Saving and Investing: Understanding the Key Differences
- 1. Savings, credit & Investing By: Addisalem T. (PhD Candidate)
- 2. Outline Savings Importance of Saving Types of Savings Accounts Strategies for Saving Common Savings Challenges and Solutions Tips for Successful Saving Credit Types of credit Importance of credit Managing credit Investment s Types of investment Importance of investment Risk, Return, and Liquidity
- 3. Savings Saving refers to the portion of income not spent on current expenditures and set aside for future use. It is the most basic form of personal financial management.
- 7. Importance of… • Emergency Fund: Provides a financial cushion in case of unexpected expenses such as medical emergencies or job loss. • Future Goals: Helps in accumulating funds for future needs such as buying a house, education, or retirement. • Financial Independence: Reduces reliance on debt and improves financial stability.
- 8. Importance of… Financial Security: Savings provide a safety net for unexpected expenses such as medical emergencies, car repairs, or job loss. Goal Achievement: Savings can help in achieving short-term and long-term goals like buying a home, funding education, or taking a vacation. Wealth Building: Regular saving and investing can lead to wealth accumulation over time. Stress Reduction: Having savings reduces financial stress and improves overall well-being.
- 9. Types of Savings Accounts 1. Regular Savings Account: Easy access to funds with modest interest rates. 2. High-Yield Savings Account: Offers higher interest rates compared to regular savings accounts but may have higher minimum balance requirements. 3. Money Market Account: Combines features of savings and checking accounts with higher interest rates and limited check-writing capabilities. 4. Certificates of Deposit (CDs): Fixed-term deposits with higher interest rates, where funds cannot be withdrawn without penalty before maturity.
- 10. Strategies for Saving • Automatic Transfers: Setting up automatic transfers from checking to savings accounts ensures consistent saving habits. • Budgeting: Creating a budget to track expenses and identify potential savings. • Setting Goals: Establishing short-term and long-term savings goals to stay motivated. • Reducing Expenses: Cutting down unnecessary expenses to increase the amount saved.
- 11. Common Savings Challenges and Solutions Low Income: Start small, save consistently, and gradually increase the savings amount. High Debt: Focus on paying off high-interest debt first while saving a small amount. Lack of Discipline: Automate savings to ensure consistency. Inflation: Use high-yield accounts or investment options to combat the eroding effects of inflation on savings.
- 12. Tips for Successful Saving 1. Track Your Spending: Use apps or spreadsheets to monitor expenses and identify savings opportunities. 2. Set Realistic Goals: Break down large goals into smaller, manageable ones. 3. Stay Informed: Keep learning about new savings products and strategies. 4. Review and Adjust: Regularly review your savings plan and make adjustments as needed.
- 13. Credit Credit is the ability to borrow money or access goods or services with the understanding that you will pay later.
- 14. Types of Credit 1. Revolving Credit: Credit that can be used repeatedly up to a certain limit as long as the account is open (e.g., credit cards). 2. Installment Credit: A loan for a fixed amount that is repaid in regular installments (e.g., auto loans, mortgages). 3. Open Credit: Must be paid in full each period (e.g., charge cards).
- 15. Importance of Credit • Purchasing Power: Allows consumers to make significant purchases and pay over time. • Emergency Situations: Provides financial assistance during unexpected expenses. • Building Credit History: Responsible use of credit builds a good credit history, which is crucial for obtaining future credit.
- 16. Managing Credit • Paying on Time: Ensuring timely payments to avoid late fees and negative impacts on credit scores. • Monitoring Credit Reports: Regularly checking credit reports to identify and dispute errors. • Maintaining Low Balances: Keeping credit card balances low relative to credit limits. • Avoiding Unnecessary Credit: Only applying for credit when necessary to avoid excessive hard inquiries.
- 17. What are Financial Intermediaries? Financial intermediaries are institutions that facilitate the channeling of funds between savers and borrowers. They play a crucial role in the financial system by providing a bridge between those who have surplus funds (savers) and those who need funds (borrowers).
- 18. Types of Financial Intermediaries •Banks •Credit Unions •Investment Companies •Insurance Companies •Pension Funds •Mutual Funds
- 19. Benefits of Financial Intermediaries for Savers Safety and Security: Protection of funds through insurance (e.g., FDIC for banks). Liquidity: Easy access to savings and investments. Interest and Returns: Earn interest on deposits and returns on investments. Convenience: Simplified processes for managing finances and making transactions Expertise: Access to professional financial advice and management.
- 20. Investments Investing is the purchase of assets with the goal of increasing future income. Investment involves committing money to an asset with the expectation of generating income or profit
- 21. Investments Investing is the purchase of assets with the goal of increasing future income. Investment involves committing money to an asset with the expectation of generating income or profit
- 22. Importance of Investing • Building Wealth • Inflation Protection • Achieving Financial Goals
- 23. Importance of Investment Wealth Accumulation: Investments can grow in value over time, contributing to long-term wealth. Income Generation: Certain investments provide regular income, such as dividends from stocks or interest from bonds. Inflation Protection: Investments often offer returns that outpace inflation, preserving purchasing power.
- 24. Types of Investments Stocks: Shares of ownership in a company, offering potential for capital gains and dividends (Common vs. Preferred). Bonds: Debt securities issued by entities such as governments or corporations, providing regular interest payments. Mutual Funds: Pooled funds from multiple investors to invest in a diversified portfolio of stocks, bonds, or other assets. Real Estate: Investment in property, either directly through purchasing physical property or indirectly through REITs (Real Estate Investment Trusts).Commodities: Physical assets like gold, silver, oil, or agricultural products. Cryptocurrencies: Digital or virtual currencies that use cryptography for security
- 25. Investment Strategies • Growth Investing • Suitable for Long-term Goals • Value Investing • Finding Undervalued Stocks • Income Investing • Focus on Dividends and Interest
- 26. Risk, Return, and Liquidity Risk The chance that the value of an investment will decrease. Return The profit or yield from an investment. Liquidity The ability of an investment to be converted into cash quickly without loss of value.
- 27. Risk, Return, and Liquidity Savings Low risk Low return High liquidity Investments High risk High return Low liquidity
- 28. Risk Mitigation Strategies • Asset Allocation • Hedging • Insurance Tools and Resources for Investors • Financial Advisors and Planners • Online Brokerage Accounts • Investment Research Tools • Educational Resources (Books, Online Courses, Webinars)
- 31. Inflation, Savings and Investments The point? Inflation can work against your money. You need to learn to invest wisely, follow the rate of inflation, and make sure your investment rates are higher than those of inflation.
- 32. Time Value of Money The time value of money refers to the fact that a dollar in hand today is worth more than a dollar promised at some future time.
- 33. Future Value Refers to the amount of money to which an investment will grow over a finite period of time at a given interest rate. Put another way, future value is the cash value of an investment at a particular time in the future.
- 34. “You can always make more money, but you can’t make more time.” Respond to this statement on your guided notes and then discuss it with a partner. How does it relate to future value?
- 35. Time Value of Money Picture from NEFE
- 37. Risk and Return What is the relationship between risk and return?
- 39. Which financial product is appropriate for the following situations? Saving for a senior trip Saving for a down payment on a house Saving for retirement
- 44. Thank you!