Check Your Financial Literacy
The FINRA Investor Education Foundation has been studying the financial knowledge of adults in the U.S. through a short 5-question quiz as part of its Financial Capability Study. Sadly, Americans do not fare very well. Happily, the questions could easily be turned into engaging classroom exercises for middle- and high-school age students. Maybe even elementary-school students for some of these.
First, take the test by clicking on the following link:
Then come back for some ideas on how to explore these in the classroom.
Question 1: Suppose you have $100 in a savings account earning 2 percent interest a year. After five years, how much would you have?
In class. Give every student a dollar (real or fake) and explain that it is equivalent to 100 pennies. Do you care whether you have 100 pennies or a dollar bill (or 4 quarters, etc.)? A percent is simply how many pennies we’re talking about. So 2% of a dollar is 2 pennies. One form may be more convenient, but you can buy the same candy bar with it. Role play one student hiding the dollar in their desk and the other student putting it in a bank account that offers 2% interest. Pretend a year goes by. Now, one student still has one dollar, but the other has $1.02. Repeat for the second year. You can have students discuss the interest on $1.02 or you can simply ask them if it will be at least 2 cents again the second year. After five years, the answer should be clear.
Question 2: Imagine that the interest rate on your savings account is 1 percent a year and inflation is 2 percent a year. After one year, would the money in the account buy more than it does today, exactly the same or less than today?
Inflation, of course, means that the prices of things go up on average over the course of time. Set up a candy store, a stickers store, and a toy store (or have the students choose something). Give the students a salary of $1 a year and tell them that it will go up by 1% (1 penny) a year. So next year, their salary will be $1.01. After the preceding exercise, they should appreciate that. Have them shop with the first year’s salary. Then, while you are distributing the $1.01 for the second year, have all the stores raise their prices by 2%. Then try it the other way, with income increasing faster than inflation. Lots of fun will be had by all.
Question 3: If interest rates rise, what will typically happen to bond prices? Rise, fall, stay the same, or is there no relationship?
This one sounds harder than it is. Create stores again in the classroom, but this time, they are all selling the same thing — promises to pay a certain amount every year to the holder of that promise in exchange for paying $1. Have some students buy promises (bonds) and have others watch. At times, tell students that it is time to sell their promise to another investor (buy school books for the kids or some other good reason). Of course, they get to keep whatever interest they have earned. It should be easy to find a new investor to buy the bond for the same price ($1.00) that the student paid for it at the start. You can do a few “years” in this manner. Then announce that the Classroom Reserve Board has just announced that it is raising the interest rate on new promises. From now on, any promises sold by the promise sellers will receive 5% interest, instead of 2%. Set up a situation where a student who has a dollar can choose from buying an old promise at 2% or a new promise at 5%. Have students explain their decisions. Then have the students who are holders of old promises (who must sell their promises to buy school books for their children) come up with a strategy to attract the new investors. The only way for the new investors to realize the same interest rate (return) is to lower the price of the promises (bonds) that they have.
There are two more questions which are admittedly harder, but if you can help students get these first three, you’ve made a huge difference in their lives!