Building Wealth and Understanding Insurance

Essential Question: “How does interest and investing affect my money?” 

Investigate: Interest and Rate of Return

[Time Required: 30 minutes] 

1. If you could have $100 right now or $150 in one year, which would you choose and why? What factors did you consider in making your decision (e.g., current versus future wants and needs)? In our financial lives, waiting often means the opportunity to earn more money.
2. Can you think of any money management strategies that involve waiting to spend money in order to grow the initial amount? Understand that both saving and investing can earn money because of potential benefits such as interest and rate of return. Interest is a percentage of money earned on top of money invested, paid as an incentive to keep your money somewhere. Interest is also the percentage you pay on top of the amount borrowed when you take out loans. For example, banks offer interest as an incentive because they want to use your money to provide loans to other people. Rate of return is the amount gained or lost on an investment over time, expressed as a percentage of the initial amount invested, or the principal.
3. Understand that when determining how to manage your money, it’s important to consider the risks and rewards involved. For example, savings options such as Certificates of Deposit (CDs) offer guaranteed interest rates, making them low-risk; but it can often take a long time for money to grow because the interest rates are lower. Investing options offer higher rates of return, but they can be variable, meaning they change over time and can be more of a risk.
4. Download the student activity sheet Investing Tips and review the investment strategies. You can distinguish the differences between the investments by looking at the pros, cons and risks of each. Risk is intrinsically linked to investing and that, historically, greater risks have reaped greater rewards but have also been subjected to greater losses.
5. Understand that consumers can buy, sell and trade investments, and that the government regulates these transactions to ensure equality. For example, the U.S. Securities and Exchange Commission works to protect the interests of all parties by maintaining and enforcing regulations to reduce the risk of fraud for consumers. Other accounts, like most checking and savings accounts and Certificates of Deposit (CDs), are insured by the Federal Deposit Insurance Corporation.
6. Next, download the What’s My Interest? activity sheet and explain that different investing strategies offer different types of interest or returns: simple or compound. Some investment options have guaranteed interest rates, while others have variable rates that fluctuate. Review the calculations for simple and compound rates on the activity, and then allow yourself ten minutes to complete the activity.
7. Understand your money can grow differently depending on types of interest, rates and strategies. Why is potential money growth important to consider? What kind of return would you want in an investment and why? 

Student Preparation: Power of Investing

[Time Required: 15 minutes]

1. Watch the video “Millionaire in the Making” available at com/watch?v=gCTEPzSjvVw.
2. Brainstorm why Damon’s investing methods are successful. What strategies does he use and why? What factors does he consider when making investments? What advantages does Damon have by starting to invest while young?
3. Damon utilizes several strategies to ensure successful investments, including maintaining a diverse portfolio of stocks in different industries, reading analyst reports to learn more about each stock, selecting companies that match his values, and finding investments that offer compound returns.
4. Understand that depending on the investment choices you make, the end result can vary drastically. By making wise investment choices and starting at a young age, we can maximize long-term savings and increase wealth over time like Damon. But it’s also possible to lose some or all of the money you’ve invested. For example, the average annual rate of return on the stock market since 1926 is close to 10%. However, in 2009 when our country was experiencing a recession, stocks overall lost 37% of their value for that year.
5. Depending on your stage in life, there are different levels of risk to assess. For example, if you were about to retire, making risky investments wouldn’t be wise because you need cash flow to live on while in retirement. In the opposite vain, Damon is young so he is able to take on more risk in his investments because he has time to recoup from any potential losses. 

Challenge: Wealth Accumulation

[Time Required: 20 minutes]

1. In order to understand how money grows, it helps to visualize growth over time. Visit the How Much Will My Savings Grow Calculator at com/resources/financial_calculators/savings_investment/savings_grow. 
2. Enter different numbers in the calculator in each of the categories and watch how the amounts change. For example, begin with a $50,000 initial balance or deposit, a 6% interest rate or return on savings, and no savings added each year over 25 years. In this circumstance, they would accumulate $214,593.54 over the next 25 years. Then increase the investment to 30 years and observe differences in the amounts accumulated. Over 30 years, the same amount with the same interest rate would become $287,174.56. Part of the reason the amounts increase exponentially over time is that you are earning compound interest—or interest on the interest.
3. Money growth changes over time and why compound returns are so powerful. Explain that at 35 years with no additional investments, the same $50,000 at 6% interest compounded would be over $384,000. If these were simple rather than compound earnings, (meaning you weren’t earning interest on your interest), that amount would be just $105,000. 

Reflection

[Time Required: 5 minutes]

 Reflect in your notebook on what investment strategies you will consider using in the future and what factors will go into you decisions.