# Algebra And Personal FiNANCE - PowerPoint PPT Presentation

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Algebra And Personal FiNANCE. Dr. Amit Dave Cornell Grant Georgia Piedmont Technical College Atlanta, Georgia. Importance of Financial Mathematics Many students have very limited knowledge of personal finance.

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Algebra And Personal FiNANCE

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## Algebra And Personal FiNANCE

Dr. Amit Dave

Cornell Grant

Georgia Piedmont Technical College

Atlanta, Georgia

• Importance of Financial Mathematics

• Many students have very limited knowledge of personal finance.

• They tend to make decision without realizing the impact of their decision on their personal finance.

• Borrowing money for automobile, home, education can be a big burden if not managed properly.

• A survey conducted in 2008 by the US Department of Education reflects continued increases in student debt.

• According to this survey, the average debt of a public university student was about \$17,000 in 2004, and it rose 24% to \$23,200 in 2008.

• According to the US Department of Education, the national two-year federal student loan cohort default rate rose from 9.1 percent for FY 2010 to 10 percent for FY 2011 and three-year cohort default rate rose from 13.4 percent for FY 2009 to 14.7 percent for FY 2010.

• The average entry-level job pays \$46,000 a year, and average college senior graduates with nearly \$23,000 in debt.

• That’s about half of the first year salary and not including other expenses like insurance, rent, utilities, car payments, etc.

• These figures clearly emphasize the importance of financial literacy among students.

• A research study conducted by Sallie May showed nearly 85% undergraduate students expressed their desire to have a college course to teach money management skills.

• Approximately 25% of high schools in the United States teach personal finance.

• Average student debt for a graduating senior in 2008 increased by 24% compared to 2004. The average debt amount for graduate was \$23,200 compared to \$18650 in 2004.

• In 2008, the average debt at a public university was \$20,200 - 20% higher than 2004.

• In 2008, the average debt at a private non-profit university was \$27,650 – 29% higher than 2004.

• In 2008, the average debt at a private for-profit university was \$33,050 – 23% higher than 2004.

• Approximately 40-50% of the graduating kids will have less that \$10,000.00 of net worth during their liftime.

### . Facts and Figures from National Post Secondary Student AID study (NPSAS)

• In 2008, 67% graduating students from a four year college had student debt; which equates to approximately 1.4 million students (27% higher than 2004).

• 92% graduates from private for-profit had student loans compared to 85% of the students in 2004.

### Kelly Walsh’s 10 reasons to teach financial literacy to the students.

• Students do not know enough about personal finance

• They start at a younger age

• There are greater temptations

• They have more debt options

• They have more debt in general

• Student loans are more expensive

• People are going bankrupt

• Students start saving later

• The government would not be able to support them

• Not everyone is given the same chance

### CLASS AND STUDENT INFORMATION

• Many students enrolled in College Algebra class will not take another math class or any business class if it is not required in their major of studies.

• Majority of these students are adult students in their early to mid 20’s.

• They never received any formal training in money management.

• These students need guidance from some source and algebra course can be a wonderful source.

### What is tHE ROLE of ALEGBRA in FINANCIAL MATHEMATICS

• College Algebra class does not include any chapter that covers financial mathematics.

• Instructor must be creative in using algebraic concepts to teach financial mathematics.

• Instructor is expected to be knowledgeable in personal finance.

• Just about all financial mathematics calculations can be performed using algebraic formula.

• The idea is to assist students to use algebraic concepts to solve problems with financial applications, which in turn helps students to make best financial decisions.

• The real world applications when incorporated with technology can be great motivator for students.

• Students are exposed to formulas to determine monthly car payment, saving, investment, and retirement planning.

• Students also work with examples on mortgage, and debt.

### Specific TOPICS COVERED

• Difference between simple interest and compound interest.

• Explain the difference between regular IRA (401K) and Roth IRA.

• Home loan calculations.

• Automobile loan and interest calculations.

• Resources for information on financial planning.

### Difference between SIMPLE and Compound Interest

• Students do not know the difference between simple and compound interest.

• The difference is explained with real world example.

• Explain the magic of compounding.

• Explain the difference between APR and APY.

• Introduce them to continuous compounding.

### Retirement planning

• Majority of the students do not know the difference between regular IRA(401K) and Roth IRA.

• The project involves creating a nest egg with regular IRA and Roth IRA. For this purpose the concept of exponent is used in the classroom.

• Each student is assigned a fixed amount (500.00) for investment per year for 25 years at 8% interest rate.

• Students are required to use the formula

FV = Future Value

PMT = Payment

i = Interest rate

• The future value of the \$500.00 invested each year = \$36,552.97.

• Interest earned = \$36,552.97 - \$12,500.00 = \$24052.97.

• Many students do not have any idea that a small amount invested each year after year could result in such a large amount.

• On top of this, the entire amount is tax free since the Roth IRA is after tax investment.

• Same calculation is performed for regular IRA (401K); however since the regular IRA (401K) is based on pre-tax dollars, the entire amount (\$36,552.97) is taxable. The tax rate depends on the income of the individual.

• Students are asked to stop investing \$500.00 per year after 25 years and invest \$36,552.97 for another 10 years at 6% interest compounded annually.

• Compound interest formula is used to calculate the future value.

FV = \$65,460.80

• An investment of \$12,500 grew to \$65,460.80 in 35 years.

• These examples helped students understand the magic of compounding while working with algebraic concepts.

### Personal Savings Example

• Students are asked to estimate the amount they need to save today so they can withdraw a fixed amount every month, six months, or year.

• The formula for Present Value of the Annuity is used to perform this calculations.

• The same formula is used to perform calculations for “n”, and i, where students are required to use logarithms.

### Mortgage CALCUlations

• The examples are based on first time home buyers.

• Calculations of monthly payments are based on the affordable home price for first time home buyer.

• Example: Calculate the monthly payment for a \$90,000 home. Loan is for30 year fixed rate at 5% annual interest with 20% down payment.

• The formula listed below is used:

• M = Monthly payment

• R = Interest rate

• N = Number of years

• Students are asked to try the calculations for different loan amount at different interest rate.

• Students are also asked to calculate the amount of interest paid to the lender.

### PRESENT VALUE :

• CJ and Heather decided to establish a savings account at the SPC credit union for Taylor, their newborn baby girl, that would provide her with \$48,000 college expenses at the age of 18 . The manager of the credit union advised them that they can deposit a certain amount at 10% compounded semiannually to reach their goal. How much money would they need to deposit in her savings account?

### SOLUTION :

• P = unknown amount to be deposited

• A = \$48,000, I = 10%/2 = 0.05 , n = 2 x 18 = 36

• Therefore, P = A(1 + i)^(-n)

= \$48,000(1.05)^(-36)

= \$48,000(.172657415)

= \$8,287.56

### Resources for financial Planning

• www.kiplinger.com

• www.money.com

• www.cnnfn.com

• www.cnbc.com

• www.daveramsey.com

### References

• Azimova, M. (2010). Student Debt and Financial Literacy, Business Today online Journal, Retrieved on March 27, 2013

• Quick Facts about Student Dept (2010), http://projectonstudentdebt.org/files/File/Debt_Facts_and_Sources.pdf. Retrieved on March 26, 2013

• Walsh, K. (2011). 10 Reasons Why Schools Should Be Teaching Financial Literacy To Our Kids,http://www.emergingedtech.com/2011/04/10-reasons-why-schools-should-be-teaching-financial-literacy-to-our-kids. Retrieved on March 28, 2013

• Default Rates Continue to Rise for Federal Student Loans (September 30, 2013)

• http://www.ed.gov/news/press-releases/default-rates-continue-rise-federal-student-loan.Retrieved on October 3, 2013