copy for every two students Comic book A Penny Saved (FRB New York) for each student Handout 1.3 Assessment for Building Wealth for each student Handout 1.3 Answer Key Procedure 1. Ask students to jot down their definitions of wealth. Ask participants to share their thoughts with the class. (Answers will vary.) 2. Ask students to look at the three blocks on the cover of Building Wealth and read these three wealth-building strategies. 3. Play Chapter 1 from the CD. 4. Direct students to turn to the booklet, Chapter 1, pp. 2-3, and discuss assets and liabilities from p. 2. 5. Distribute Handout 1.1: Leslie’s Story to pairs of students. Direct students to work in pairs to calculate Leslie’s net worth and write answers on p. 3 of the booklet. 6. Call on students to provide answers while the teacher enters them into the CD online net worth calculator. 7. Play Chapter 2 from the CD but stop where Betty and Lynne’s story begins. 8. Ask students what they notice about Bob’s long-term goals vs. his short-term goals? (Answers will vary.)
9. Direct students to turn to p. 4 of the booklet. Discuss the following. A. What are some examples of short-term goals? (Answers will vary.) B. What are some examples of long-term goals? (Answers will vary.) C. How is a student’s time span for short-term and long-term likely to be different from an adult’s? (Students’ timeframe for short-term might be one year compared to an adult’s which might be three years. Students’ timeframe for long-term might be 5 years compared to an adult’s which might be 30 years. The actual numbers of years suggested will vary.) 10. Distribute one copy of Handout 1.2 Planners, Strugglers, Deniers, Impulsives to each pair of students. Direct students to work in pairs to categorize the nine people as planners, strugglers, deniers or impulsives. Direct students to refer to p. 5 of the booklet and read to the class the definitions of planners, strugglers, deniers and impulsives. 11. When pairs of students have finished Handout 1.2, call on students to read each scenario and to suggest how they classified the person described and why they chose that category. Tell the class that answers are subjective and that there may be more than one classification that could apply to some scenarios. (Suggested answers are 1-planner, 2struggler, 3-denier, 4-impulsive, 5-impulsive, 6-denier, 7-denier, 8-planner, 9-struggler. All answers are subject to debate, however.) 12. Direct students to return to p. 4 of the booklet to review wealth-creation strategies. Ask the students what generalizations they can draw about the strugglers, deniers and impulsives on Handout 1.2? (Suggested answers may include that these groups do not have a budget or do not stick to their budgets.) 13. Play Chapter 2 from the CD starting with Betty and Lynne’s story. 14. Direct students to turn to the booklet, pp. 6-7. Remind students that Lynne’s day-today expenses do not include fixed expenses such as monthly rent, car payment, etc. Point out that they do account for spending that is often overlooked when individuals think about how they have spent their money. 15. Ask students to identify some of the day-to-day expenses that Lynne might be able to forego (somewhat painlessly) in order to meet her savings goal of $125 a month. (Answers will vary.) 16. Challenge (or assign) students to use p. 7 to track their spending for a week and to circle any spending items that would be fairly easy for them to eliminate in order to save. Note: Optional—discuss p. 8 and create a scenario (similar to Handout 1.1 Leslie’s Story) which would be used by students to create My Monthly Budget on p. 9. 17. Play Chapter 3 from the CD but stop after the compound interest section.
18. Handout A Penny Saved comic book to all students and direct them to read pages 7-8. Discuss the following. Compound interest means that interest is paid not only on the original deposit, or principle, but also on accumulated interest. (Page 7) When you divide the number 72 by the interest rate you are earning on your savings (assuming compound interest), you find out how many years it will take for your savings to double. (Page 8) Note: Optional homework or in-class assignment: Assign students to read A Penny Saved and answer the discussion questions found in FRB St. Louis’ Resource Guide plus Tips and Tools. Go to www.stlouisfed.org/education/resourcetools/search_tools.cfm and scroll down to A Penny Saved, and then click on the hot link for the discussion questions. 19. Go to the online calculator for the Rule of 72 in Ch. 3 of the CD. Demonstrate the use of the Rule of 72 by using the online calculator and inputting various interest rates. Use current interest rates that students are likely to earn on various types of savings and/or investments. 20. Refer to p. 11 of the Building Wealth booklet and discuss the risk-expected return relationship (which is often referred to as the risk-reward relationship). Identify the concepts of time horizon, financial risk tolerance and inflation risk as described on p. 11. 21. Go to the risk pyramid slide in Ch. 3 of the CD and point out the basic features. Note that the pyramid slide is not in the booklet. 22. Play Ch. 4 from the CD. View Betty and Tim’s story on the CD and stop at the online calculator. 23. Direct students to refer to Handout 1.1 in order to find out how much credit card debt Leslie had. (Answer is $350.) 24. Demonstrate the online calculator by using Leslie’s $350 credit card debt. Assume 18% interest for 50 months. 25. Direct students to p. 21 of the booklet, and call on students to read the bulleted suggestions for reducing credit card debt. 26. Play the rest of Ch. 4 of the CD which includes tips to reduce credit card debt and Pauline’s story. Closure Direct students to read and complete the questions on p. 25 of the booklet. Assessment Give each student Handout 1.3: Assessment for Building Wealth to complete in class.
See answers on Handout 1.3 Answer Key.
Handout 1.1
Leslie’s Story
Read the following story about Leslie and fill out her balance sheet. Leslie graduated from college two years ago and has worked as a research assistant at the Federal Reserve Bank of St. Louis for 24 months. She wants to buy a downtown loft in the next five years. In order to be in a position to purchase a loft, she knows she has to plan. Her first step is to figure out her net worth. Leslie has been saving $50 a month since she started work at the Fed and has the money automatically deposited into her savings account. In addition, from day one on the job, she selected to have $75/month automatically deducted from her paycheck that is invested in her 401(k) retirement plan at the Fed. She has a savings bond in the amount of $500 that she was awarded for winning the Fed’s essay contest when she was in high school. In addition, her parents had invested in a mutual fund on her behalf and gave that to her as her college graduation gift. The fund is currently worth $2,000. Leslie drives a 2001 Pontiac Sunfire which has a market value of about $5,500. Leslie is careful to pay her rent on time each month, but she does have a credit card balance of $350. She still has student loans in the amount of $6,000. She feels fortunate that she was able to pay off her car a few months ago. Leslie currently has $340 in her checking account.
Handout 1.2
Planners, Strugglers, Deniers, Impulsives
Read the following statements and identify whether the subject is a planner, struggler, denier or impulsive. 1. I’m having $300 a month automatically deducted from my paycheck each month and put into a tax-deferred account to save for my retirement.
2. Good grief—our Visa bill is $1300 again this month! What gives? 3. I’ll probably make 15% to 20% a year on my investments so why do I need to keep contributing to my retirement plan? 4. I have got to have that purse. It is too cute! And wouldn’t that blouse be perfect to take on our cruise? 5. Once we get the kids through college we’ll start saving for retirement. By the way, did I tell you that we’re getting John a BMW convertible for graduation? He’ll be so thrilled! 6. I’ve contributed to Social Security all my life. By golly, they’d better not mess with my benefits. What do they think I’d live on if we didn’t have Social Security?
7. Did I tell you about little Jimmy hitting another homerun at the Little League game the other night? That kid is a natural athlete. ‘Course I’m counting on him getting a full ride at college—anybody with his athletic ability is bound to get an athletic scholarship. 8. Fran and I are planning a cruise for our 25 th wedding anniversary in two years. If we continue to put $60 a month in our vacation savings account, it should be doable. 9. I can’t believe my car is in the shop again. I may as well have my school check made payable to Randy’s Garage.
Handout 1.3: Assessment for Building Wealth
Explain why a savings account and investments in stocks and bonds are classified as assets. Explain why a car loan or a student loan is classified as a liability. If Mark had $450 in a savings account, a $500 savings bond, and credit card debt of $180, what is his net worth? (Show your work.) What is compound interest? How long would it take for Sonya’s savings to double if she were receiving 6% interest compounded monthly? How long would it take for Larry’s savings to double if he were receiving 8% interest compounded monthly? The risk versus expected return relationship suggests that the higher the expected return on an investment, the __________ (higher, lower) the risk. Referring to the time horizon aspect of risk, if you will need your money in one year, you may want to take _______ (more, less) risk than you would if you won’t need your money for 20 years. List three ways to reduce credit card debt.
Handout 1.3: Assessment for Building Wealth Answer Key
Explain why a savings account and investments in stocks and bonds are classified as assets. (Because they generally increase in value or provide a return on investment.) Explain why a car loan or a student loan is classified as a liability. (Because a liability is a debt, i.e. money you owe.) If Mark had $450 in a savings account, a $500 savings bond, and credit card debt of $180, what is his net worth? (Show your work.) ($450+ $500=$950 in assets; $950-$180=$770 net worth) What is compound interest? (Interest paid on both principle and accumulated interest.) How long would it take for Sonya’s savings to double if she were receiving 6% interest compounded monthly? (72 divided by 6 =12 years) How long would it take for Larry’s savings to double if he were receiving 8% interest compounded monthly? (72 divided by 8=9 years) The risk versus expected return relationship suggests that the higher the expected return on an investment, the __________ (higher, lower) the risk. (higher) Referring to the time horizon aspect of risk, if you will need your money in one year, you may want to take _______ (more, less) risk than you would if you won’t need your money for 20 years. (less) List three ways to reduce credit card debt. (Any three of the following: -Pay cash. -Set a monthly limit on charging. -Limit the number of credit cards you have. -Choose the card with the lowest interest rate and no or very low annual fee. -Don’t apply for credit cards to get a free gift. -Steer clear of blank checks that financial services companies send you. -Pay bills on time.)