You’ve probably heard the saying, “Time is money,” but what does that really mean? Let’s explore this idea with the help of Sheila, who just received her first big bonus. Sheila has been dreaming of buying a convertible car, but she doesn’t have enough money right now. Instead of buying the car immediately, Sheila decides to deposit her bonus in the bank for a year to earn interest. This way, she hopes to have enough money to buy the car later.
Sheila understands that the money she deposits today is called the present value. After a year, the money will grow because of the interest, and this new amount is called the future value. The interest rate is what connects the present value to the future value, and this concept is known as the time value of money.
By calculating the future value, Sheila finds out that in a year, her money will grow to $11,000. After waiting patiently for a year, Sheila finally has enough to buy her dream car. She has successfully used the time value of money to her advantage!
Now, let’s meet Timmy, who also received a bonus. Timmy is eager to buy a fancy car, but like Sheila, he doesn’t have enough money right now. Inspired by Sheila’s strategy, Timmy decides to deposit his money and wait for it to grow. After the first year, Timmy’s money also grows to $11,000, but it’s still not enough for the car he wants.
Timmy decides to leave his money in the bank for another year. By doing some calculations, he learns that the future value of his money after two years is determined by multiplying the present value by one plus the interest rate, squared. Unfortunately, even after two years, Timmy still can’t afford the car.
Timmy wonders how long he will have to wait. By calculating the future value over several years, he discovers that after five years, he’ll have $16,105.10. However, even after ten years, it’s still not enough. Finally, Timmy realizes that it will take 26 years for his money to grow enough to buy the car he wants.
While Timmy waits, he might consider asking Sheila for a ride or exploring other transportation options like a bicycle or public transit. The lesson here is that understanding the time value of money can help you make smart financial decisions. By being patient and letting your money grow, you can achieve your financial goals over time.
Imagine you have $1,000 to deposit in a bank account. Use an online calculator or a spreadsheet to calculate the future value of your money after 1, 5, and 10 years with an interest rate of 5%. Share your findings with the class and discuss how the interest rate affects the future value.
In groups, create a role-playing scenario where you make financial decisions like Sheila and Timmy. Decide whether to spend or save your money, and calculate the future value of your savings over time. Present your scenario and decisions to the class, explaining the outcomes of your choices.
Create a storyboard illustrating the journey of Sheila and Timmy as they learn about the time value of money. Use drawings or digital tools to depict key moments, such as depositing money, calculating future value, and reaching financial goals. Share your storyboard with the class and explain the concepts depicted.
Conduct an experiment to see how different interest rates affect the growth of money. Use a simple formula to calculate the future value of $500 at interest rates of 3%, 5%, and 7% over 5 years. Present your results in a chart and discuss how interest rates impact financial decisions.
Create a vision board of your financial goals, such as buying a car or saving for college. Include images and captions that represent your goals and the steps you’ll take to achieve them using the time value of money. Present your vision board to the class and explain how patience and smart financial planning can help you reach your goals.
Here’s a sanitized version of the transcript:
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They say, “Time is money,” but what does one really have to do with the other? Meet Sheila! She just received her first big bonus and knows exactly what she wants to do with that money. She’s had her eye on a nice convertible for a while now. However, it looks like Sheila is a little short on funds. But wait! She has an idea. Sheila is resourceful and understands that if she deposits the money for a year instead of buying the car today, she will earn interest. This way, she’ll be able to afford the car.
Sheila knows that the value of her deposit one year from now will equal the money deposited today plus the interest earned. We refer to the money deposited today as the present value of money, while the value of Sheila’s deposit next year is the future value of money. The connection between the two is the interest rate, also known as the time value of money.
With a little bit of rearranging, we can calculate the future value of Sheila’s money. So, in a year, the future value will be $11,000. Well, it’s been a year! And there’s Sheila, with enough money to buy the car. Sheila really understands the future value of money!
Now, meet Timmy. He’s also received a bonus, and the money seems to be burning a hole in his pocket. Timmy, that’s a nice car that will surely impress people. However, it looks like you’re a little short as well. Maybe you can follow Sheila’s example. Just like Sheila, after the first year, you’ll have $11,000. But Timmy, that is still not enough to buy that fancy car.
Why not leave the money deposited for another year? Let’s see how your deposit will grow in two years. With a little bit of rearranging, we can express the value of your money next year as the present value times one plus the interest rate. We can even simplify this further by squaring the value of one plus the interest rate.
Sorry, Timmy, you’ll have more money after two years, but you still can’t afford the car! I don’t know how many more years you’ll have to wait, but we can figure it out. The number in the equation represents the number of years you are waiting, also known as the period.
Sure, Timmy, let’s see how much you’ll have in five years. After five years, you’ll have $16,105.10. Sorry, Timmy, you’ll need to wait a little longer. What about ten years? Not quite enough yet.
Well, Timmy, it looks like you’ll need 26 years to afford this car. You might want to ask Sheila for a ride to the beach. Perhaps a bicycle would suit you better? I hear public transportation is quite affordable!
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This version maintains the original message while removing informal language and ensuring clarity.
Time – The duration in which events occur, often used in finance to determine the period over which money is invested or borrowed. – To calculate the interest earned on a savings account, you need to know the time the money is deposited.
Money – A medium of exchange used to facilitate transactions, often represented in currency like dollars or euros. – Saving money regularly can help you achieve your financial goals in the future.
Present – The current point in time, often used in finance to refer to the current value of money or investments. – The present value of an investment tells you how much it is worth today.
Value – The worth of an asset or investment, often determined by market conditions or intrinsic factors. – The value of stocks can fluctuate based on economic news and company performance.
Future – A time period that is yet to come, often used in finance to project the growth of investments or savings. – Planning for the future is important to ensure financial security in retirement.
Interest – The cost of borrowing money or the return earned on an investment, usually expressed as a percentage. – The bank offers a 3% interest rate on savings accounts.
Rate – The percentage at which interest is charged or paid, often used to calculate the growth of investments or loans. – A higher interest rate can lead to more earnings on your savings over time.
Calculate – To determine a numerical value using mathematical processes, often used in finance to assess costs, returns, or risks. – You can calculate the total amount of interest earned using the formula for compound interest.
Patience – The ability to wait for a desired outcome, often important in finance when investing for long-term growth. – Patience is key when investing in the stock market, as it can take time for investments to grow.
Grow – To increase in size or value, often used in finance to describe the increase in value of investments over time. – With regular contributions and compound interest, your savings can grow significantly over the years.
