The Bank or the Mattress?

A large proportion of students I teach have personal finance experience. I use this term loosely of course, the experience tends to be related to illicit activities and usually ends unsuccessfully. Unsurprisingly then, pretty much everyone I am teaching is either broke or owes money in the form of restitution payments to victims and/or the government. One of my goals in this facility is definitely to teach students how to manage money efficiently, and this works perfectly in tandem with Pre-Algebra and Algebra students.

I provide a number of scenarios for students.

Scenario 1

You are given $10,000. You decide to keep $5000 in cash and hide it under your mattress. You take the other $5000 to the local bank and open a savings account that promises a 5% interest rate a year for 15 years if you don’t touch the money. 

I love this scenario because my students have an idea in their head that cash is king and using banks means you could lose your money. I love to watch their reactions as they calculate how much their $5000 is worth after the 15 years.

Some questions for them to consider:

1. At what time during the 15 years does your bank account grow the fastest?

2. What would happen if you left the money in the bank for another 15 years?

3. What are the pros and cons of having your money in the bank? Under the mattress?

The last question can really be the most interesting. Students live under the misconception the bank can take your money, or if someone robs the bank you will lose your money, or the bank could simply steal it. This is a great opportunity to investigate what the FDIC guarantees. Then take all these ideas suggested about banks, and show how they really apply to the mattress, plus the associated lump you have to feel everytime you lay down.

Scenario 2

This one is a bit more realistic

You are currently broke but interested in saving money in hopes of becoming a millionaire. When you are released from the facility you begin working full-time hours and decide to put $100 a month in a bank account no matter how much you need it. The bank gives you a 5% interest rate compounded annually.

1. How long will it take for you to become a millionaire?

2. After 10 years, what is the difference between the amount of money set aside in the bank, and that same amount of monthly money if it hadn't been put in a bank?

3. What if the interest rate increased to 8% after 5 years?

4. If you started with $1000 in the bank, would this make much of a difference twenty years later?

I love the direction of the these graphs, students see right away what is happening and then quickly start introducing hypothetical situations. They start saving $200 a month at the beginning, change it to $500 a few years in the future when they figure they have a higher paying job. Pretty soon the "million dollar date" is dropping from 50+ years down to 36 years, and maybe below 30. Strangely becoming a millionaire doesn't seem so far fetched.

A lof of skills are included in this lesson. Percents, linear equations, non-linear equations, forecasting, budgeting, graphing. This is the type of mathematics that really gets me excited with all the questions we can ask, test out the new scenarios, and see how it turns out.

Last but not least, don't forget to mention they have to pay taxes on all this interest. I have no intentions on being called out for missing that slight detail years from now!