Timemaps Theme 3 Student Activity

TimeMAPS™

Theme 3.0 – Money Basics

Student Activity

Who Wants to be a Millionaire? – Student Activity

Name / Who Wants to be a Millionaire – SA0300A3
Prerequisites / Complete Lesson 3.4 – The Time Value of Money
Complete Living Without Compound Interest Student Activity
Complete Living With Compound Interest Student Activity
Estimated Time / ½ - 1 hour
Activity Resources / Converting a Percentage to a Decimal Fraction Handout – PtoDF.pdf
Understanding Graphs and Charts Handout – UGraphs.pdf
Understanding Interest Rates – Interest_Rate.ppt
Objectives / 1. Introduce students to the Equal Annual Deposits formula
2. Clarify and reinforce the importance of time to building Personal Wealth
3. Confirm that becoming a millionaire is a personal choice that virtually anyone can achieve if they have the knowledge and will power

There is absolutely nothing wrong with wanting to become a millionaire. In fact, just about everyone has dreamed about it. Unfortunately, most people really don’t have any idea of what it takes to become a millionaire. If they did, many of them would be millionaires today. Essentially, the only things you need are knowledge and will power.

You must know how long you have to grow your money and the rate of return or interest rate for your investment. You can then calculate how much you should be saving and investing each year in order to become a millionaire. The problem for most people is they delay starting, which means they have less time for their money to grow.

There is significant price associated with delaying. Waiting to start means it will take more of your money or a higher rate of return in order to reach your goal. Depending on your personal situation and the economic environment, you may not be able to contribute more of your money or get a higher rate of return. Figure 1 illustrates how waiting to begin can and will affect you.

Figure 1

The Cost of Waiting to Begin

The first graph shows the more years your money has to grow, the less of your money it will take. The second graph shows the more years your money has to grow, the lower the required rate of return. Finally, the last graph shows the longer you wait to begin, the greater the delay cost will be to you.

The formula shown in Figure 2 can be used to calculate how much money you must save and invest each year in order to accumulate a target amount of money in a specified length of time when you know the rate of return for the investment.

Figure 2

Equal Annual Deposits Formula

It looks complex, but it really isn’t. For example, if you wanted to accumulate a million dollars over the next 20 years and the rate of return for the investment was 10%, you would need to deposit $17,460 in the investment each year for the next 20 years.

$17,460 = 1,000,000 ÷ [ ( 1.1020 – 1 ) ÷ 0.10 ]

The most powerful weapon you have on your side is time. As a young adult, you have an abundance of time to increase your Personal Wealth and Net Worth. To learn how much waiting to start actually costs you, you will calculate the annual deposit necessary to accumulate $1,000,000 in 40 years, 30 years, 20 years and 10 years. The calculations for 30, 20 and 10 years simulate waiting 10, 20 or 30 years to begin saving and investing because waiting to start means you have fewer years to reach your target.

You can assume the money will be deposited each year into an investment having an 8% annual rate of return. Complete Table A using the formula above. The Total Contributions is simply the Annual Deposit times the number of years you will contribute and it represents how much of your money will be needed. The Delay Cost is the total amount you must contribute minus the Total Contributions for 40 years. For example, if you must contribute $100,000 over 40 years or $150,000 over 30 years, your delay cost would be $50,000.

$50,000 = $150,000 - $100,000

Show your calculations in the space provided and record the results in Table A. The Annual Contribution is calculated using the formula shown in Figure 2. The Total Amount you will contribute is the Annual contribution times the number of years.

40 years calculations

30 years calculations

20 years calculations

10 years calculations

Table A

The Cost of Waiting to Begin Saving and Investing

Years / Annual Deposit ($) / Total Contributions ($) / Delay Cost ($)
40 / $0
30
20
10

Use the information in Table A to answer the following questions. If you need more space than is provided, you can use a separate sheet of paper. Remember to include the separate sheet when you turn in this activity.

1. Can you become a millionaire and if so, what must you do in order to accomplish this?

2. Waiting to begin means one or both of two parameters must change if you are still going to accumulate the same amount of money in a reduced amount of time. What are these two parameters and how much can they change in real life?

Page 1 of 3