Savings and investments – part 2

Learning outcomes

The main learning outcomes for this lesson are:

To understand the sort of interest they will get on a savings account e.g. simple or compound.

To gain an understanding of how their money will grow.

Starter

What is interest?

Interest

Interest can be very confusing but it is quite simple when you know about it. If you are borrowing money from a bank you have to pay interest. This is a way for the bank to make their money because you have to pay more for the money you borrowed. Also, as a customer, you can earn extra money on your savings as the bank will pay you a small amount of interest. This interest will depend on the banks’ interest rate for a savings account.

Different types of interest

Simple interestThis is where the bank pays money to a customer as a percentage of their original balance. For example if you deposited £200 in your saving account and the banks’ interest rate is 10%, you would receive £20 a the end of the year to add to your original deposit. This would leave you with a balance of £220 at the end of the year. This depends on you not withdrawing any money.

Interest RatesInterest rates will depend on the bank you chose to go with for your savings account. The higher the interest rate percentage the more money you will receive in interest. So when you are shopping around for the best savings account you must look for the ones with the highest interest rate percentage.

Different types of interest

Compound interestCompound interest is the money given to people who have a savings account where the bank pays interest on their original balance and on the interest earned. For example, if you deposited £1,000 into your savings account, after the first year you would receive simple interest of £100 pounds if the interest rate is 10%. This would give you a starting balance of £1,100 at the start of year 2. At the end of year 2 compound interest would be given. You would still get your simple interest rate of £100 but you will also get compound interest of £10. This would give you a grand total at the end of year 2 of £1,210. The compound interest is £10 because you are getting interest on the simple interest from the previous year. This is £100 so 10% of £100 is £10.

Activity

You now need to fill in the table below. You must work out how much interest Amy will get in years

3,4 and 5.Year Amy’s starting balance

Simple interest earned on original balance

Amy’s new balance with 10% simple interest

Interest earned on simple interest money

Amy’s new balance with 10% compound interest

Year 1 £1,000 £100 £1,100 £0 £1,100

Year 2 £1,100 £100 £1,200 £10 £1,210

Year 3

Year 4

Year 5

AnswersYear Amy’s starting

balanceSimple interest earned on original balance

Amy’s new Balance with 10% simple interest

Interest earned on simple interest money

Amy’s new balance with 10% compound interest

Year 1 £1000 £100 £1100 £0 £1100

Year 2 £1100 £100 £1200 £10 £1210

Year 3 £1210 £100 £1310 £21 £1331

Year 4 £1331 £100 £1431 £33.10 £1464.10

Year 5 £1464.10 £100 £1564.10 £46.41 £1610.51

Activity

You now must do the Interest activity worksheet on your own.

You have 10 minutes!

Video on savings accounts

https://www.youtube.com/watch?v=vKgQ4pKVkGo