Wealthy Relations and Net Worth, Part 1
Objective
Students will be able to:
- Distinguish between financial transactions and classify them as income, expenses, assets and liabilities.
- Select when it is appropriate and use the Income Equation: Net Income = Gross income – expenses.
- Select when it is appropriate and use the Accounting equation: Net worth = assets – liabilities.
- Manipulate equations with multiple variables (“solving for an unknown”).
Standard
Standard: 1
- Students will understand that: Most people earn wage and salary income in return for working, and they can also earn income from interest, dividends, rents, entrepreneurship, business profits, or increases in the value of investments. Employee compensation may also include access to employee benefits such as retirement plans and health insurance. Employers generally pay higher wages and salaries to more educated, skilled, and productive workers. The decision to invest in additional education or training can be made by weighing the benefit of increased income-earning and career potential against the opportunity costs in the form of time, effort, and money. Spendable income is lower than gross income due to taxes assessed on income by federal, state, and local governments.
Standard: 3
- Students will understand that: People who have sufficient income can choose to save some of it for future uses such as emergencies or later purchases. Savings decisions depend on individual preferences and circumstances. Funds needed for transactions, bill-paying, or purchases, are commonly held in federally insured checking or savings accounts at financial institutions because these accounts offer easy access to their money and low risk. Interest rates, fees, and other account features vary by type of account and between financial institutions, with higher rates resulting in greater compound interest earned by savers.
Standard: 2
- Students will understand that: A budget is a plan for allocating a person’s spendable income to necessary and desired goods and services. When there is sufficient money in their budget, people may decide to give money to others, save, or invest to achieve future goals. People can often improve their financial wellbeing by making well-informed spending decisions, which includes critical evaluation of price, quality, product information, and method of payment. Individual spending decisions may be influenced by financial constraints, personal preferences, unique needs, peers, and advertising.
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In this math lesson, students will use net income & net worth equations to learn about wealth and equality (math).
Procedure
This lesson is presented by Council for Economic Education in partnership with FiCycle.
Warm-Up
In some cases the terminology and definitions provided in this lesson come from the accounting professions. Economists may define some concepts differently. The use of accounting terminology is intended to aid students’ understanding of their personal financial situation using the language of business.
Introduce the lesson by telling students that they will be exploring why they should think about their financial situation in terms of wealth rather than money. Project slide 1 of the Understanding Wealth PowerPoint. Have a student read aloud the Stingy Steve and Flashy Fiona scenario and then ask the class the following questions:
- Who is in a better financial position – Steve or Fiona?
- Why do you think this is?
- What advice would you give Steve and Fiona?
Most students will say Steve is in the better position as he has more cash.
Project slide 2. Ask another student to read aloud the scenario and then ask the class the same questions. Most students will probably flip their position as more information is introduced, though they may lack the vocabulary to articulate why. If students struggle to understand why Fiona is in a better situation, emphasize each person’s future outlook. Steve has to repay money and does not have a way to earn more, while Fiona is set to gain high income in the future.
Explain to students that there is no direct connection between wealth and cash savings. If you want to know whether someone is in a good position, financially speaking, it is not enough to see how much cash they have.
Modeling
Distribute one copy of the Key Terms worksheet to each student. Use slides 3-10 in the Understanding Wealth PowerPoint to discuss the key terms as the students follow along on the worksheet.
Individual Activity
Distribute one copy of ALIE Activity to each student. Use the ALIE Activity Answer Key as a teacher guide for reference. Tell students that ALIE is just an abbreviation standing for Assets, Liabilities, Income and expenses. Also, give each student four colored cards made from the ALIE Card Template: one “A” (Asset) card, one “L” (Liabilities) card, one “I” (Income) card, and one “E” (Expense) card. Be sure that the cards are each a different color, which will give a striking visual indication of what the class is thinking, and whether there is disagreement. Alternately, distribute index cards and have students make the cards themselves. Have students individually read the instructions and complete the activity sheet.
Group Activity
Once students have completed the ALIE Activity come together again as a class. Ask a student to read the first Situation and tell the entire class how he or she completed the table for that situation. After the student has provided his or her response ask the rest of the class to hold up an “A” or “L” card and a “I” or “E” card based on how they responded. If they think the answer is “none” they can just hold up an empty hand with no card. Make sure all members of the class participate. Repeat this process for each Situation. After each Situation, scan the class to see how students have responded. Provide a running commentary of the various answers you are seeing. Call on students to explain their answer – make sure to call on at least one student corresponding to each different answer. If a significant percentage of the class is getting a concept wrong, review it again.
Assessment
Ask students to come up with situations from their own lives, or give situations that are derivative of those that students struggled with. Have students explain how they would fill out the table for their Situation and ask the class to raise the A/L and I/E cards that they think fit the situation. Ask students to explain their reasoning. Remember that assumptions they make about the situations might make conflicting answers valid. For example, if you buy limited edition sneakers to wear, the sneakers are an expense. If you buy them and never wear them with the intention of selling them (essentially treating them like a work of art) you have acquired an asset.