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## Algebra And Personal FiNANCE

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**Algebra And Personal FiNANCE**Dr. Amit Dave Cornell Grant Georgia Piedmont Technical College Atlanta, Georgia**Importance of Financial Mathematics**• Many students have very limited knowledge of personal finance. • They tend to make decision without realizing the impact of their decision on their personal finance. • Borrowing money for automobile, home, education can be a big burden if not managed properly.**A survey conducted in 2008 by the US Department of Education**reflects continued increases in student debt. • According to this survey, the average debt of a public university student was about $17,000 in 2004, and it rose 24% to $23,200 in 2008. • According to the US Department of Education, the national two-year federal student loan cohort default rate rose from 9.1 percent for FY 2010 to 10 percent for FY 2011 and three-year cohort default rate rose from 13.4 percent for FY 2009 to 14.7 percent for FY 2010.**The average entry-level job pays $46,000 a year, and average**college senior graduates with nearly $23,000 in debt. • That’s about half of the first year salary and not including other expenses like insurance, rent, utilities, car payments, etc. • These figures clearly emphasize the importance of financial literacy among students.**A research study conducted by Sallie May showed nearly 85%**undergraduate students expressed their desire to have a college course to teach money management skills. • Approximately 25% of high schools in the United States teach personal finance. • Average student debt for a graduating senior in 2008 increased by 24% compared to 2004. The average debt amount for graduate was $23,200 compared to $18650 in 2004.**In 2008, the average debt at a public university was $20,200**- 20% higher than 2004. • In 2008, the average debt at a private non-profit university was $27,650 – 29% higher than 2004. • In 2008, the average debt at a private for-profit university was $33,050 – 23% higher than 2004. • Approximately 40-50% of the graduating kids will have less that $10,000.00 of net worth during their liftime.**. Facts and Figures from National Post Secondary Student AID**study (NPSAS) • In 2008, 67% graduating students from a four year college had student debt; which equates to approximately 1.4 million students (27% higher than 2004). • 62% graduates from public universities had student loans • 72% graduates from private non-profit universities had student loans • 92% graduates from private for-profit had student loans compared to 85% of the students in 2004.**Kelly Walsh’s 10 reasons to teach financial literacy to**the students. • Students do not know enough about personal finance • They start at a younger age • There are greater temptations • They have more debt options • They have more debt in general • Student loans are more expensive • People are going bankrupt • Students start saving later • The government would not be able to support them • Not everyone is given the same chance**CLASS AND STUDENT INFORMATION**• Many students enrolled in College Algebra class will not take another math class or any business class if it is not required in their major of studies. • Majority of these students are adult students in their early to mid 20’s. • They never received any formal training in money management. • These students need guidance from some source and algebra course can be a wonderful source.**What is tHE ROLE of ALEGBRA in FINANCIAL MATHEMATICS**• College Algebra class does not include any chapter that covers financial mathematics. • Instructor must be creative in using algebraic concepts to teach financial mathematics. • Instructor is expected to be knowledgeable in personal finance. • Just about all financial mathematics calculations can be performed using algebraic formula. • The idea is to assist students to use algebraic concepts to solve problems with financial applications, which in turn helps students to make best financial decisions.**The real world applications when incorporated with**technology can be great motivator for students. • Students are exposed to formulas to determine monthly car payment, saving, investment, and retirement planning. • Students also work with examples on mortgage, and debt.**Specific TOPICS COVERED**• Difference between simple interest and compound interest. • Explain the difference between regular IRA (401K) and Roth IRA. • Home loan calculations. • Automobile loan and interest calculations. • Resources for information on financial planning.**Difference between SIMPLE and Compound Interest**• Students do not know the difference between simple and compound interest. • The difference is explained with real world example. • Explain the magic of compounding. • Explain the difference between APR and APY. • Introduce them to continuous compounding.**Retirement planning**• Majority of the students do not know the difference between regular IRA(401K) and Roth IRA. • The project involves creating a nest egg with regular IRA and Roth IRA. For this purpose the concept of exponent is used in the classroom. • Each student is assigned a fixed amount (500.00) for investment per year for 25 years at 8% interest rate.**Students are required to use the formula**FV = Future Value PMT = Payment i = Interest rate**The future value of the $500.00 invested each year =**$36,552.97. • Interest earned = $36,552.97 - $12,500.00 = $24052.97. • Many students do not have any idea that a small amount invested each year after year could result in such a large amount. • On top of this, the entire amount is tax free since the Roth IRA is after tax investment.**Same calculation is performed for regular IRA (401K);**however since the regular IRA (401K) is based on pre-tax dollars, the entire amount ($36,552.97) is taxable. The tax rate depends on the income of the individual.**Students are asked to stop investing $500.00 per year after**25 years and invest $36,552.97 for another 10 years at 6% interest compounded annually. • Compound interest formula is used to calculate the future value. FV = $65,460.80**An investment of $12,500 grew to $65,460.80 in 35 years.**• These examples helped students understand the magic of compounding while working with algebraic concepts.**Personal Savings Example**• Students are asked to estimate the amount they need to save today so they can withdraw a fixed amount every month, six months, or year. • The formula for Present Value of the Annuity is used to perform this calculations.**The same formula is used to perform calculations for**“n”, and i, where students are required to use logarithms.**Mortgage CALCUlations**• The examples are based on first time home buyers. • Calculations of monthly payments are based on the affordable home price for first time home buyer. • Example: Calculate the monthly payment for a $90,000 home. Loan is for30 year fixed rate at 5% annual interest with 20% down payment.**The formula listed below is used:**• M = Monthly payment • R = Interest rate • N = Number of years • Students are asked to try the calculations for different loan amount at different interest rate. • Students are also asked to calculate the amount of interest paid to the lender.**PRESENT VALUE :**• CJ and Heather decided to establish a savings account at the SPC credit union for Taylor, their newborn baby girl, that would provide her with $48,000 college expenses at the age of 18 . The manager of the credit union advised them that they can deposit a certain amount at 10% compounded semiannually to reach their goal. How much money would they need to deposit in her savings account?**SOLUTION :**• P = unknown amount to be deposited • A = $48,000, I = 10%/2 = 0.05 , n = 2 x 18 = 36 • Therefore, P = A(1 + i)^(-n) = $48,000(1.05)^(-36) = $48,000(.172657415) = $8,287.56**Resources for financial Planning**• www.kiplinger.com • www.money.com • www.cnnfn.com • www.cnbc.com • www.daveramsey.com**References**• Azimova, M. (2010). Student Debt and Financial Literacy, Business Today online Journal, Retrieved on March 27, 2013 • Quick Facts about Student Dept (2010), http://projectonstudentdebt.org/files/File/Debt_Facts_and_Sources.pdf. Retrieved on March 26, 2013 • Walsh, K. (2011). 10 Reasons Why Schools Should Be Teaching Financial Literacy To Our Kids,http://www.emergingedtech.com/2011/04/10-reasons-why-schools-should-be-teaching-financial-literacy-to-our-kids. Retrieved on March 28, 2013 • Default Rates Continue to Rise for Federal Student Loans (September 30, 2013) • http://www.ed.gov/news/press-releases/default-rates-continue-rise-federal-student-loan.Retrieved on October 3, 2013