Young Money Classroom Activities—May/June 2004
The Miracle of Compound Returns Summary One tool in the financial world that will affect your savings and investments the greatest is compound interest. Compound interest is the key to successful long-term investing. However, for this tool to work it means not spending the income earned on savings accounts and investment vehicles. Discussion After your students have read “The Miracle of Compound Returns” discuss the following questions as a group: 1. What types of accounts might benefit from compound interest? 2. Explain the process of how compound interest works. 3. Do you know where to locate information on interest rates? Explain. 4. Which would you rather do—save money in an account earning simple interest or compound interest? Why? 5. Do you feel the potential long-term reward of saving/investing money with compounding interest is worth not spending your earnings right now? Share your feelings. Project Ideas 1. Inquire locally to find simple and compound interest rates available within your community or surrounding area. 2. Have a local financial professional speak to your class about interest rates and their effect on today’s economy. 3. Have students compare interest rates from local financial institutions with online banks. Develop a graph of the various rates discovered by the students. Discuss differences/similarities. 4. Have students complete the Simple Interest Calculations worksheet. 5. Have students complete the Compound Interest Calculations worksheet. [Answers for compound calculations are included.] 6. Share The Impact of Compounding at 9% Interest handout with your students. Use as a discussion piece. 7. Check the Web sites of the Federal Reserve Banks across the nation for information on interest and interest calculations.
Potential Quiz and Test Questions • What did you learn about simple interest? Compound interest? • Was there much variation in simple and compound interest rates in your community? Explain. • Why is learning about interest important? • Explain the difference between simple and compound interest calculations. Additional Challenges • Visit with parent(s) about simple and compound interest. • Share information from the The Impact of Compounding at 9% Interest handout with family and friends. • Calculate simple interest on $100 at two percent interest for three years. • Calculate simple interest on $250 at three percent interest for seven years. • Calculate compound interest on $100, $1,000, and $1,000,000 each over five years. Share your figures and findings with your class and teacher. Glossary Words Compound Interest—interest figured on the original amount deposited, plus the earned interest from each year money is not withdrawn Deposit—to put in a bank account Earned interest—the payment received for allowing a bank or company to use or invest your money Interest—what the bank pays you for using your money Principal—the amount of money on which interest is calculated Rate of return—a percentage (interest) over a certain period of time, usually a year, which is paid to you for the use of your money Savings account—a bank account that permits you to make deposits and withdrawals in various amounts at any time; you receive interest on your money Simple interest—figured only on the initial amount placed on deposit
Guide developed by Dr. Rebecca J. Travnichek, Youth Financial Education Consultant, University of Missouri Extension.