Economics · Lesson e04

Where Does Your Money Go? Budgeting, Saving & Banks

Earning money is only half the story. The other half is deciding where it goes, and what happens when you park it in a bank.
A girl and a chestnut horse in a sunny stable yard, with a jar of coins and a friendly old bank building in the distance

In e03 you saw that money lets us swap, store value and measure. Now comes the practical question every traveller, rider and artist faces: money arrives, and then what? A pony needs feed, a sketchbook needs paper, and a plane ticket needs a plan. Today you will learn how to divide your money on purpose, how to save toward a goal, and what a bank does with the money you leave there.

💡 Big idea 1: A budget is a plan for your money

A budget splits your income into groups before you spend it. A popular starting rule has three groups:

The "50/30/20" rule puts 50% into needs, 30% into wants and 20% into saving. It is a starting point, not a law: your own numbers can differ. The same item can switch groups: boots are a need when your feet have outgrown the old pair, and a want when the old pair still fits.

Monthly income: EUR 80 Needs EUR 40 (50%) Wants EUR 24 (30%) Saving EUR 16 (20%) The three parts always add back up to the whole income. 50% + 30% + 20% = 100% and EUR 40 + 24 + 16 = EUR 80
A budget bar: the whole bar is income, each slice is a job for that money.
💡 Big idea 2: Saving toward a goal

A goal needs a target amount and a plan. If you already hold some money, you only need to save the gap. The time it takes is the gap divided by how much you set aside each month. Being specific ("a saddle pad for EUR 60 by 14 March") beats a vague wish ("some money for stuff").

💡 Big idea 3: What a bank does with your deposit

When you deposit money, the bank does not keep your coins in a drawer with your name on it. It lends most of the money to other people and businesses (to buy a house, a tractor, a horse trailer). Borrowers pay the bank interest. The bank passes a smaller share of that interest back to you as a thank-you for letting it use your money. The difference is how the bank earns its living.

So interest is the price of using money for a while. You earn it when you lend (by depositing), and you pay it when you borrow.

Depositors (you) Bank Borrowers (a stable, a family) deposit money loan money small interest back (example: 2% a year) bigger interest paid (example: 5% a year) Solid arrows: money lent. Dashed arrows: interest paid.
The two rates (2% and 5%) are invented for this lesson. Real rates change from bank to bank and year to year.
Maths connection: Budget slices are percentages of a whole (Lesson 13, proportional thinking: 20% of EUR 80 is the same as 0.20 × 80). Interest uses simple interest from Lesson 23: $I = P \times r \times t$, with principal $P$, yearly rate $r$ and time $t$ in years. Note: many real banks use compound interest (interest on interest), which grows faster. We use simple interest only in this lesson.
Worked Examples
Worked Example 1: splitting an income

Mia earns EUR 80 a month feeding horses at a stable. She uses the 50/30/20 rule. How much goes to each group?

Needs: $50\% \text{ of } 80 = 0.50 \times 80 = 40$, so EUR 40.

Wants: $0.30 \times 80 = 24$, so EUR 24.

Saving: $0.20 \times 80 = 16$, so EUR 16. Check: $40 + 24 + 16 = 80$. Nothing is missing and nothing is counted twice.

Worked Example 2: interest on a deposit

A bank pays 3% simple interest per year (an invented rate). Mia deposits USD 200 for 5 years. How much interest does she earn, and what is in the account at the end?

Interest: $I = P \times r \times t = 200 \times 0.03 \times 5 = 30$, so USD 30.

Balance: the original deposit is still hers, so $200 + 30 = 230$, or USD 230.

Warm-Up
  1. Problem 1
    Mia's old riding boots are still comfortable, but she spots a new pair in a shop window in Madrid. Describe one situation in which buying new boots is a need and one situation in which it is a want.
    same item, two situations →
  2. Problem 2
    During a month in Mexico, Mia's budget is MXN 1 500. She decides that 20% goes to saving. Calculate her saving in MXN.
    turn 20% into a decimal, multiply by the budget →
  3. Problem 3
    Mia is saving for a sketching tablet that costs JPY 24 000. She already has JPY 6 000 and sets aside JPY 3 000 each month. Calculate how many months it will take.
    gap first, then months →
Core Problems
  1. Problem 4
    Mia's monthly income in London is GBP 200. Her plan: needs GBP 90, wants GBP 70, saving GBP 30. Calculate the percentage of her income that goes to saving, and state whether this meets a 20% saving target.
    part ÷ whole →
  2. Problem 5
    A bank pays 3% simple interest per year (invented rate). Mia's brother deposits USD 500 for 4 years. (a) Calculate the interest he earns, in USD. (b) He says, "After 4 years my account will hold exactly that interest amount." Calculate what the account really holds and state his mistake.
    I = P r t → what else is still in the account? →
  3. Problem 6
    A bank holds EUR 10 000 of deposits and lends all of it for one year at 5% a year. It pays its depositors 2% a year on the same EUR 10 000 (both rates invented, simple interest). Calculate how many euros the bank has left over after paying its depositors.
    interest in minus interest out →
  4. Problem 7 Challenge
    Mia wants to earn exactly EUR 36 in simple interest in 3 years from a savings account paying 4% a year. (a) Calculate how large a deposit she needs, in EUR. (b) At a different bank paying only 2% a year, calculate how many years that same deposit would need to earn the same EUR 36.
    rearrange I = P r t to find P → then find t →
  5. Problem 8 Open
    Pick a country you would love to ride or sketch in for a month, and a goal you could save for there. Invent a monthly income in that country's currency, then design a budget with needs, wants and saving. State your goal, the target amount and how many months it will take. Explain one choice in your budget that you could defend to a friend. There is no single right answer.
    income → three slices → goal and months →
Think like an economist 🧠 Why can a bank safely lend out most of your deposit? Because on any normal day only a few depositors want their money back at the same time. What do you think would happen if everyone asked for their money on the same morning? Banks need trust in the same way money does.
Show answers
Problem 1
Need: her feet have grown and the old boots hurt or are unsafe for riding. Want: the old boots still fit well and she simply likes the new colour or style. (Any situation that clearly separates the two works.)
Problem 2
MXN 300 (0.20 × 1 500)
Problem 3
6 months (gap JPY 18 000, divided by JPY 3 000 a month)
Problem 4
15% (30 ÷ 200 = 0.15). No, this is below the 20% target.
Problem 5a
USD 60 (500 × 0.03 × 4)
Problem 5b
USD 560. His mistake: he forgot that his original USD 500 deposit is still in the account, so the balance is deposit plus interest.
Problem 6
EUR 300 (EUR 500 collected from borrowers minus EUR 200 paid to depositors)
Problem 7a
EUR 300 (36 ÷ (0.04 × 3))
Problem 7b
6 years (36 ÷ (300 × 0.02))
Problem 8
Open. Look for: an income in a sensible local currency, three slices that add back to the whole income, a goal with a target amount, and months equal to (target minus savings so far) divided by monthly saving. A good defence names a trade-off between a want and the goal.
Next up → e05: Exchange Rates, Money Across Borders Your savings might be in euros while the saddle you love costs pesos or yen. Next we turn "EUR 1 = USD 1.10" into a tool: convert both ways, compare prices abroad, and find out why the rate wobbles from week to week.
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