# Financial Literacy: How to Calculate Interest

\$1.95

With this lesson, students will learn how to calculate simple interest. This is a foundational skill that is essential for understanding personal finance and making sound financial decisions in the real world. We’ll walk through some examples so that students can see how this concept applies in everyday life.

Included with this lesson are some adjustments or additions that you can make if you’d like, found in the “Options for Lesson” section of the Classroom Procedure page. One of the optional additions to this lesson is to invite someone who works at a bank to speak to your class about home, car, vacation, and college loans.

# What our Financial Literacy: How to Calculate Interest lesson plan includes

Lesson Objectives and Overview: Financial Literacy: How to Calculate Interest teaches students about simple interest. At the end of the lesson, students will be able to calculate simple interest rates, have a basic understanding of interest rates, and will be able to relate understanding interest rates to real-world applications. This lesson is for students in 5th grade and 6th grade.

### Classroom Procedure

Every lesson plan provides you with a classroom procedure page that outlines a step-by-step guide to follow. You do not have to follow the guide exactly. The guide helps you organize the lesson and details when to hand out worksheets. It also lists information in the blue box that you might find useful. You will find the lesson objectives, state standards, and number of class sessions the lesson should take to complete in this area. In addition, it describes the supplies you will need as well as what and how you need to prepare beforehand. The supplies you will need for this lesson are calculators and Internet access.

### Teacher Notes

The teacher notes page includes a paragraph with additional guidelines and things to think about as you begin to plan your lesson. This page also includes lines that you can use to add your own notes as you’re preparing for this lesson.

## FINANCIAL LITERACY: HOW TO CALCULATE INTEREST LESSON PLAN CONTENT PAGES

### Interest Rates

The Financial Literacy: How to Calculate Interest lesson plan includes three pages of content. The lesson begins by explaining that people borrow money for cars, mortgages, vacations, college, starting businesses, and more. If you want to buy something but can’t pay full price immediately, you might be able to borrow money to purchase it. For example, if you want to buy a \$700 phone but only have \$200, you might ask your bank for a \$500 loan. They might agree but might also charge you 10% interest on the loan.

#### Interest

Interest is the amount of money you either earn or pay. When you borrow money, you might have to pay interest. If you save money, you can earn interest.

#### Principal

The principal is the amount of money borrowed or saved. In this example, the \$500 you borrow from the bank for the phone is the principal.

#### Rate

The rate is the percentage that a company or bank charges you for borrowing money or pays you for keeping your money in their bank.

If you want to calculate the simple interest on a loan, you can use the following formula: Interest = Principal x Rate x Time (years).

If you decide to pay the bank back within a year, you can use the formula to determine what you will owe: Interest = \$500 x 0.10 x 1. Interest = \$50. This means that after a year, you will have to pay the bank the full amount that you borrowed (\$500) plus interest (\$50). The full amount that you will owe is \$550. If you borrow the money for two years, the formula would be: Interest = \$500 x 0.10 x 2 = \$100. After two years, you will have to pay the bank the amount borrowed plus interest (\$500 + \$100). The full amount that you will owe is \$600.

It’s important to understand that interest can be a good thing for you, too. If you save \$200 and put it into a savings account at 15% interest for a year, we can use the same formula to see how much money the bank will pay you in interest: Interest = \$200 x 0.15 x 1. Interest = \$30. After a year, you would have \$230 total (\$200 principal plus \$30 in interest).

What if you kept it in that account for five years instead of one? Interest = \$200 x 0.15 x 5. Interest = \$150. After five years, you’ll have \$350 (\$200 + \$150).

A good way to calculate interest is by using the rule of 72, which is when you take the number 72 and divide it by the interest rate. This gives you the approximate number of years that it would take to double your money. If you invest money at an 8% rate of return, it would take roughly nine years to double that money, according to the formula: 72 / 8 = 9.

## FINANCIAL LITERACY: HOW TO CALCULATE INTEREST LESSON PLAN WORKSHEETS

The Financial Literacy: How to Calculate Interest lesson plan includes three worksheets: an activity worksheet, a practice worksheet, and a homework assignment. You can refer to the guide on the classroom procedure page to determine when to hand out each worksheet.

### CAR PURCHASE ACTIVITY WORKSHEET

The activity worksheet asks students to find a car online that costs under \$15,000. They will describe the car, write down the price, calculate the interest they would have to pay on the car, calculate the total cost of the loan, and more. They will do this for two interest rates. 4% if they have good credit, and 13% if they have bad credit.

### CALCULATE INTEREST PRACTICE WORKSHEET

For the practice worksheet, students will calculate the interest on four items.

### FINANCIAL LITERACY: HOW TO CALCULATE INTEREST HOMEWORK ASSIGNMENT

The homework assignment asks students to answer various questions about loans, interest rates, and more. They will also contact their local financial institution and ask them questions about loans, credit, and savings accounts.