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Understanding the Importance of Saving: Disposable Income and Interest Concepts

In Lesson 1, we explore the critical reasons for saving and how disposable income is defined as the sum of consumption and saving. We learn that saving can be calculated as disposable income minus consumption. Through examples, we calculate simple interest, illustrating how $100 saved at an 8% interest rate grows over time. Furthermore, we introduce the Rule of 72, a simple method to determine the time required for an investment to double, demonstrating the power of compound interest with practical examples.

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Understanding the Importance of Saving: Disposable Income and Interest Concepts

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Presentation Transcript

  1. Lesson 1 Why Save?

  2. Slide 1.1 Lesson 1 – Why Save? Disposable Income and Saving Disposable income = consumption + saving Saving = disposable income − consumption

  3. Slide 1.2 Lesson 1 – Why Save? Interest Earned on an Initial $100 Saved at 8% Interest Rate

  4. Slide 1.3 Lesson 1 – Why Save? Calculating Simple Interest Interest = Principal (amount of initial saving) x Rate (of interest being paid on savings) x Time (in years) Example: Simple Interest at 8% for 3 years Interest = ($100) x (0.08) x (3) = $24

  5. Slide 1.4 Lesson 1 – Why Save? The Rule of 72 • The Rule of 72 is a simple way to illustrate the magic of compound interest. • Rule of 72 • 72 divided by the rate of interest = the number of years it will take for a saved amount to double when interest is allowed to compound • The Rule of 72 illustrates how quickly compound interest can make saved amounts grow. • Example: Compound Interest at 8% for 9 years • 72 divided by 8 = nine years • At the end of nine years, the initial saved amount of $100 has increased to $200 – double the initial amount.

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