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Student handout

Measure what savings can buy

Distinguish a nominal account balance from its value in today's dollars.

Class period, optional

Class date

Use only the fictional scenario

Do not enter or write personal income, debts, account balances, policy details, names, or identifying information. This activity does not need a name or FinanceLearn account.

Scenario

A fictional saver holds $5,000 for one year at a 4 percent effective annual return while prices rise by 3 percent.

Open these resources

Tasks and response space

  1. 1. Calculate the statement balance after one year at 4 percent before opening the calculator.

  2. 2. Enter 4 percent return, 3 percent inflation, $5,000, and one year. Record the exact real return and the balance in today's dollars.

  3. 3. Compare the exact real return with the 1 percentage point subtraction shortcut.

  4. 4. Explain in one sentence why $5,200 on the statement does not buy 4 percent more goods when prices also rise.

  5. 5. Raise inflation to 5 percent, keep every other input fixed, and describe the sign of the real return.

Extension

Test a ten-year holding period and explain why the nominal and real dollar balances separate more over time.

All six activities: classroom lessons.

This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.