Teaching Students About Saving and Investing
below a series of talking points that can help teachers
or parents introduce students to the basics of saving and
investing and help them understand the importance of planning
for their financial future. We've also provided a list of
resources and interactive tools for young people.
Key Topic: Why
Save and Invest?
Many people experience
financial hard times when they get older because they never got
the facts on saving and investing.
The best way to
achieve financial success is to plan for it. Maybe you'd like
- buy a car when
you graduate from high school or college;
- have money set
aside for special occasions or emergencies;
- buy a house
- live comfortably
Once you decide
what you're saving for—and when you'd like to have it—you can
decide how you should save and invest.
The best time to
learn about money is when you're young and still in school. Starting
young lets you take advantage of the magic of "compound interest."
Key Topic: What
Is “Compound Interest”?
is the interest you earn on interest.
If you have $100.00
and it earns 5% interest each year, you'll have $105.00 at the
end of the first year. But at the end of the second year, you'll
have $110.25. Not only did you earn $5.00 on the $100.00 you initially
deposited—your original "principal"—but you also earned an extra
$0.25 on the $5.00 in interest. Twenty-five cents may not sound
like much at first, but it adds up over time. Even if you never
add another dime to that account, in 10 years you'll have over
$162.00 through the power of compound interest, and in 25 years
you'll have almost $340.00.
The Rule of 72 — really just a “rule of thumb” — is a great
way to estimate how your investment will grow over time. If
you know your investment’s expected rate of return, the Rule
of 72 can tell you approximately how long it will take for your
investment to double in value. Simply divide the number 72 by
your investment’s expected rate of return (ignoring the percent
sign). Assuming an expected rate of return of 9 percent, your
investment will double in value about every 8 years (72 divided
by 9 equals 8).
Knowing how quickly your investment will double in value can
help you determine a “ballpark” estimate of your investment’s
future value over a long period of time. Let’s say that you
invest $10,000 in a retirement plan. What will your investment
be worth after 40 years, if you don’t make any additional contributions?
Assuming an expected rate of return of 9 percent, the total
approximate value of your investment would double to $20,000
in 8 years, $40,000 in 16 years, and $80,000 in 24 years, $160,000
in 32 years, and $320,000 in 40 years.
way to look at compound interest. How much does a slice of pizza
cost? Would you believe nearly $65,000? If a slice of plain pizza
costs $2.00, and you buy a slice every week until you're old enough
to retire, you'll spend $5,200 on pizza. If you give up that slice
of pizza and invest the money instead, earning 8% interest compounded
every year for 50 years, you'll have over $64,678.87.
the AIE Savings Calculator
If your classroom
has access to the Internet, use the AIE
Savings Calculator to do a "live" demonstration of the power
the compound interest. For example, a 12 year old who invested
the $5.00 he or she might otherwise have spent on a fast-food
meal would have nearly $350.00 at retirement. And an 18 year old
who invested the $75.00 he or she might otherwise have spent on
yet another pair of sneakers would have nearly $3,200.00 by age
We've designed posters to illustrate
four examples using the calculator. The posters are in pdf (Adobe Acrobat) format
so you can print them easily at your own computer. If you are
demonstrating the calculator in a classroom or working independently
at the computer, you'll like the color posters best. If you
are printing them on a black and white (B&W) printer, the
print quality of the posters will be better if you select the
black and white version of the posters to print.
Key Topic: How
Can I Save and Invest?
Many people get
into the habit of saving or investing by following this advice:
"Pay yourself first." Many people find it easier to pay themselves
first if they allow their bank to automatically remove money from
their paycheck and deposit it into a savings or investment account.
Other people pay themselves first by having money automatically
deposited into an employer-sponsored retirement savings account,
such as a 401(k).
There are many
different ways to save and invest, including:
the students to identify different ways to save and invest, and
ask them to explain each.]
If you save
your money in a savings account, the bank or credit union
will pay you interest, and you can easily get your money whenever
you want it. At most banks, your savings account will be insured
by the Federal Deposit Insurance Corporation (FDIC).
Money Market Accounts.
tend to offer higher interest rates than savings accounts
and often give you check-writing privileges. Like savings
account, many money market accounts will be insured by the
FDIC. Note that bank money market accounts are not the same
as money market mutual funds, which are not insured by the
You can earn
an even higher interest if you put your money in a certificate
of deposit, or CD, which is also protected by the FDIC. When
you buy a CD, you promise that you're going to keep your money
in the bank for a certain amount of time.
Have you ever
thought that you'd like to own part of a famous restaurant,
or the company that makes the shoes on your feet? That's what
happens when you buy stock in a company-you become one of
the owners. Your share of the company depends on how many
shares of the company's stock you own.
borrow money so they can become even bigger and more successful.
One way they borrow money is by selling bonds. When you buy
a bond, you're lending your money to the company so it can
grow. The company promises to pay you interest and to return
your money on a date in the future.
bonds can be purchased individually, or you can buy them by
buying shares of a mutual fund. A mutual fund is a pool of
money run by a professional or group of professionals who
have experience in picking investments. After researching
many companies, these professionals select the stocks or bonds
of companies and put them into a fund. Investors can buy shares
of the fund, and their shares rise or fall in value as the
values of the stocks and bonds in the fund rise and fall.
Key Topic: Risk
Every saving or
investing product has its advantages and disadvantages. Differences
include how fast you can get your money when you need it, how
fast your money will grow, and how safe your money will be. For
Insured Money Market Accounts, and CDs.
products, your money tends to be very safe because it's federally
insured, and you can easily get to your money if you need
it for any reason. But there's a tradeoff for security and
ready availability. Your money earns a low interest rate compared
with investments. In other words, it gets a low return.
Over the past
60 years, the investment that has provided the highest average
rate of return has been stocks. But there are no guarantees
of profits when you buy stock, which makes stock one of the
most risky investments. If the company doesn't do well or
falls out of favor with investors, your stock can fall in
price, and you could lose your money.
You can make
money in two ways from stock. First, the price of the stock
can rise if the company does well and other investors want
to buy the company's stock. If a stock rises from $10 to $12,
the $2 increase is called a capital gain or appreciation.
Second, a company sometimes pays out a part of its profits
to stock holders-that's called a dividend. Sometimes
a company will decide not to pay out dividends, choosing instead
to keep its profits and use them to expand the business, build
new factories, design better products, or hire more workers.
One of the
riskiest investments you can make is buying stock in a new
company. New companies go out of business more frequently
than companies that have been in business for decades or longer.
If you buy stock in a small, new company, you could lose it
all. Or the company could turn out to be a success. You'll
have to do your homework and learn as much as you can about
the company before you invest. And only invest money that
you can afford to lose.
"promise to repay" your principal generally makes bonds less
risky than stocks. But bonds can be risky. To assess how risky
a bond is you can check the bond's credit rating. Unlike stockholders,
bond holders know how much money they will make, unless the
company goes out of business. If the company goes out of business
or declares bankruptcy, bondholders may lose money. But if
there is any money left in the company, they will get it before
stockholders. Bonds generally provide higher returns (with
higher risk) than savings accounts, but lower returns (with
lower risk) than stocks.
risk is determined by the stocks and bonds in the fund. No
mutual fund can guarantee its returns, and no mutual fund
the greater the potential return, the greater the risk. Risk is
scary because no one wants to lose money, but there's also such
a thing as "too safe." We all know that prices go up. That's called
inflation. For example, a loaf of bread that costs a dollar
today could cost two dollars ten years from now. If your money
doesn't grow as fast as inflation does, that's like losing money,
because while a dollar buys a whole loaf of bread today, in ten
years it might only buy half a loaf.
Key Topic: What
One of the most
important ways to lessen the risks of investing is to diversify
your investments. It's common sense: don't put all your eggs in
one basket. If you buy a mixture of different types of stocks,
bonds, or mutual funds, your savings will not be wiped out if
one of your investments fails. Since no one can accurately predict
how our economy or one company will do, diversification helps
you to protect your savings. If you had just one investment and
it went down in value, then you would lose money. But if you had
ten different investments and one went down in value, you could
still come out ahead.
Key Topic: Credit
plenty of students—have wallets filled with credit cards, some
of which they've "maxed out" (meaning they've spent up to their
credit limit). Credit cards can make it seem easy to buy expensive
things when you don't have the cash in your pocket—or in the bank.
But credit cards aren't free money.
Most credit cards
charge high interest rates—as much as 18 percent or more—if you
don't pay off your balance in full each month. If you owe money
on your credit cards, the wisest thing you can do is pay off the
balance in full as quickly as possible. Few investments will give
you the high returns you'll need to keep pace with an 18 percent
interest charge. That's why you're better off reducing your credit
Once you've paid
off your credit cards, you can budget your money and begin to
save and invest. Here are some tips for avoiding credit card debt:
Put Away the
Don't use a
credit card unless your debt is at a manageable level and
you know you'll have the money to pay the bill when it arrives.
It's easy to
forget how much you've charged on your credit card. Every
time you use a credit card, write down how much you spent
and figure out how much you'll have to pay that month. If
you know you won't be able to pay your balance in full, try
to figure out how much you can pay each month and how long
it'll take to pay the balance in full.
Pay Off the
Card with the Highest Rate.
If you've got
unpaid balances on several credit cards, you should first
pay down the card that charges the highest rate. Pay as much
as you can toward that debt each month until your balance
is once again zero, while still paying the minimum on your
Key Topic: Achieving
Make a Plan.
The key to
financial security is to have a "financial plan." That means
you should set financial goals and start saving or investing
to reach those goals. While that may sound hard, it doesn't
have to be. You'll first need to figure out where you're starting
from – for example, how much do you owe, how much money have
you saved already, how much money will get from your job or
your parents. Next, you should set goals. Do you want a car?
A college education? New clothes? Once you know what you want,
when you want it, and how much it costs, you can figure out
how much you need to save each week or month or year.
and "Opportunity Cost" in Mind.
lucky enough to have an unlimited amount of money, you'll
have to choose how you spend your money. That means you'll
have to make trade-offs and consider the "opportunity cost,"
meaning what you give up by choosing one option over another.
For example, let's say you've got $100.00:
If you put
the money in an account that earns 5 percent interest, you'll
have $105.00 at the end of the year.
If you spend
it on new clothes, you won't earn that extra $5.00, although
you should still have the clothes. But if you wanted to sell
them, they'd probably be worth less, especially if they're
used or out of style.
If you spend
the money on video games at the arcade, you'll have nothing
at the end of the year, except the memory of whatever fun
you had playing those games.
Save and Invest
for the Long Term.
best protection against risk is time, and that's what young
people are fortunate to have the most of. On any day the stock
market can go up or down. Sometimes it goes down for months
or years. But over the years, investors who've adopted a "buy
and hold" approach to investing tend to come out ahead of
those who try to time the market.
Before You Invest.
to reduce risk is to do your homework before you part with
your hard-earned cash. Call your state securities regulator
to check up on the background of any person or company that
you're considering doing business with. You'll find that number
in the government section of your phone book. Find out as
much as you can about any company before you invest in it.
Companies that issue stock have to give important information
to investors in a booklet called a "prospectus" and, by law,
that information is supposed to be truthful. Always read the
prospectus. And beware of "get rich quick schemes." If someone
offers you an especially high rate of return on an investment
or pressures you do invest before you've had time to investigate,
it's probably a scam.
Costs of Delay.
Time can also
be the most important factor that will determine how much
your money will grow. If you saved five dollars a week at
8% interest starting from the time you were eighteen years
old, you'd have $134,000 saved by the time you're 65. But
if you wait until you're 40 years old to start saving, you'll
have to save $32 a week to catch up. In fact, just one year's
delay – waiting until you're 19 years old to start saving
five dollars a week at 8% interest – will cost you more than
$10,000 by the time you're 65.
The SEC's quiz,
Test Your Money Smarts,
tests the top ten things students should know about money.
The quiz is also available in a pdf version with an answer key.
interactive tool shows how small amounts saved today can add
up to big money over a lifetime. Using real-life examples—such
as CDs, fast food, jeans, and sneakers—the calculator tells
students how much they'll accumulate by retirement if they
save money instead of spending it. The calculator assumes
an 8 percent annual return and retirement at age 65. You'll
find the calculator and other helpful information on saving
and investing at http://www.sec.gov/cgi-bin/goodbye.cgi?www.investoreducation.org/.
the American Savings Education Council (ASEC), the Ballpark
Estimate is a single-page worksheet that helps individuals
quickly calculate how much they'll need to save each year
for retirement. You'll find the Ballpark Estimate on ASEC's
Web site at http://www.sec.gov/cgi-bin/goodbye.cgi?www.asec.org/.
Be sure to hand out the Ballpark Estimate for students to
take home to their parents.
the American Savings Education Council, this bright, colorful
poster reinforces the message that students can save
if they put their minds to it and that those savings can add
up over a lifetime. You'll find the poster and other useful
savings tools, such as the Ballpark Estimate, on ASEC's Web
site at http://www.sec.gov/cgi-bin/goodbye.cgi?www.asec.org/.
"Get the Facts
on Saving and Investing".
primer from the U.S. Securities and Exchange Commission
to get you started on the road to saving and investing.
A helpful calendar
tool from the American Financial Services Association
Education Foundation to help you organize your finances and
manage your money.
posters to illustrate four examples of how much you can save by
making simple choices. The posters are in pdf (Adobe Acrobat) format
so you can print them easily at your own computer. If you are
using these posters in a classroom or working independently at
the computer, you'll like the color posters best. If you are printing
them on a black and white (B&W) printer, the print quality
of the posters will be better if you select the black and white
version of the posters to print.
Your Money $marts Quiz