Teaching Tip: Knowing how much you need to save to reach your financial goals, is at the heart of financial planning. But do you really know how to save that money to reach those goals? This assignment provides some great tools to help your students start to really think this issue through and highlights the importance of understanding the Time Value of Money.
According to the Federal Reserve, less than one-third (32 percent) of low-income households even have a savings account and it’s not much better for moderate-income households where less than half (48 percent) have savings accounts. Unfortunately, when there is a downturn in the economy, saving becomes more difficult for those on the financial edge.
When we look at recent personal savings rates — that is, the ratio of disposable personal income less personal outlays, we find that they were 4.0% in December 2011, compared to 3.5% in November. (Check out the nice graph that tracks this rate provided by the St. Louis Fed.) However, it is probably not a surprise that the big savers are the very wealthy, and their high level of savings gives the appearance that we, as a country, are doing better than we really are.
How are you doing when it comes to saving? Do you know how you can improve at saving? First, to understand how saving really works, you need an understanding of the Time Value of Money. Chapter 3 in Personal Finance Turning Money Into Wealth is titled “Understanding and Appreciating the Time Value of Money”. This is pretty powerful information as far as saving for your future is concerned. After you’ve finished reading and studying this section you need to see where you stand with respect to your understanding of savings and the time value of money. One way to assess that understanding is by taking the Savings Knowledge Quiz offered by AmericaSavesWeek.org.
Discussion Questions and Assignment:
- Take the “Test Your Savings Knowledge” quiz on the AmericaSavesWeek.org website. What answer surprised you the most? Why? Be prepared to discuss this in class.
- Read through the “Saver Stories” and pick two to write a one page paper on – commenting on why you found that story compelling. Be prepared to discuss this in class.