Banking Your Money
About the Activity
Did you know that money can grow?
Well, it’s true. In this activity, you’ll learn about financial interest—which is what makes money grow—and how to calculate it.
You’ll learn about ‘principal’ and ‘interest,’ and use real-life scenarios to demonstrate how interest is calculated using the equations I = P(1 + rt) and A = P(1 + r/n)nt.
Materials
Here’s what you’ll need to complete this activity:
A pen or pencil
A calculator
A piece of paper
Activity Steps
Learning how to calculate interest starts with understanding several key terms.
- Principal (P): Principal is the starting sum of money, whether it’s what you deposited in the bank, or an amount that you’re borrowing from the bank.
- Interest (I): Interest is an amount of money that the bank agrees to pay you to be able to use your money. People and businesses who borrow money from the bank pay a fee to borrow the money, and the bank then passes some of that interest on to you for keeping a savings account with the bank. That’s the interest you earn on your savings.
- Interest Rate (R): This is the percentage rate offered by the bank. When using the percentage in a calculation, convert it to a decimal. For example, 5% is the same as 0.05.
- Compounding frequency (N): The frequency at which interest is added back into the principal.
- Time (T): The length of time you let interest accrue on the principal.
Interest that adds to your savings account is a good thing. But have you ever wondered how much interest can you earn in a year? There’s a simple math equation to help us figure that out: Interest = the Principal times the total of 1 + the Rate multiplied by the Time or I = P(1 + rt).
Let’s put that equation to test with a real-life scenario.
Pretend you’re two years away from graduating high school and you’re saving up money for the next step in your journey. You spent all summer working—mowing lawns, babysitting, walking dogs, or something else. In all that time you earned $2,000. Now that you have all that money, you want to keep it in a safe place where it can earn money. So, you’re going to visit the (pretend) websites of three different kinds of banks and see what they can offer you.
The challenge: If you correctly figure out which bank will help you save the most money over the next two years before you graduate high school, your boss is going to give you a $250 bonus. Make your decision wisely!
Your first stop is at Mr. Morgan’s Savings Bank. You see on their website that they offer a 5% savings rate.
How much interest would you earn if you invest your $2,000 in a savings account for two years?
Use the I = P(1 + rt) equation and answer on your sheet of paper.
Next, you’ll visit American Trust Bank which offers Certificates of Deposit (CD). For a CD, you’ll use a formula that calculates compound interest.
This formula is A = P(1 + r/n)nt.
The terms of this bank’s CDs are that you have to maintain it for two years and the interest rate is 3%, which is still lower than the rate at the Morgan Savings Bank—but with one important difference: The interest rate on this CD is compounded each year.
How much money will you have after investing your $2,000 for two years?
Write the equation and answer on your sheet of paper.
Did you know?A Certificate of Deposit (CD) is a type of savings account that requires you to keep the money at the bank for a specified amount of time, and if you withdraw it early you have to pay a penalty fee. But these accounts may also have higher interest rates or compound interest rates.
Your last stop is First Eagle Credit Union. Their Savings Accounts have a 3.8% interest rate. This is obviously lower than the other two banks, but let’s see how that interest rate would work out for you over the next two years compared to the compounded interest rate of the CD at American Trust.
Crunch the numbers and write your answer on the sheet of paper.
Which bank will earn you the most interest? Remember, choose the right one and you’ll get an extra $250 from your employer—so choose wisely!
Check your work. Download the answer key.
Test Your Knowledge
See how well you know the concept of interest and find great activities to try next!
Reflection Questions
Questions for your kids and teens.
How does interest change how you think about saving your money?
How do you think this impacts people in your community? Do you think these are things that they are aware of or should be more aware of?
Investigate and Explore
Think about the compound interest rate in your CD. That wasn’t as good of a value as the other two banking options because the rate was so much lower and the time was too short for it to make a difference. But imagine if you had a savings or CD account that compounded interest every year for three years, or five years, or ten years? And some accounts compound their interest monthly and even daily. Depending on the rate and the amount of principal, that’s a deal that can really work out for you.
Career Connections
Regardless of your career path, it’s wise to learn how to manage your own money. If banking and finance piques your interest, you might find success in any number of careers, from economics to accounting. Whether you see yourself working as a bank teller or a mortgage broker, or dream of a day where you own your own business, understanding the fundamental principals of currency will be important at work.
