Lesson15 whydon'tpeoplesave

Why Don’t People Save?Why Don’t People Save?

Lesson 15

April 10, 2023 Why Don’t People Save? 2

The Risky Behavior MysteryThe Risky Behavior Mystery

• People usually know what is good for them, but they often act as if they don’t know.

• Some people:• Drive too fast.• Fail to take medications.• Go surfing!

• Why would people do things that don’t seem to be in their interest?


Lesson 15 Visual 1Lesson 15 Visual 1Why Don’t People Do What They Should Do?Why Don’t People Do What They Should Do?

QuestionNumber of Yes Responses

How many of you know that smoking is unhealthy?

How many of you know people--even people your age--who smoke?

How many of you know that eating foods that are high in transfats, such as packaged cookies, margarine and peanut butter, isn’t healthy?

How many of you know people who eat foods that are high in transfats?

How many of you know that regular exercise provides many health benefits?

How many of you know people who don’t exercise regularly?


Perhaps the answer lies in identifying Perhaps the answer lies in identifying the costs and benefits.the costs and benefits.

• Costs: All the things that have to be given up when a choice is made.

• Opportunity Cost: The next best alternative (or the value of that alternative) that a person gives up when a choice is made.

• Benefits: Gains or favorable outcomes that make people more satisfied when a choice is made.


An analogyAn analogy

• Saving is like smoking, diet and exercise.


What are the benefits of a eating a What are the benefits of a eating a healthy diet and exercising regularly?healthy diet and exercising regularly?

• Feel better• Look better• Reduce your risk of heart disease• Reduce your risk of cancer• Boost your life expectancy


Do the benefits of diet and exercise Do the benefits of diet and exercise occur now or in the future?occur now or in the future?

• Although people may start to feel better right away, most of the benefits occur in the future.


If people choose a healthful diet and exercise If people choose a healthful diet and exercise

regularly, are they guaranteed these benefits?regularly, are they guaranteed these benefits?

• No. • Some people may still get heart disease or

cancer, no matter what they eat or how well they exercise.

• Also, a person engaged in a diet-and-exercise program could die prematurely from any number of causes other than heart disease or cancer.


What are the costs of choosing a healthful What are the costs of choosing a healthful diet and exercising regularly?diet and exercising regularly?

• Possibilities include:• Giving up food that tastes really good.• Paying dues for membership at a fitness club.• Spending time on exercise that you could

spend in other ways--napping, reading, gardening, watching television, playing video games.


SavingSaving

• Saving is income not spent on consumption or taxes.

• Most people know that starting to save money at an early age and saving regularly are good habits that lead to financial well being.

• Yet many people fail to save early and regularly.

• Why?


What are the benefits of saving? What are the benefits of saving?

• Ability to attain your goals for the future.• A feeling of security and satisfaction.


What are the costs of saving? What are the costs of saving?

• Things you could obtain now if you weren’t saving.


When do the benefits of saving occur? When do the benefits of saving occur?

• In the future.


When do the costs of saving occur? When do the costs of saving occur?

• In the present.


The Costs and Benefits of SavingThe Costs and Benefits of Saving

• The costs of saving are immediate and certain.• People have to give up

things they could buy now.

• The benefits of saving occur in the future and are uncertain.• Events might prevent

people from reaping the benefits of saving.


Opportunity Cost and IncentivesOpportunity Cost and Incentives

• Considering the opportunity cost of spending might change how people analyze the costs and benefits of saving.

• Setting goals is an important factor related to saving.

• Goals act as incentives to save.

• Interest provides another incentive to save.


Opportunity Cost and IncentivesOpportunity Cost and Incentives

• What are some things for which you would like to save?


Setting Savings GoalsSetting Savings Goals

Short-Term Savings Goals

(One year or less)

Medium-Term Savings Goals

(One to five years)

Long-Term Savings Goals (Over five years)


ReviewReview

• What is saving?• How is failing to save like

failing to eat right and exercise?

• What are incentives to save?

• What are short-term, medium-term and long-term saving goals?


Disposable Income and SavingDisposable Income and Saving

• Disposable Income = Consumption + Savings

• Savings = Disposable Income - Consumption


Following Activity OneFollowing Activity One

• Pay Yourself First = Saving before spending on consumer goods and services

• Simple Interest on Savings = annual interest paid on the initial amount saved (the principal)

• Compound Interest = interest paid on both the principal and the interest added to the principal

• jellybeans


Calculating Simple InterestCalculating Simple Interest

• Interest = Principal (amount of initial savings) X Rate ( of interest being paid on savings) X Time (in years)

• Example: Simple Interest at 8% for 3 years• Interest = ($100) X (.08) X (3) = $24


The Rule of 72The Rule of 72

• The Rule of 72 is a simple way to illustrate the magic of compound interest.

• 72 divided by the Rate (of interest being paid on savings) = the number of years it will take for savings to double when interest is allowed to compound.


The Rule of 72The Rule of 72

• The Rule of 72 illustrates how compound interest doubles savings more quickly than simple interest.

• Example: Compound interest at 8% for 9 years

72/8 = 9 years


The Magic of Compounding!The Magic of Compounding!

• http://www.econedlink.org/interactives/interest.html

http://www.econedlink.org/interactives/interest.html

http://www.econedlink.org/interactives/interest.html


ReviewReview

• If you have $50 in savings for one year at an interest rate of 6%, how much interest will you earn at the end of the year?

• $3


ReviewReview

• If you divide 72 by the interest rate paid on savings, the result tells you how many years it will take for your savings to double if you receive compound interest.

• At a compound interest rate of 10%, how many years will it take to double your money?

• 7.2 years

Lesson15 whydon'tpeoplesave

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