Financial Literacy - Fifth Grade

Complete Notes & Formulas

What is Financial Literacy?

Financial literacy is understanding how money works - how to earn it, manage it, spend it wisely, and save it for the future.

Key Financial Concepts:

✓ Income (money you earn)

✓ Taxes (money paid to government)

✓ Budget (plan for spending and saving)

✓ Records (tracking your money)

1. Understand & Calculate Gross and Net Income

A. Gross Income

Gross income is the total amount of money you earn BEFORE any deductions (taxes, insurance, etc.) are taken out.

Gross Income = Total Earnings

Hourly: Gross Income = Hourly Rate × Hours Worked

B. Net Income

Net income (also called "take-home pay") is the amount of money you have AFTER all deductions are taken out.

Net Income = Gross Income − Total Deductions

Gross Income = Net Income + Total Deductions

Example 1: Calculate Gross Income

Problem: Sarah earns $15 per hour and worked 20 hours this week. What is her gross income?

Gross Income = Hourly Rate × Hours Worked

Gross Income = $15 × 20

Gross Income = $300

Answer: $300 (before any deductions)

Example 2: Calculate Net Income

Problem: Tom's gross income is $500. His deductions are: taxes $75, health insurance $25. What is his net income?

Step 1: Calculate total deductions

Total Deductions = $75 + $25 = $100

Step 2: Calculate net income

Net Income = Gross Income − Deductions

Net Income = $500 − $100 = $400

Answer: $400 (take-home pay)

2. Understanding Pay Stubs & Taxes

What is a Pay Stub?

A pay stub is a document showing your earnings and deductions for a pay period. It shows both gross and net income.

Key Information on a Pay Stub

1. Employee Information: Name, address, employee ID

2. Pay Period: Dates covered (e.g., Jan 1-15)

3. Gross Pay: Total earnings before deductions

4. Deductions: Money taken out (taxes, insurance)

5. Net Pay: Take-home pay after deductions

Common Payroll Deductions

Federal Income Tax: Tax paid to federal government

State Income Tax: Tax paid to state government

Social Security Tax: For retirement benefits (6.2%)

Medicare Tax: For healthcare (1.45%)

Health Insurance: Medical coverage premium

Example: Reading a Pay Stub

Maria's Pay Stub:

Gross Pay: $800

Federal Tax: $80

State Tax: $40

Social Security: $49.60

Medicare: $11.60

Health Insurance: $50

Total Deductions: $231.20

Net Pay: $800 − $231.20 = $568.80

3. Identify Types of Taxes

What are Taxes?

Taxes are payments to the government used to fund public services like schools, roads, police, and hospitals.

Main Types of Taxes

1. Income Tax

What it is: Tax on money you earn from work

Who pays: Workers, businesses

Goes to: Federal and state governments

2. Payroll Tax

What it is: Tax for Social Security and Medicare

Who pays: Employees and employers

Percentage: About 7.65% from employee paycheck

3. Sales Tax

What it is: Tax added when you buy things

Who pays: Consumers (buyers)

Goes to: State and local governments

4. Property Tax

What it is: Tax on homes, land, and buildings

Who pays: Property owners

Goes to: Local governments (schools, fire departments)

Tax Formulas

Sales Tax Amount = Price × Tax Rate

Total Cost = Price + Sales Tax

Example: Sales Tax

Problem: A video game costs $50. The sales tax is 8%. What is the total cost?

Step 1: Calculate sales tax

Sales Tax = $50 × 0.08 = $4

Step 2: Add to original price

Total Cost = $50 + $4 = $54

Answer: $54

4. Payment Methods

Types of Payment Methods

Payment Method	Advantages	Disadvantages
Cash	• Accepted everywhere • Easy to use • No fees	• Can be lost or stolen • No purchase record • Hard to use online
Debit Card	• Safe and convenient • Automatic record • Can't overspend	• Risk of theft • May have fees • Needs bank account
Credit Card	• Build credit history • Protection on purchases • Earn rewards	• Can lead to debt • High interest rates • Easy to overspend
Check	• Written record • Safer than cash • Can stop payment	• Takes time to process • Can bounce • Not widely accepted
Digital Payment (PayPal, Venmo)	• Fast and convenient • Good for online • Easy to track	• Needs internet • Security risks • May have fees

When to Use Each Payment Method

Cash: Small purchases, garage sales, vending machines

Debit Card: Everyday purchases, ATM withdrawals

Credit Card: Large purchases, building credit, online shopping (with supervision)

Check: Rent, bills, large amounts

Digital: Online purchases, sending money to friends

5. Reading & Keeping Financial Records

Why Keep Financial Records?

Financial records help you track your money, understand spending patterns, and prepare for taxes.

Types of Financial Records

1. Bank Statements: Monthly record of deposits and withdrawals

2. Receipts: Proof of purchases

3. Pay Stubs: Record of earnings and deductions

4. Bills: Statements for utilities, rent, etc.

5. Tax Forms: W-2, 1099, tax returns

How to Read a Bank Statement

Opening Balance: Money at start of period

Deposits: Money added (+)

Withdrawals: Money taken out (−)

Closing Balance: Money at end of period

Closing Balance = Opening Balance + Deposits − Withdrawals

Example: Bank Statement

Opening Balance: $500

Deposit (paycheck): +$300

Withdrawal (groceries): −$75

Withdrawal (gas): −$40

Calculate Closing Balance:

$500 + $300 − $75 − $40 = $685

Closing Balance: $685

Tips for Keeping Records

✓ Save all receipts and statements

✓ Organize by month or category

✓ Check bank statements monthly

✓ Keep records for at least 1 year

6. Balance & Adjust a Budget

What is a Budget?

A budget is a plan for how to spend and save your money. It helps you make sure you don't spend more than you earn.

Budget Formula

Income − Expenses = Savings (or Deficit)

Balanced Budget: Income = Expenses

Surplus: Income > Expenses (Good!)

Deficit: Income < Expenses (Problem!)

Parts of a Budget

INCOME (Money Coming In):

• Allowance

• Earnings from jobs/chores

• Gifts

EXPENSES (Money Going Out):

• Fixed: Same every month (rent, insurance)

• Variable: Changes monthly (food, entertainment)

SAVINGS:

• Money set aside for future goals

Example 1: Balance a Budget

Problem: Jake has $200 income. Expenses: rent $80, food $60, entertainment $40, savings $20. Is his budget balanced?

Income: $200

Total Expenses: $80 + $60 + $40 + $20 = $200

$200 (income) − $200 (expenses) = $0

Answer: Yes! Budget is balanced.

Example 2: Adjust a Budget

Problem: Emma has $150 income but her expenses total $180. How can she adjust her budget?

Current situation:

Income: $150

Expenses: $180

Deficit: $150 − $180 = −$30 (spending too much!)

Solutions to adjust:

Option 1: Reduce expenses by $30

• Cut entertainment from $50 to $20

Option 2: Increase income

• Find extra work to earn $30 more

Option 3: Combination

• Reduce expenses by $15 AND earn $15 more

Goal: Make Income = Expenses

The 50/30/20 Budget Rule

Simple Budget Guideline:

• 50% for Needs (food, housing, transportation)

• 30% for Wants (entertainment, hobbies)

• 20% for Savings (future goals, emergency fund)

Quick Reference: Financial Formulas

Concept	Formula
Net Income	Gross Income − Deductions
Gross Income	Hourly Rate × Hours Worked
Sales Tax	Price × Tax Rate
Budget Balance	Income − Expenses
Bank Balance	Opening + Deposits − Withdrawals