Grades 912
What’s the Cost of Spending and Saving?
This lesson examines the benefits and opportunity cost of spending and saving. The students learn how compound interest makes savings grow. Compounding provides an incentive to save and invest early. The benefits of saving and investing when you are young can increase substantially over time when funds are allowed to compound.
Introduction
This lesson examines the benefits and opportunity cost of spending and saving. The students learn how compound interest makes savings grow. Compounding provides an incentive to save and invest early. The benefits of saving and investing when you are young can increase substantially over time when funds are allowed to compound.
This lesson was originally published in CEE’s Financial Fitness for Life (Grades 912), a comprehensive personal finance curriculum that teaches students how to make thoughtful, wellinformed decisions about important aspects of personal finance, such as earning income, spending, saving, borrowing, investing, and managing money. Visit CEE’s Financial Fitness for Life website for more information on the publication and how to purchase it.
Learning Objectives
 Identify the opportunity cost and the benefits of spending and saving.
 Calculate investment accumulations for various interest rates and investment time periods.
 Compare the benefits and opportunity cost of saving and investment strategies that vary over one’s life cycle.

Analyze and explain the impact of amount saved, time, and rate of return on financial accumulations.
Resource List
 A copy for each student of Theme 5 Introduction from the Student Workbook.
 Visual 20.1
 Visual 20.2
 Exercise 20.1
 Exercise 20.2
 Exercise 20.3
 A copy for each student of Illustration 20.1 from the Student Workbook

Pennies
Process

Introduce the lesson’s focus on saving and spending. Everybody says it is a good idea to save money, but many people—even some who earn good incomes—save very little over their lifetimes. Why might that be?
(Discuss responses briefly.)  Distribute a copy of Theme 5 Introduction from the Student Workbook to each student. Ask the students to read the section to become acquainted with the concepts presented in this theme.
 Explain that this lesson focuses on decisions that are involved in saving. Although many people don’t think about it in this way, it is important to decide how much of your income you want to spend and how much of it you want to save. The decision is not an easy one, because spending and saving each involve benefits and opportunity costs. Review the definition of opportunity cost—the nextbest alternative that is forgone when a decision is made.

Give each student a copy of Exercise 20.1 from the Student Workbook. Ask the students to read the exercise and answer the questions at the end. Discuss the answers with the class.
 What are the benefits and the opportunity cost of spending your income today? (The main benefit is that spending today enables you to consume goods and services immediately. The opportunity cost is that you have less money to use for consuming goods and services in the future.)
 What are the benefits and the opportunity cost of saving some of your income? (The benefit is that saving will enable you to consume more goods and services later. The opportunity cost is that you will enjoy fewer goods and services today.)
 Give each student a copy of Exercise 20.2 from the Student Workbook. Do not distribute the table at the end of the exercise. Tell the students to read the exercise (they should not try to answer the questions at the end of the exercise yet). Ask: Which person do you believe had more money in savings at the end of his or her 65th year? Call for a show of hands to see how many students picked Ana and how many picked Shawn. Call on some students to explain why they answered the question in the way they did.

Who guessed right? Give each student a copy of the table at the end of the exercise. They should study the table and use the information it provides to answer the questions at the end of Exercise 20.2. Discuss these answers in class.
 How much money had Ana put into savings by age 65? ($24,000)
 How much money had Shawn put into savings by age 65? ($64,000)
 How much total savings (wealth) did Ana have at the end of her 65th year? ($993,306.59)
 How much total savings (wealth) did Shawn have at the end of his 65th year? ($442,503.99)
 In money terms, what was the opportunity cost of Ana’s savings decision? What was the benefit? (Ana gave up the immediate uses she might have made of $24,000, but she benefitted by acquiring $993,306.59 at age 66.)
 In money terms, what was the opportunity cost of Shawn’s savings decision? What was the benefit? (Shawn gave up the uses he might have had of $64,000 between ages 32 and 65, but he acquired $442,503.09 at age 66.)
 In trying to build wealth, the amount saved is obviously important. What other factors are important? Why? (Other important factors include the amount of time that savings are allowed to accumulate and the interest rate or rate of return at which these savings are invested. These factors will help determine a person’s wealth. Even a small amount of money saved will grow surprisingly if it is left to compound over a long period of time at a reasonably high rate of interest.)
 What are the incentives for saving early in life? (Getting an early start on saving will have a large positive effect on the wealth produced by your savings. Compounding of interest really works for people who begin saving early.)
 What was Ana’s opportunity cost of saving early? (Ana gave up buying a nicer car in order to save more.)
 What conclusions can you draw from this activity? (The earlier people begin saving, and the longer they hold their savings in an interestbearing account, the more wealth their savings will generate. It is better to save early and put your savings to work than to save later and try to catch up. Although Ana saved only $24,000, her accumulations were much greater than those of Shawn, who saved $64,000.)
 Display Visual 20.1. Place a penny on one of the corner squares. Ask the students if, given a choice, they would take $10,000 in cold cash OR the amount resulting from the penny in the corner doubled on the next square, and that amount doubled on the next square, and so on, repeatedly, until each square has been used. Use pennies to do the first few squares so the students get the idea (2, 4, 8,16,32,64, etc.). Ask the students to explain their choices.
 Then ask the students to use calculators to continue calculating the amounts that would accumulate on the chessboard according to the doubling procedure. On basic calculators, they would enter 2 x .01 = .02 for the second square and then keep on multiplying by 2 for each successive square.
 Record the amounts on the transparency or on the chalkboard. Express the amounts in pennies so that students will see the visual effects of compounding. Before long, you will run out of space as the quantity of pennies increases geometrically. By the 21st square, the amount will equal $10,485.76, demonstrating that the students should have chosen to take the result of the compounding exercise instead of $10,000. Most basic calculators will display an error E in the upper millions in square 34. A scientific calculator will take you all the way to the end (the 64th square) and display the result in scientific notation—9.2E18, or 9.2 times 10 to the 18th power. You may wish to write this quantity on the board as 9,200,000,000,000,000,000 (92 followed by 17 zeros!). This is 9.2 quintillion pennies (or 92 quadrillion dollars)––more money than the world has ever known.
 Tell the students that the continual process of multiplying that turned this penny into hundreds, then thousands, then millions, billions, trillions, quadrillions and quintillions is called compounding. Explain that compounding is important to savers. For each dollar saved in a savings account, the bank pays interest. This interest is added to the principal, the amount originally saved; then additional interest is paid on the principal and the interest. This compounding of interest makes money grow much faster. Eventually, money saved will double, as pennies did on this chessboard. The time it takes for money to double depends on the interest rate. In the example of doubling with each square, we have assumed a 100% interest rate. This is, of course, unrealistic. But it helps students visualize what can happen with compounding.
Conclusion
Give each student a copy of Exercise 20.3 from the Student Workbook. Ask the students to read this exercise and answer the questions at the end. In going over the answers, be sure to explain the Rule of 72 and why it is important. Some students may ask where the number 72 comes from. You can explain that it derives from a mathematical calculation of how long it takes for something to double in size when it is continually compounded. The number 72 is approximately equal to the number produced by this calculation. And the number 72 is easy to use because there are many whole numbers (representing possible interest rates) that go evenly into 72. (For more on the derivation of the Rule of 72, see Mathematics and Economics: Connections for Life, Grades 912, lesson 14, Council for Economic Education, 2001.)
Answers to Exercise 20.3
Investments 
Interest or rate of return 
Years to double 
Passbook savings 
3% 
24 years 
Money market account 
4% 
18 years 
U.S. Treasury bond 
6% 
12 years 
Stock market 
9% 
8 years 
Display Visual 20.2 and explain the factors that influence how much wealth a person can accumulate. Conclude by pointing out that this closure activity is one more illustration of why it is vital for the students to make a commitment to saving and investing wisely when they are young.
 One key point in the economic way of thinking is that people respond to incentives. What is the incentive for saving early and often? (The incentive is substantial wealth accumulation over time.)
Extension Activity
Have the students collect current information on interest rates and rates of return on various financial instruments (such as checking accounts, savings accounts, certificates of deposit, bond mutual funds, stock mutual funds, Treasury bills, Treasury notes, Treasury bonds, U.S. savings bonds, corporate bonds, etc.) and use this information, along with the Rule of 72, to calculate how long it would take for funds to double in size if they were to continue compounding at their current rate.
Assessment
Divide the class into small groups and explain that each group is responsible for developing a 30second radio advertisement that describes the relationship among amount saved, interest rate, and time. The ad should be targeted to high school students and young adults. Give the groups time to prepare their ads; then have each group present its ad to the class. Evaluate the ads using these criteria:
 How well they explained how time affects the growth of savings.
 How well they explained how the amount of money deposited affects the growth of savings.
 How well they explained how the rate of interest affects the growth of savings.
 How well they used creativity to enhance the appeal of the ad.
Related Resources
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Saving and Investing Video
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The Little Red Hen is a Producer and a Consumer
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