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Intersections: Spring 2006

Helping Students Succeed with Personal Financial Education

If you ask your students, “What do you want to become later in life?” they may answer, “Millionaires!” Few students can explain how they could become a millionaire, other than perhaps by winning the lottery. Since your students have a better chance of being struck by lightning twice than winning a million dollars through playing the lottery, it makes sense for all of them to learn practical steps toward financial success.

A student named Jane works part-time and earns income throughout the school year. If she learns how to save and invest a portion of her income while young, Jane can become a millionaire by the time she retires simply by continuing throughout her working life the saving and investing habit she developed when young.

Jane needs to have a good plan, though. Learning the economic and financial concepts of saving, investing, and compound interest will help Jane to better understand how she can be financially successful. “Keys to Your Financial Success,” a high school program promoted by the Federal Reserve Bank of Philadelphia, provides teachers with the training, lessons, and materials necessary to teach students how to be financially successful.

For example, if Jane saved $100 per month ($1,200 a year) for 50 years and invested her money and received a 9 percent return each year, she would have $1,066,129 at the end of the 50 years (see the figure). That $1,006,129 sum is the result of planning, patience, and compound interest. The scenario presented in the figure demonstrates the success a sound, long-term saving and investing plan can produce. Lessons using scenarios just like this are included in the Money Management section of the Keys program.
Jane's Savings Plan Figure
Jane might think that saving $100 per month ($1,200 a year) is impossible, but it can be done. For example, she could do the following to save enough money to retire as a millionaire. First, Jane could save a third of the needed money and live a healthier life by spending $2 a day less on drinks and snacks at the vending machine. She could also ride the bus to and from work, thereby eliminating the purchase of one tank of gasoline each week. Finally, Jane, who smokes cigarettes, could give up her habit. This decision will save her money and lead to a healthier life with fewer medical costs.

Students taught the sort of steps Jane has taken can learn about other topics related to financial success, such as budgeting and reducing impulse spending. The Federal Reserve Bank of Philadelphia’s Keys to Your Financial Success program offers a high school a comprehensive financial education course that covers the concepts mentioned above. The Keys course includes five units: Setting Financial Goals and the Decision-Making Process; Career Planning – Investments in Human Capital; Money Management, including credit use; Consumer Skills; and Risk Protection. Schools that commit to offering the course receive pre- and post-testing of Keys students, semiannual roundtable meetings for “Keys” teachers, and a one-week summer training program for the Keys teachers, all free of charge.

Rule of 72

The Rule of 72 is a simple formula that individuals can use to determine how long it takes for invested money to double. For example, if Jane invests $100 in a bank account that earns 3 percent annually, the $100 will double to $200 in 24 years.

How did we get an answer of 24 years? Simply by dividing 72 by the interest rate, in this case 3. The answer, 24 years, tells the student the number of years it takes to double the initial investment.
72/3 (interest rate of savings instrument) = 24 (time period in years)

In contrast, if Jane invests $100 in a bank account that earns 9% annually, the $100 will double to $200 in eight years. Jane's money doubles much faster in the account with the higher interest rate.
72/9 (interest rate of savings instrument) = 8 (time period in years)

This simple and easy-to-remember “rule” helps students understand how long it takes to double their money.

Todd Zartman

If your school is looking to expand its course offerings or update an existing personal finance course, Keys could be a perfect fit for your school’s current curriculum. Pennsylvania and New Jersey schools interested in learning more about the Keys to Financial Success course should contact Todd Zartman (todd.zartman@phil.frb.org) at 215-574-6457. Interested high schools in Delaware should contact Barbara Emery (emeryb@lerner.udel.edu) at the University of Delaware Center for Economic Education and Entrepreneurship at 302-831-4622.

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