There are 5 key terms to learn as we get started.

• Basic Savings Account: The most fundamental saving tool; these are associated with low minimum balances and few restrictions, but also low interest rates.
• High-Yield Savings Account: A savings account with higher interest rates than typical savings accounts. Some HYSA tools have restrictions, such as the number of times you can transfer funds, or a required minimum balance.
• Credit Union: A nonprofit cooperative whose members can borrow from pooled deposits at low interest rates.
• Certificate of Deposit (CD): An investment tool in which money is invested for a fixed amount of time; these accounts usually have higher interest rates that are fixed, but also come with penalties for early withdrawals.
• Mutual Fund: An investment tool that pools the money of many investors and invests it in stocks, bonds, and money market assets, or other financial securities. They will typically have higher return rates than savings accounts or CDs, but their rates of return are not guaranteed because they’re connected to the stock market.

We learned in the Banking Your Money Activity that there are many different ways to save money. If you completed the activity (and even if you didn’t), at the end of that activity you had $2,475 saved up from your hard work and smart saving by the time you graduated high school. That’s where we’ll start with this activity.

Now, you’ll be investing that $2,475 for four years so you can grow a bigger nest egg and buy a brand new car in four years.

Just like we did in Banking Your Money, we’ll test different types of investments to find the best option.

First up is the College Town Savings Institution Bank. They have a basic savings rate of 0.45%, with earnings that are compounded once a year.

Compounding interest requires you to use the compounding interest formula: A = P(1 + r/n)^nt. As a reminder, the P stands for Principal; R is the Annual Rate; n is the compounding frequency; and the t is time (in years).

Calculate the savings for the compounded interest you would earn in the basic savings account over two years. Write the equation and answer on your sheet of paper.

Did you know?

An interest rate is also known as Annual Percentage Yield, or APY. This is the amount of interest you earn when you save your money.

Next, let’s look at the Springfield Credit Union. The main perk of their savings account is that they have no minimum amount of money required to open an account, which many savings accounts do have. Their APY is 1.2%.

The terms of this bank’s CDs are that you have to maintain it for two years. 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.

Let’s calculate that amount of savings for the compounded interest you would earn in this account over two years.

Write the equation and answer on your sheet of paper.

Next up, we’ll look at a CD account from Big State Bank. As we know, you have to pay the bank a fee for removing your money early; this CD has a five-year term—but a 6% interest rate.

Let’s calculate that amount of savings for the compounded interest you would earn in this CD over two years.

Crunch the numbers and write your answer on the sheet of paper.

As we know about CDs, a five-year term means you won’t be able to touch it for an extra year after your planned graduation, unless you want to pay the penalty fee—in this case, that’s $200, which would wipe out a bit of that savings. So if you were to choose this option, just know it won’t be ready for you when you graduate!

Did you know?

Investments like a mutual fund are not a guaranteed return. Mutual funds are invested in the stock market, and if the stock market takes a hit you could earn less than the expected annual rate of return, or even lose some of the money or principal you originally invested.

Finally, let’s look at the All Access mutual fund from the All-American Mutual Fund Company.

The average annual return for the All Access mutual fund is 9%.

Note that mutual funds do not compound their interest because those returns are not guaranteed, like they are in savings banks. Use the standard interest rate calculation formula I = P(1 + rt).

Did you know?

While there is some risk, mutual funds are not considered a bad investment. Investment specialists note that even if the stock market goes down, over time, it usually increases. But in the case of this activity, if you’re looking to earn the most money you can in just four years, a mutual fund could be taking a risk with your investment.

Okay, it’s time to pick—how do you want to invest your money?

You made your choice! There’s no wrong answer, since this is a personal decision—and since all of these are relatively safe investment choices, each with their advantages and drawbacks.