Simple v Compound Interest...Which do you prefer?
This lesson incorporates spreadsheets into a hands-on learning experience where students examine the economic concepts of trade-offs and opportunity cost to decide whether savings accounts with simple interest or savings accounts with compound interest provide the best alternative.
1 gallon size Ziploc bag for each group
Dum-dum suckers to represent deposits (any candy will do)
Smarties candies to represent interest (any candy will do)
Define the terms trade-off, opportunity cost, interest, interest rate, simple interest, compound interest.
Review how to change a percent into a decimal i.e.10%= .10, etc.
Explain that students will work in groups to calculate how much interest they will earn on a savings account using an interest rate of 30%. Note: 30% is much higher than a bank would pay, but it will make the differences between simple and compound interest much more obvious.
Divide the class into 6 equal groups: three for compound interest and three for simple interest. Each group should have a copy of either Worksheet #1 or Worksheet #2 and a calculator.
Each group should designate one person to be the banker. This student will be responsible for picking up the deposits (Smarties) and the interest (dum-dums) from the teacher and placing them in the Ziploc bag. Note: Ziploc bags work best because the students can see the candy, or should I say, "money" and "interest".
Begin by having the banker of each group come to the teacher for their first deposit (1 pack of Smarties).
The students should then compute the interest earned for the first cycle and send the banker back for the interest (dumdums).
Instruct the groups with simple interest to remove the dumdums and eat them. The other group leaves their dumdums in the bag.
Complete this process for each deposit cycle. Simple interest groups should consume (eat) their interest at the end of each cycle.
After the groups have completed all six cycles and have recorded their results on their activity sheet,
instruct the students to count the candy left in their bag.
Ask the simple interest groups to explain why they only have 60 items in their bag even though they earned an additional 63 items in interest. They should see they would have 123 candies had they not eaten the interest.
Ask the compound interest groups to explain why they have 166 items in their bag. They should see that they not only have their interest, but that their interest earned interest.
Ask students to identify the opportunity cost of using a simple interest account i.e. the benefits of the compound interest account.
The opportunity cost of a decision allows a reconsideration of whether the alternative chosen was truly the best. Ask the students if they would do things differently now that they know the opportunity cost of the way they used the interest earned.
Lesson Materials to be Attached:
Spreadsheet of Worksheet #1
Spreadsheet of Worksheet #2
Have the students enter the data from their worksheets into a spreadsheet and answer the following questions:
What happens to your ending balance if the interest rate is 10%? 7%? 2%?
How would your opportunity cast change at these interest rates?
Would your decision to save or spend the interest change given these interest rates? Why or why not?
Click here for spreadsheet of Worksheet #1
Click here for spreadsheet of Worksheet #2