Thursday, September 20, 2007

Savings, Interest and Math

One of the fundamentals of financial literacy is saving, and one of the keys to teaching about saving is the phenomenon of compound interest. Terri Cullen talks about teaching her third-grader about this important idea in today's Fiscally Fit column (link no longer available) in The Wall Street Journal.

She offers a good example of explaining percentages to an elementary student, and how those small percentages can result in big bucks. I would recommend that one might also discuss the rule of 72 so that youngsters can see how compounding starts to leverage any amount they save. The rule of 72 is used to give an estimate of "doubling time" for an investment. One only has to take 72 and divide it by the annual interest rate to get the approximate amount of time it will take for the money invested to double. Thus, $1,000 invested at 3% will take 24 years to grow to $2,000. But $1,000 invested at 8% will double in just nine years.

I would also mention (perhaps at a different point) how the rates are indicators of risk. And that higher rates, while attractive, mean having to accept higher risk. But also how higher risk can frequently be acceptable when one is younger. Regardless of what else you add to your presentation, I would recommend Cullen's beginning. It's simple and effective.

Please share your thoughts on Cullen's article, and how you teach compound interest, regardless of grade.

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