The American Dream

 Essential Question: “How do taxes and inflation affect my money?”

Investigate: What’s It Worth?

[Time Required: 20 minutes]

1. Begin by thinking about the following figures $100, $500 and $1,000. Consider what each amount of money means to you. Is it enough to buy a video game console or new cell phone? Do you view it as a large or small amount of money? Why?
2. Next, introduce the concept of inflation and brainstorm what you know about the term. Think about the context in which you have heard the word before. What does inflation apply to, and how would you define it?
3. Understand that inflation is the overall increase in prices of goods and services over time. For example, if one store increases prices for video games, but another store offers a lower price, this is not inflation. However, if all stores that carry video games increase their prices, this is considered a general increase in average prices and can be classified as inflation.
4. Next, download the activity sheet Time Travel, Inflation Style and allow 10 minutes to complete the exercise.
5. What did you learn from this exercise? Why did the numbers in your tables increase and what does this mean? Understand that the value of a dollar is not static; it changes over time. For example, in 1950 a loaf of bread might have cost 15 cents, and now it may cost about $2.50. If you had $500 in 1950 and you have $500 now, your purchasing power with the same amount of money has dramatically decreased due to inflation.

Student Preparation: How Does Inflation Affect Me?

[Time Required: 15 minutes] 

1. Next, think about how inflation will affect your own life. What does it mean that any money you have now will have less purchasing power in the future? How will inflation affect your spending or saving choices?
2. Inflation may affect you sooner than you think. While we can’t predict exactly how much inflation will rise in the future, historically the rate has increased by 2–3% each year. Pretend that you have received $1,000 as a gift to use for expenses when you go to college. Assuming a 3% yearly inflation rate, what will that gift be worth in today’s dollars five years from now? What is the impact of inflation on the gift, even in the short term? (Answer: The gift will be worth $858.73 in today’s dollars.) Were the numbers a surprise? Why or why not?
3. How does inflation influence savings and wealth accumulation? Will you make different spending or savings choices based on what you now know about inflation? 

Challenge: Taxes Take a Toll

[Time Required: 20 minutes]

1. What other factors have an impact on money besides inflation? Can you think of any other “financial forces” that may affect wealth potential? Consider the concept of taxes. Have you ever paid taxes before? Even though you might not have paid income tax; if you live within one of many U.S. states and have purchased a book, shoes or other item in a store, you have probably paid sales tax.
2. Income tax is a certain percentage of your income that is paid to federal and some state governments. The exact percentage is based on how much money you make. Sales tax is an additional charge on the items you buy that is paid to your state or local government, however not all states have sales tax. Other common taxes include property tax (taxes paid on your home), Social Security and Medicare (taxes taken out of your paycheck to fund government retirement and health care programs, respectively). Most taxes are used to invest money back into federal, state and local government efforts. For example, taxes help to pay for road repairs, education and police forces.
3. How do you think taxes will affect your own life. How will knowing that a certain portion of your income goes to taxes affect spending, saving and career choices?
4. Next, calculate ways that taxes can impact your incomes. Download the activity sheet Net Pay: The Effects of Taxes on Your Income and allow ten minutes to complete the activity.
5. What do you see as some of the positive or negative effects of taxes? How will inflation affect your buying power in the future?

Reflection

[Time Required: 5 minutes]

Reflect in your notebook about why it’s important to be aware of financial forces, such as inflation and taxes, and how these forces could impact your futures.