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TIME VALUE OF MONEY

Overview

Learning the concept of the "time value of money" at an early age will help the student make good decisions later regarding saving versus spending money.  A basic understanding of this concept is also necessary to understand future topics involving compound interest, savings and investments.

Subject areas: Math, Social Science (Economics)

Grade range: 4 - 12

Normal duration: Part I 20-30 min. Part II 20-30 min. Review & follow-up 1 week, 2 week and 1 month after initial lesson.

Learning objectives

1. Students will be able to explain the concept of the "time value of money."
2. Students will be able to explain why people may be willing accept a promise of future payment rather than actual payment now.

Materials used

Scrip money to be used for the transactions. Promise Certificates: 1 Year, 1 Week, 2 Week, 1 Month.

Activities - Part I

1. Teacher introduces the basic concept of the "time value of money": $20 in your hand today is worth more than a promise to give you $20 at some time in the future.
2. Teacher demonstrates this concept by explaining to students that they will be asked to choose between:
   1. Receiving $20 right now for sure, or 
   2. Receiving a "1 Year $20 Promise Certificate" that can be cashed in 1 year from now.
3. Teacher explains that most people choose to take the $20 now because: 
   1. If they receive the $20 now, they could choose to do with it what they wanted to do with it.  They might spend it, invest it, or a combination of both.
   2. If they accept the promise to pay $20 in a year, they will have to wait a year before they can make those choices.  If the money isn't available to pay them a year from now, they may have to wait even longer to get the money, or maybe they won't get the money at all.
4. Teacher explains that it is how people feel about making these kind of choices that creates the "time value of money."
5. Each student chooses either the $20 or the "1 Year $20 Promise Certificate" and the teacher hands out what was chosen.

Activities - Part II

1. Teacher explains that many people would be willing to purchase a "$20 Promise Certificate" if they were able to buy it for less than $20.  
2. Teacher explains that the price people may be willing to pay for a "$20 Promise Certificate" depends, in part, upon:
   1. When the certificate can be cashed in (the date it is due).
   2. The confidence the buyer has that the issuer will pay the $20 when it is due.
   3. What other things the buyer could do now with the $20.
3. Teacher offers to sell "$20 Promise Certificates" as follows:
   1. "1 Week $20 Promise Certificates" for $15 each.
   2. "2 Week $20 Promise Certificates" for $10 each.
   3. "1 Month $20 Promise Certificates for $5 each.
4. Students, who chose to receive cash in Part I, may use up to $20 of that cash to purchase certificates.  
5. Students/Teacher exchange certificates and money.
6. Teacher honors certificates when due. 
7. Teacher explains that the reasons students received more money for the certificates than they paid include:
   1. Students were willing to wait to spend their money.
   2. Students had confidence that the issuer would keep the promises made.
   3. Issuer actually did keep the promises made.

Graphing activities

Displaying financial data using graphs is very common in the business world because it helps people understand the information and motivates them to take action when they see the data in a graph form.  To demonstrate graphing, the teacher will direct students to enter their own data on an Excel Spreadsheet.  The teacher will provide a template that includes Investment Performance averages for the entire class after the "1 month $20 Promise Certificates" have been exchanged by the students for cash.  Students will use the graph to compare their individual performance with the class average.

Evaluation

The teacher observes, answers student questions, helps students as needed during activities.  After each section, students are asked to reflect upon and discuss the options they had available, the choices they actually made, and why they made the choices that they did.  For follow-up the teacher will periodically provide exercises and word problems involving the time value of money.  Students research the time value of money on the Internet and Students/Teacher discuss what is found.

Jim Hetherman is a member of the National Council of Teachers of Mathematics. You may send comments about this article to Jim@Burbank.com. Please include the phrase BURBANK TIME VALUE OF MONEY in the subject of your email.

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