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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.

- 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).
- 62% graduates from public universities had student loans
- 72% graduates from private non-profit universities had student loans
- 92% graduates from private for-profit had student loans compared to 85% of the students in 2004.

- 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

- 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.

- 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.

- 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.

- 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.

- 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.

- 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.

- 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.

- 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?

- 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

- www.kiplinger.com
- www.money.com
- www.cnnfn.com
- www.cnbc.com
- www.daveramsey.com

- 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