Time Is Money
Lesson 1

1. Compound interest on investments
1. What is compound interest and how does if differ from simple interest?

1. Simple interest is an example of arithmetic growth where the amount of interest generated each term is constant; it’s based only on the starting amount (linear function)
2. Compound interest is an example of geometric growth where the amount of interest generated each term increases because it is based on both the starting amount and the previously earned interest (exponential growth)

2. What are investment options that earn compound interest?

1. IRA’s, CD’s, Savings Accts, 401K’s, 403B’s, and IRS penalties (not a good investment option)
1. Discuss differences between the retirement options above.
2. Ask students if they know on average what each one has as a return. Obviously IRA’s, 401K’s, 403B’s can make very high percents or lose money based on investment options. If the professor has knowledge of mutual funds and risk associated with market investing then a further discussion could ensue. (Enron, Winn Dixie can also be discussed)
2. How is interest normally compounded on investments? (weekly, monthly, quarterly, ….)
3. Formula for calculating compound interest (Optional):
1. A = P-used when interest is not compounded continuously where n represents the number of times per year interest is compounded; t represents years; and r represents rate (in decimal form)
2. Professor will discuss how this formula is used for the following example: How much would an initial investment of $2,000 be worth after 10 years invested in a 6% interest bearing account that is compounded monthly?
4. How does 2%, 5%, & 10% affect my investment outcome? Use the $4,000.00 scenario with nothing added compounded quarterly. Use 30, 35, and 40 year windows and create a table on the board.
1. Students will be grouped in the class according to an investment strategy (i.e. savings accounts, cd’s, IRA) and each will be assigned a percent.
2. Groups will then use formula 1 (or the website noted later in the lesson) from above to find the amount of their particular investment after 30, 35 and 40 years.
3. Once the table is filled in, ask students if Time Matters in long term investing?
4. Also ask them how compounded interest changed the way a 5% return differs from a 10% return.
1. Discuss and view exponential growth curves and how time and rate of return change the curve.
5. For a class that does not want to spend time using the formula for calculations, the professor can have students go to a website and look at the differences. A website to go to could be: http://deposits.interest.com/content/calculators/new/savings.asp

 

3. For additional study, we can change the questions around to the following:

1. What initial investment would be needed to make $1,000,000.00 in 30 years.
2. What initial investment would be needed to make $2,000,000.00 in 35 years? Does the rate matter.
3. Further questions can be discussed and students can either use the formula or the website to answer the questions.

4. Homework:

1. Have students go home and research what they should be planning for in $ for retirement. In other words, what should be their monetary goal for retiring and why?
1. Some students may find articles on the web, while others may find websites that estimate projected needs for retirement.
2. They also need to estimate the % of return they are expecting and how they think they will come up with that.
3. Finally, when will they begin their retirement plan and why?

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