F1.5 Explain how interest rates can impact savings, investments, and the cost of borrowing to pay for goods and services over time.
Skill: Explaining the Impact of Interest Rates on Investing and Borrowing
The term interest can be associated with debt or investment. Investment is a strategy to make money grow.
When a person invests money (home purchase, retirement savings plan, education savings plan), the goal is a large return. Students will analyze and discover the effect of interest rates on the total amount of an investment by comparing different interest rates. In addition, they will relate the length of the investment to the total return on the investment using scenarios with different interest rates. Students will learn about and analyze the fluctuation of interest rates in Canada and discuss the effect of this fluctuation on the economic and budgetary situation of families from different socio-economic backgrounds.
In order to learn more about investing, students will learn about situations when interest will be present. Students will research the different investment options and the reasons for borrowing money.
A person can start investing for retirement as early as age 18 in an RRSP or can wait until age 30 to start, depending on their personal and financial situation. Students will compare the total amount borrowed, including principal and interest accumulated over time, and relate the length of the loan and interest rates to the total amount borrowed. Similarly, students will be expected to make this same connection between the amount invested, the total amount in an investment account, and for several investment scenarios.
Interest can work to the advantage of the investor. A person who decides to invest a sum of money at a young age will have a better return on their investment because it will accumulate interest over many years. For example, if a person decides to put $200, twice a month, into an investment account earning 3% interest for 30 years, the total amount after 30 years would be $252 519. However, if a second person decides to invest $400, twice a month, for 15 years at the same interest, the total amount in the bank account would be $196 709. This is an example of the importance of compounding over time. Smaller sums of money invested over a long time period are better than a large sum of money invested over a short period of time.
The following is a list of questions that could be asked of intermediate students to help them learn more about investing.
- What are the benefits of investing at a young age?
- Why should a parent start investing in a Registered Education Savings Plan for their children, if economic conditions permit?
- Why is high-risk investing not recommended for someone approaching retirement?
- How much money do you think a person needs to have in order to start investing?
Knowledge: Investment
An investment is a monetary asset purchased with the expectation that it will produce income or will be sold at a higher price for a profit in the future. Investments can include stocks, bonds, interest-bearing accounts, and real estate.
Source : The Ontario Curriculum, Mathematics, Grades 1-8, Ontario Ministry of Education, 2020.
An investment can have short, medium and long term goals. In Ontario, there are several investment accounts available. The most popular investment accounts are:
- Tax-Free Savings Account (TFSA)
- Registered Retirement Savings Plan (RRSP)
- Registered Education Savings Plan (RESP)
More recently, cryptocurrency investment accounts have started to become increasingly popular.
Investment accounts are available for the entire population and can be opened with bank accounts or even online brokers, thanks to different applications.
Knowledge: Borrowing
Borrowing money can be scary for many people. Some people borrow money for renovations, projects, starting businesses, or buying a property or car. Each time a person borrows money, he or she and the lender set up a due date, interest rate and payment dates. It is possible to borrow money from a bank or from a lender.
It is important to note that borrowing is not only for large expenses. Some people use credit cards to take advantage of different incentives to make all their purchases. A credit card represents a loan by a person to the credit card company.
Despite the fact that credit cards are very present and used by the Canadian population, it is important to note that debt can be dangerous to financial stability. It is important to be aware of the risks of debt in a household and to make sure to budget in order to limit interest rates.
It is important to note that creditors have certain rules and several factors may limit access to credit for some individuals and families, causing a disparity in socioeconomic differences.
Knowledge: Types of Loans
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Cash Advance |
Borrowing money from a credit card. This can be a very expensive way to borrow money. It is recommended that the balance be paid off as soon as possible, as interest is accrued from the date of borrowing to the date of repayment. |
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Line of Credit |
Borrowing from a line of credit is an efficient and flexible way to get money for expenses for which a consumer has no savings. The interest on this type of loan is lower than the fees on a credit card. |
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Mortgage Loan |
Credit granted to a person or company for the purchase of real estate. The loan may be renewed at a negotiated interest rate set out in the contract and paid according to a defined amortization. The interest associated with a mortgage can be fixed or variable. |
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Commercial Loan |
A loan granted to a business for purchases or for starting a business. The interest on this type of loan is lower than the fees on a credit card. |
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Car Loan |
Credit granted to an individual or company for the purchase of a vehicle. The loan will be established at a negotiated interest rate based on a predefined contract and paid according to a defined amortization. |
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Student Loan |
Credit granted to a person for education and obtaining a certificate or degree. The loan must only be repaid at the end of the studies or according to the terms of the contract. |
Knowledge: Interest Rates
Interest rates represent the price or fee associated with borrowing money. For example, when a person invests money in the stock market, the companies in the stock market may pay interest, in the form of a dividend to the investor. Similarly, when a person buys a property and borrows money from the bank in the form of a mortgage, that person will have to pay a fee, or interest.
Interest rates fluctuate from day to day, week to week. This fluctuation can affect the total amount to be repaid to the bank. When the interest rate is high, the payments will be higher and therefore the total amount will be higher.
However, interest can work in the consumer's favour. If, for example, a person decides to invest a sum of money at a young age, this sum will quickly grow thanks to the interest.