- Author:
- Utah Lesson Plans
- Subject:
- Financial Literacy
- Material Type:
- Lesson Plan
- Level:
- Middle School, High School
- Tags:

- License:
- Creative Commons Attribution
- Language:
- English
- Media Formats:
- Text/HTML

# Education Standards

# Compound-Interest-Assessment

# Compound-Interest-Assessment-Answer-Key

# Compound Interest Calculator

# EconEdLink - Compound Interest

# Financial Football

# Quizziz Activity

# What-is-Compound-Interest

# Who Wants to be a Millionaire? Understanding Compound Interest

## Overview

Students will define compound interest, distinguish it from simple interest, calculate compound interest using a compound interest rate calculator, and apply the concept to real-life scenarios.

# Summary

**Class Time Needed: **90 minutes

**Key Terms:**

- Compound Interest

**Strand & Standard:** Strand 4, Standard 3

**Resource Links/Location: **

- Website - EconEdLink - Compound Interest
- Website - Compound Interest Calculator
- Website - Compounding Your Savings
- Game - Financial Football
- Quizziz Activity
- Compound Interest Assessment
- Compound Interest Assessment Key

**Author**:

Heather Woffinden

Finance In The Classroom

7-12 Grade Teacher Task Force

# Advanced Materials needed

# Classroom Objective/Learning Target

- Define compound interest and its importance in personal finance.

- Understand how compound interest differs from simple interest.

- Calculate compound interest using a compound interest rate calculator.

- Apply the concept of compound interest to real-life scenarios.

# How will students practice what they know

How will students practice what they know:

- Review real life compound interest scenarios

How will students demonstrate mastery:

- Compound interest assessment

# Instructional Procedures or Steps

**Bell Ringer (10 min)**

1) Begin the lesson by asking students if they have ever heard of the term "interest" and what it means to them. Allow a brief discussion.

2) Explain that today, they will be learning about a special type of interest called "compound interest" and how it can help their money grow over time.

3) Share the learning objectives with the students.

**Alternate Bell Ringer (10 min)**

4) Play Quizziz Activity

**Group Discussion (5 min)**

Define and explain the following terms:

**Define compound interest:**Compound interest is the interest earned not only on the initial amount of money (the principal) but also on any interest previously earned. It's like earning interest on interest.

**Activity (40 min)**

Use the Compound Interest Slides to present this lesson.

- Slide 1. Ask students if they have heard the term “compound interest”. Have them identify what they know about compound interest, how it could help them, or how it could hurt them financially. (Accept all answers without giving them the definition or evaluating their answers.)

- Slide 2. Tell students they are going to watch a video and ask them to listen for how people can make their money grow. Show the video No-Frills Money Skills Episode 1. After viewing the video ask the following questions:
- What is the best plan for building your saving? (Pay yourself first.)
- What is the price people pay for using someone else’s money? (Interest.)
- What is the money deposited into a bank account that will earn interest called? (Principal.)
- Why do banks pay interest? (Because they use the deposits to make loans to other customers; the interest is their cost of using someone else’s money for the loans.)
- When was the young woman in the video better off — when she started saving early or when she waited to save? (When she started saving early.) Why? (By saving early she had a longer time to earn interest on her deposits.)
- How did she earn more interest? (By receiving a higher interest rate.)
- How did saving regularly benefit her? (Saving regularly allowed her to have more money in her account on which to earn interest.)

- Slide 3. Review the terms: interest, compound interest, and simple interest. Be sure students understand the differences and how they are used before proceeding.

- Slide 4. Explain that interest can be compounded over different lengths of time. How and when it is calculated and added should be included in any agreements or policies related to the account or loan.

- Slide 5. Put students into small groups. Tell students the next few slides will demonstrate the difference in simple and compound interest, and they will be working in their groups to solve a series of problems. Allow students some time to calculate answers as needed.

- Slide 6. Review the scenario posed in the slide, asking how much interest Dianna will earn. Remind students that simple interest is paid only on the principal, making it easier to calculate.

- Slide 7. Explain the terms in the equation and walk through the steps in calculating simple interest.

- Slide 8. Have students use the formula to answer how much interest Dianna will earn. ($25.01 interest earned.)

- Slide 9. Have students use the simple interest formula to solve the two problems. (Problem 1: p=$550; r=.07; t=4; I=$154. Problem 2: p=$870; r=.037; t=2.5; I=$80.48).

- Slide 10. Review the steps for calculating compound interest.

- Slide 11. Tell students they will be using the formulae to calculate how much interest Simon will earn in the next two years.

- Slide 12. Walk students through the equation to calculate Simon’s earned interest. Ask the students how much more interest was earned as a result of compounding than if he earned only simple interest. ($.36). Point out that it doesn’t seem like much for a year or two, but as they saw in the video, over time it adds up.

- Slide 13. Have students calculate the interest that Jackie will earn in three years ($366.64).

**Group Activity (20 min)**

- Slide 14. Tell students that they may also choose to use an online interest calculator to find the answer to these problems. Have students go to the Compound Interest Calculator. Remind them that long-term savings can add up because of compounding interest. Have them use the online calculator to complete two activities noted on the slide. Tell them to write a brief paragraph explaining the difference in results. You may want to select an additional scenario, such as having them enter their current, selecting a monthly amount to save, at a selected interest rate to see how much they would have saved by age 65.

**Assessment (15 min)**

- Distribute copies of the Compound Interest Assessment, and have students complete the assignment.
- Review the answers using the answer key.

**Exit Ticket (5 min)**

- Exit Ticket Question 1: Imagine you have $1,000 to invest, and you expect to earn an annual interest rate of 5%. If the interest is compounded annually, how much money will you have in your account after 5 years?

- Exit Ticket Question 2: Sarah deposited $500 into a savings account with a 3% annual interest rate, compounded quarterly. If she doesn't make any additional deposits or withdrawals, how much money will be in her account after 2 years?

- Exit Ticket Question 3: Explain in your own words the key difference between simple interest and compound interest. Provide an example to illustrate your explanation.

# Any additional resources exist for those who excelled or need re-teach

**Have students work in small groups to research interest rates paid on savings accounts and other savings instruments in their community. Encourage them to use an online calculator to determine the long-term difference in earnings.**