Saving

In this personal finance lesson, students determine their monthly earned income and estimate how much they could be saving.

• Internet access – iPad, laptop, or some electronic device for each student
• Slides 1-19
• Activity 1 and Activity 2, one copy per student
• Calculator, one per student
• Colored pencils, two per student
• Ruler, one per student
• Uncooked spaghetti, one strand per student
• Interactive:  technology.councilforeconed.org/wheel-of-mystfortune/

Most students have an idea of what earned income is, but they generally do not have a good idea of what expenses they will have or what taxes they must pay. It is a surprise to many young people when they examine their first paycheck to see the pay that they receive is less than the pay they earned. Students usually do not think about the importance of saving for a goal or for unexpected expenses, large or small, and the impact these expenses have on their ability to save. This lesson makes students aware of how earned income is spent and saved and the impact of various life events on their savings. In today’s economy it is important for students to understand the importance of managing their money and determining how much they can save on a monthly basis in order to prepare them for a financially sound future.

1. Display Slide 1. Ask students to answer questions 1 and 2 of the Warm Up on a piece of notebook paper. Discuss the following:
   1. How much should Ottis estimate his monthly earnings to be? [Monthly earnings: $47560/12 = $3963.33.] How much are his weekly earnings? [$47560/52 = $914.61] How much would he earn bi-weekly? [$1829.22]
   2. What tools can you use to help estimate Ottis’ monthly saving? [Answers will vary.]
2. Show Slide 2. Ask the students how income might be earned. [Answers will vary but students will probably mention money earned at after school or summer jobs.] Tell students that income is defined as money received for work performed. This may include salary, wages, tips, professional fees, commissions, etc.
3. Show Slide 3. Define saving as disposable income minus consumption spending. Tell students that saving is the part of income that people choose to set aside for future uses. Explain that consumption spending is money spent on durable goods (e.g., cars, houses, and large appliances), non-durable goods (e.g., food, clothing, soap), and services (e.g., haircut, tanning at salons, and going to a movie theater). Remind students of the difference between saving (i.e., the part of the flow of income that is not used for consumption) and savings (e.g., an amount of funds that might have accumulated over many time periods). For example, the amount in savings might be some number like $12,345 and after earning another $100, the worker saves another $5. In this example, the worker is saving $5 and his savings now would be $12,350.
4. Tell the students that for today’s lesson they are going to be taking a short career aptitude test. Explain that a career aptitude test asks specific questions that help determine what type of career might be likely for someone based on his or her skills and interests. Explain that the reliability of the test depends on several factors, including the truthfulness of the answers.
5. Display Slide 4. Tell students to take out a piece of technology to use (iPad, computer, or smart phone) and to go to the interactive shown on Slide 4 (http://technology.councilforeconed.org/wheel-of-mystfortune/ ). Instruct students to complete the test and hit “Finish and Get Your Careers.” From the list, ask students to click on a career that interests them.
6. Distribute a copy of Activity 1 to each student and tell them to write their chosen career and the “Annual Median Wage” at the top of the graph paper.
7. Ask the students what median means. [Median is the middle number.] Ask students what might skew the data when calculating mean. [Outliers.] Explain that median is frequently used when talking about income because the outliers skew the data.
8. Tell the students that they are going to use the median earned income for their career to graph and calculate their monthly earnings.
9. Ask the students how they can estimate their monthly earnings. [Take the wage and divide it by twelve.]
10. Explain that this is not entirely accurate because we did not include taxes in the calculation. Tell students that taxes are compulsory payments to governments required of households and businesses. Ask the students what will happen to the annual or monthly earnings if we include taxes paid. [Both would be lower.]
11. Display Slide 5. Explain to the students that you are going to use a typical worker’s “Annual Median Wage” of $55,050 as an example to demonstrate how to complete a table. Ask the students what you should label your “in” and what you should label your “out.” [Students should answer that the “in” should represent months and the “out” should represent saving.]
12. Explain that you are going to start the table at (0,0).
13. Explain that you will plot two points at this time. The first point is the origin or starting point (0, 0). The second point is going to be (12, 55050), which represents the full year and the savings you would have if you did not spend any money throughout the year and paid no taxes. Explain that when consumers save (i.e., engage in the act of saving), they are choosing to set aside money for future uses.
14. Ask the students what the two points in the table are called. [Coordinate points.]
15. Tell the students to create their own tables using the median wage for their chosen careers with their two points on the back of Activity 1. Distribute two colored pencils and a ruler to each student. Tell students that they are going to create a graph on Activity 1. Ask the students what the title of this graph should be. [Answers will vary but may include My Yearly Income, Earnings, Saving and so on. Be certain to gently correct any student using the term savings when saving should be used instead.] Guide students to select “Yearly Saving” as a title.
16. Ask the students how the axes should be labeled. [X-axis should be labeled as “months” and the y-axis should be labeled as “saving.”]  Tell the students to use rulers to draw and label their x-axis (months) and their y-axis (saving) on Activity 1.
17. Ask the students what scale factorshould be used for the y-axis. [Answers will vary.  For example, if a student had a lower starting salary, they may suggest a lower scale factor.] Suggest that the students scale by $500.
18. Display Slide 6 and tell the students to plot their two coordinate points as demonstrated in the slide. Make clear that they are plotting their own data, not the typical worker example. Ask the students to connect the two coordinate points using one of the colored pencils.
19. Ask the students if they can tell you the rate of change for the line graph on Slide 6. Explain that the rate of change is the change in the “out/y” divided by the change in the “in/x.” Ask a student if he or she can show the equation used to get the rate of change for our graph. [(55,050-0)/(12-0)= 4,587.50.] Show Slide 7: Calculating Rate of Change.
20. Ask the students to take a couple minutes to discuss with a partner what they think the $4587.50 represents. [The $4,587.50 represents the monthly amount earned or saved if students do not spend any of their income and pay no taxes.] Have the students figure out their rate of change using the annual median wage for the career they have chosen.
21. Explain to the students that they now need to make another In/Out Table, but this time the “IN” has to be numbered from zero to 12 (for each month). Show the example on Slide 8. Distribute a copy of Activity 2 to each student. Ask students to record their monthly income in Column 2. The slide shows the monthly income for the typical worker example.
22. Ask the students if they think that they could keep all the money they earn for the month. [No.] Why not? [We will have to pay our bills. Some students may mention paying taxes.]
23. Explain that they will have to pay expenses, which are payments for goods and services, and taxes, which are compulsory payments to governments by households and businesses. Ask the students what expenses they think they will have when they are older. [Rent, electric, phone, groceries, going out to eat or to the movies, getting nails and hair done, insurance, car payment, gas, etc.] Explain to the students that these dollars spent must come out of their monthly earnings.
24. Explain that they also must include taxes. Explain that there are various rates for different taxes such as federal and state income tax, personal property taxes, and payroll taxes—Social Security and Medicare. This makes calculating these amounts more difficult. Display Slide 9. Tell students that for the sake of this lesson they are going to use these simplified guidelines for the tax brackets. Students use the earnings from the survey to determine the percent they are to take out for taxes. Explain that they can calculate the dollar amount they owe in taxes and subtract it from their income or they can take the percent owed, subtract it from 100, and multiply that by the earnings.
25. Show the example on Slide 10. This slide shows how to calculate the amount of money left (after taxes are paid). Walk students through the calculations using the typical annual median wage.
    • Calculate yearly wage with taxes taken out.
      $55,050 (yearly wage) x 0.75 (take the tax percent and subtract from 100) = $41,287.50 (new yearly wage with taxes out) or $55,050 x .25 (taxes) = $13,762.50 (amount of money taken out from taxes), then $55,050 (yearly wage) – $13,762.5 = $41,287.50 (new yearly wage with taxes taken out).
    • Calculate monthly earnings minus taxes.
      $41,287.50/12 = $3,440.625. Tell students you are going to round to the nearest dollar so for this example you will use $3,441.00
26. Display Slide 9 again. Ask students to identify their tax rate. Display Slide 10 and ask students to use this information and their annual median wage to determine their yearly income after taxes. Explain that their monthly income after taxes is called disposable income. This amount could be spent or saved. For the purposes of this lesson, the goal is to save all of our disposable income if possible.
27. Explain to the students that, in general, people who earn more money tend to spend more money each month. Display Slide 11. Tell students to use this information and subtract these expenses from their monthly earnings after taxes. Display Slide 12 and walk students through the calculations using the median income of a typical worker.
    1. Calculate monthly earnings with $2400 of expenses deducted.
       $34,401.00 – $2,400 = $1,041.00 (monthly saving after expenses and taxes).
    2. Instruct students to fill in their tax rate, monthly income after taxes, and monthly income after taxes and expenses at the bottom of Activity 2.
28. Ask the students to record the amount they have after paying taxes and their expenses in Column 3 of Activity 2 for each month.
29. Point out to students that they have created a simple budget. Tell students a budget is a spending and saving plan, based on estimated income and expenses for an individual or an organization, covering a specific time period.
30. Explain exactly what they should have completed at this point. The students should have the starting point (0).
31. Display Slide 13. In row one, January, they should have their monthly earnings (Column 2) and their income after taxes and expenses that is available to save (Column 3), recorded in their table before starting the game.
32. If you have a 45-minute class period, this is a good stopping point.
33. Explain to the students that no matter how well people plan, sometimes in life they have unexpected expenses or a change in income. They are going to experience some of these unexpected life events through the “Game of Mystfortune.”
34. Show the example on Slide 14. Explain that you spun the wheel and you landed on “going out to dinner three times.” This is an expense of $300.00. Explain that in the game people spin the wheel two times per month. Tell them that on your second spin you had to repair your car. The cost of the car repair was $600.00. Explain to the students that you added the expense of $300.00 for going out and the $600.00 for car repair together. This $900.00 is your total unplanned expenses for the month. Show the students that you subtracted your unplanned expenses from your income, minus taxes and expenses, for the month. This allows saving of $141.00, which would be put into the Monthly Saving column (Column 4) of your “IN/OUT” table.
35. Have students now write down a prediction for how much they will save at the top of Activity 2.
36. Tell students how to solve for month two. Again, remind them that you have spun the wheel twice. On the first spin for month two, the wheel told you that you clipped (i.e., used) coupons and saved $75.00 on your groceries. On the next spin, the wheel read that you used more hours than planned on your cell phone so your bill shows that you owe an additional $45.00.
37. Use Slide 14 and explain the steps for getting your “OUT” (Column 4 in Activity 2).  Step 1: add your income, minus taxes and expenses, in Column 3 and your savings from coupons, then subtract the additional charge on your cell phone bill. $1,041.00 + $75.00-$45.00 = $1,071. Explain that because you made a choice to save money by clipping coupons you gained $30.00. Step 2: add Month 1 and Month 2 together. $141.00 (Month 1) +  $1,071.00 (Month 2) = $1,212.00 (Entry for month two saving).
38. Explain to the students that they will go to http://technology.councilforeconed.org/wheel-of-mystfortune/  where the game is located.  They will spin the wheel and what they land on will determine if they have to add, subtract or do nothing to their monthly earnings.
39. Ask students to go to the interactive and play the “Wheel of Mystfortune.” Explain again that they will be recording each month after two spins of the wheel. Continue to display Slide 14 for students’ reference. Circulate the room and ensure that all students are properly recording their data in the IN/OUT table.
40. After the students are finished putting their data into the IN/OUT chart, refer them to Activity 1 in which they graphed their original yearly wage. Point out that this was the student’s annual income. Because they had not subtracted any expenses or taxes, it also represents their potential accumulated savings for each month.
41. Show Slide 15. This slide shows the results of the game you played using a typical worker’s salary. Show Slide 16. Explain that these are the results from Slide 15 when you graphed your accumulated savings for each month.
42. Tell the students that they are now going to use their “IN/OUT” table and plot all points on the graph. Ask the students to use the other color pencil. Explain that they are plotting the points using values in the table for months (Column 1) and accumulated savings, allowing for the unexpected events from the game (Column 4).
43. Let the students know that their graphs should look similar. If you have a document camera, ask a couple of students to come up and place their graphs under the camera and share their results. If you do not have a document camera, have the students share their results with a small group of students. Discuss the following:
    1. What was similar about your graphs? (Everyone saw an increase in accumulated savings but some had more than others.)
    2. What was different about your graphs? (Some students were able to save more than others and the difference between their predicted savings and their actual saving varied among students depending on what number they landed on in the game.)
44. Point out to students that their accumulated savings in this activity changed based on chance. In the real world, they will face unexpected events. Ask them what they might do to prepare for such events. (Plan to save on a monthly basis and not just save what is left after paying expenses and taxes.) Tell students that some financial planners recommend treating the amount to save like an expense in your budget. This way a specific amount is put into savings every month. This is often referred to as “paying yourself first.”
45. Tell students that they are going to find the Line of Best Fit. Explain that the Line of Best Fit is a line that goes through the most points on a graph. Hand out the strand of uncooked spaghetti to each student. Have the students position the spaghetti so the plotted points are as close to the strand as possible. Show the example on Slide 17.
46. Tell the students to find two points that they think will be on the “best-fit” line. As an example, use the points (5, 8334) and (7, 11711) from the graph on Slide 17.  Ask the students to find the rate of change (slope) for the new graph using the same steps they used before. Display Slide 7 again to guide students in their calculations.
47. Display Slide 18. Explain how you determined the rate of change using the typical worker example. Ask students what this number means. (The average amount you saved each month.)
48. Ask the students to find the average they saved each month by using the rate of change equation.
49. Explain that in real life there are times when two or more unforeseen expenses come up in a month. Tell students of a time an unforeseen expense has come up for you (e.g., car expenses, wedding gifts, taking a sick pet to a vet). Explain that these unforeseen events are why it is important to calculate their monthly expenses and have a savings plan. Point out that it is a good idea to save first (determine a specific amount to save each month) rather than saving what is left over at the end of the month.

1. Display Slide 19. Pose the following questions for review:
   1. How can we define income? [Money received for work performed; may include salary, wages, tips, professional fees, commissions, etc.] Disposable income? [Income minus taxes.] Taxes?  [Compulsory payments to governments by households and businesses.] Saving? [Disposable income (income minus taxes) – consumption.] Savings?[Money that people choose to set aside for future use.] Expenses? [Payment for goods and services.] Budget? [Spending and savings plan, based on estimated income and expenses for an individual or an organization, covering a specific time period.]
   2. How can we find the line of best fit? [We can use a straight edge and draw a line that goes through the most points.]
   3. How can we find the rate of change? [We can take the change in the value of “y,” or our “out,” and divide it by the change in our “x,” or our “in.”]
   4. Why is it important to save? [Saving helps you reach a goal or handle unexpected expenses.]
   5. What are some unforeseen events that might arise for which you should save? [Students answers will vary but might include car repairs, new shoes, and an opportunity to go on a vacation with a friend’s family.]
   6. If Henry earns $35,000 a year and must pay 15% in taxes, how much disposable income (earned income minus taxes) does Henry have?  [$35,000 x .85 = $29,750 or $35,000 x .15 = $5,250 then $35,000 – $5,250 = $29,750]
   7. Given the points (3,474) and (10, 789), what is the rate of change? [(789-474)/(10-3) =  315/7 = 45]
   8. How can you graph and use the line of best fit to help you establish a  plan to save?  [The line of best fit will give you an estimate of your monthly amount to save.]

Multiple Choice:

1. What is income?
   1. The income that people choose to set aside for future use.
   2. The unequal distribution of an economy’s total income among families, individuals or other designated groups.
   3. [Money received for work performed; may include salary, wages, tips, professional fees, commissions, etc.]
   4. Money paid regularly to a person, often by a parent to a child; sometimes paid in compensation for services rendered.
2. Bradley earns $46,750.00 per year and must pay 25% in taxes. How can you calculate his monthly disposable income?
   1. [($46,750 x .75) / 12]
   2. ($46,750 x .25) /12
   3. ($46,750 / 12)
   4. (($46,750 /12) x .25)
3. Given the table below, pick two points and find the rate of change (the monthly saving).

a.  $700

[b.  $350]

c.  $1,400

d.  $200

Constructed Response

1. Roselyn just graduated from college as a financial advisor. Her salary for the year is $58,458 before taxes.
   1. If she must pay 25% in taxes on her salary, what will be her yearly income after tax? [$43,843.50]
   2. How much is her disposable income each month (round to the nearest cent)? [$3,653.63]
   3. Roselyn, like many other young adults, has a college loan to repay. Her monthly payment is $700. Her rent is $900 a month, car insurance $256 a month, and other expenses $800 a month. Using your answer from (b), what is her average saving per month? [$997.63]
   4. After Roselyn’s first month of work, her friends decide to plan a trip to Cancun for Spring Break. The trip is going to cost $900.00. Roselyn asks you if going on this trip is a wise financial decision. What advice would you give Roselyn? [Answers will vary but may include the following: point out that she has enough saved to take the trip and won’t have to borrow any money if she decides to go. However, she will have only $97.63 remaining in her accumulated savings for any unexpected expenses.]