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TExES Physics/Mathematics 7-12 (243): Practice & Study Guide62 chapters | 688 lessons | 60 flashcard sets

Instructor:
*Tammy Galloway*

Tammy teaches business courses at the post-secondary and secondary level and has a master's of business administration in finance.

In this lesson, we will define financial literacy and show you how we incorporate math in our instruction. You'll also learn how to calculate sales tax, interest on savings and interest on debt.

Tyler is taking his first class as a high school freshman called Money Matters. His teacher Ms. Hicks starts the lecture by asking, 'How many people did well in middle school math?' They all look around the classroom, shrug their shoulders and no one answers her. Then she says, 'Math will be important in this financial literacy course.'

One student raises their hand and says, 'What is financial literacy and why is math important for this class?' Ms. Hicks explains that **financial literacy** is the learning and understanding of how to manage money in the real world. Financial literacy helps you make intelligent and solid financial decisions. You will use math regularly in your everyday life.

For the rest of this lesson, we will explore financial literacy topics in which mathematical processes are utilized. These topics include: taxes, interest on savings and interest on debt.

There are three main types of taxes: payroll, sales and property tax. Each tax is considered a levy against an a dollar amount or item(s) to pay for state, local and federal programs and services.

State and local government receives a large percentage of their revenue from sales and property tax. While the federal government imposes payroll taxes to pay for social programs, the military, national parks, education and much more.

Taxes are simple to calculate since we multiply the tax percentage times a dollar amount to calculate payroll tax. For example, if Jon makes ten dollars per hour and works 40 hours per week, he will not take home $400 ($10 x 40). The federal government may impose an 11% payroll tax rate in which Jon would pay $44 ($400 x 11%), so his take home pay would be $356 ($400 - $44)

Sales and property tax are calculated in the same manner, a mandated percentage multiplied by the cost or market value of an item. These type of mathematical calculations are usually taught in middle and high school. Now, let's look how interest is applied on savings.

Interest can be defined in two ways, to calculate interest on savings, interest is defined as a fee paid to the customer for depositing money. There are two types of methods for calculating interest: simple and compound.

Simple interest is the easiest to calculate since we multiply the interest rate times the amount of the deposit, called the principal. Then, we take that amount and multiply it by the number of years. Let's say we have $100 at ten percent interest in an account for two years:

- $100 x 10% = $10
- $10 x 2 years = $20
- $100 + $20 = $120 total principal and interest

Now, let's see how compounding works. **Compounding** allows for reinvestment of the principal and interest for a specific period of time. We follow step one of the simple interest example, but instead of multiplying it by number of years, we add the interest to the original principal. In this case, we add $10 to $100 to get $110.

In compound interest, we reinvest the $110 at 10%, which will then equal $11. Our total principal and interest at the end of two years is $121.

- $100 x 10% = $10
- $100 + $10 = $110
- $110 x 10% = $11
- $110 + $11 = $121

While it's only an extra dollar, imagine if we kept this $100 in an account for 20 years. Compounding would yield a significantly more amount of money than a simple interest calculation.

Simple versus compound interest calculations are usually taught in middle and high school. Now let's discuss debt and how interest is calculated.

Debt is an obligation we owe, for example a car loan is an example of debt. Let's say we find a $25,000 car and go to the bank for a loan. The bank approves the loan but wants something in return for loaning us the money - interest. In this instance, interest is a fee the bank charges us for borrowing money, and the principal is the amount we borrowed, $25,000.

For most debt loans, a simple interest calculation is used, and interest is calculated monthly on the outstanding balance. If the bank charges us seven percent interest on a 5-year car loan, we must find the monthly interest rate by taking the interest rate divided by 12 months in a year, .07/12 = .0058. Now we use the following formula to find the payment:

P = principal

R = interest rate

N = number of periods

In our example, P = $25,000, R = .0058, N = 60 months (five years x 12 months in a year). If we plug these numbers in our formula, we derive at a $498.65 monthly payment. Multiplying $498.65 x 60 months = $29,919 which is total principal with interest. We can calculate the total interest on this loan by taking total principal with interest - the amount borrowed ($29,919 - $25,000) = $4,919.

The simple interest car loan example is typically calculated in high school classes due to its advanced nature.

**Financial literacy** is the learning and understanding of how to manage money in the real world. You will use math in your everyday life to make solid financial decisions.

There are several financial literacy topics in which mathematical processes are utilized: taxes, interest on savings and interest on debt.

Taxes include payroll, property and sales tax and each require you to multiply a tax percentage times a dollar amount for payroll tax or the cost of market value.

Interest can be defined in two ways: as a fee to deposit money or the cost of borrowing money. When interest is applied to a savings account, it's calculated using a **simple** or **compounded** method. Interest on debt uses the simple method; however, interest is compounded monthly.

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TExES Physics/Mathematics 7-12 (243): Practice & Study Guide62 chapters | 688 lessons | 60 flashcard sets

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