MODULE 4 Flashcards
Saving and Investing
These two concepts are being interchangeably used but they are different. The two
are important part of personal finance.
Saving
storing or
putting money aside
regularly
Investing
making your
money grow by putting
money to items that would
earn
Why do people save?
People save for purchased and emergencies
It is one way to meet short term goals and be able to meet unexpected situation
Benefits of Savings
Providing safety net for unexpected events (emergency fund)
Improve liquidity for item purchases and attainment of short term goals
Safety from loss (minimal risk and insured—if savings are in bank)
Disadvantages
Have lower returns
Maybe lessen due to inflation
Incur opportunity cost for not investing in more risky and high return assets
Types of Savings (Lake, 2024)
Traditional Savings
High Yield Savings Account
Money Market Accounts
Certificate of Deposit Accounts
Cash Management Accounts
Specialty Savings Account
Types of savings accounts you need to know about
Regular Savings Account
Passbook Savings Accounts
Time Deposits
Digital Bank Accounts
Joint Savings Accounts
Business Savings Account
Traditional Savings (Meaning)
These accounts will help you to earn interest on the money that you have deposited.
However, they are lower rates that other type of savings. The savings accounts are usually
made with banks or credit unions. This type of savings is recommended for people who
need money for either short term of long term without considering higher interest rate.
Pros Traditional Savings
-It’s usually easy to open a regular savings account at a branch, and some banks allow
you to do so online.
-You can earn interest on your savings to grow your money.
-You can visit a branch if you need help or want to deposit cash.
Cons Traditional Savings
-The interest rates are usually low compared to other savings options.
-Monthly maintenance fees may cancel out interest earnings.
-Additional fees may apply for excess withdrawals.
High Yield Savings Account (Meaning)
These savings account is usually offered in online banks that offers higher interest compared
to the traditional savings account. This is recommended for people who want to be more
competitive on the rate of the savings they have but lessens fees.
Pros High Yield Savings Account
-You could earn a much higher interest rate compared to traditional savings accounts.
-Online banks typically have lower minimum deposit requirements to open an account.
-You’re less likely to be charged a monthly fee at an online bank.
Cons High Yield Savings Account
-No branch banking access means you can’t deposit cash directly into your account at a
branch.
-Transferring money between an online savings account and accounts at another bank can
take up to a few days to process.
-You may or may not have access to your money via ATM, depending on the bank.
Money Market Accounts (Meaning)
These savings account has both features of regular savings and checking account. These
accounts also allow you to earn interest on savings which usually better than regular savings
and the same rate with high yield savings account.
Pros Money Market Accounts
-Money market accounts can offer better rates than other types of bank savings accounts.
-You may be able to write checks from your account or access your money using a debit or
ATM card.
-You can open money market accounts at traditional banks or online banks.
Cons Money Market Accounts
-A higher minimum deposit may be required to open a money market account.
-Interest rates may be tiered, meaning you’ll need a higher balance to earn the best rates.
-Banks may charge a monthly fee for money market accounts.
Certificate of Deposit Accounts (Meaning)
These savings account is usually recommended for people who does not have the desire to
access their savings right away. The savings is commonly being saved in the bank for a set
period of time. This is offered both in onsite and online banks.
Pros Certificate of Deposit Accounts
-CDs can offer above-average interest rates for savers pursuing short- or longer-term goals.
-There are typically no monthly maintenance fees involved with CD accounts.
-CDs at online banks may offer lower initial deposit requirements.
Cons Certificate of Deposit Accounts
-Withdrawing money from a CD before its maturity date may trigger an early withdrawal
penalty.
-CDs at traditional banks tend to offer lower interest rates than online banks.
-Putting your savings into a longer-term CD makes it harder to capitalize on future interest
rate increases
Cash Management Accounts (Meaning)
These savings account is commonly made by people who want to keep cash available to
be invested in stocks or accounts for retirement.
Pros Cash Management Accounts
-They’re a convenient way to earn interest on money you plan to invest.
-Cash management accounts can offer benefits and features of both checking and
savings accounts.
-Accounts may offer higher-than-normal FDIC coverage limits by partnering with multiple
banks.
Cons Cash Management Accounts
-High-yield savings accounts could offer better interest rates on the money you’re saving.
-Since they’re attached to online brokerage accounts, you may not have access to
branch banking.
-These accounts aren’t always covered by FDIC insurance.
Specialty Savings Account (Meaning)
These savings account that is for special savings goals. These would help in reaching the
specific savings goals.
Pros Specialty Savings Account
-They can help you save money for a variety of specific financial goals.
-Specialty accounts can earn interest to help you grow your money, just like other savings
accounts.
-You may pay low or no monthly maintenance fees depending on the account.
Cons Specialty Savings Account
-Some specialty accounts, such as IRAs, 529s and HSAs, have strict tax rules for making
withdrawals.
-The interest rates you earn for child savings accounts, student accounts or Christmas Club
accounts may be lower than high-yield or even regular savings accounts.
-Specialty accounts may have restrictions on who can open them.
Investing
is one of the means to achieve long term financial goals.
In investing one should remember that it has no guarantee, there is always risk.
Benefits of Investing
-Potential for higher returns than savings
-Can help achieve long-term financial goals
-Diversification can reduce risk
Disadvantages
-Risk of loss, especially in the short-run
-Requires discipline and commitment
-May require longer time horizons
Investment Options (BSP)
Business
Non Financial
Financial Instruments
Treasury Bills
Treasury Bonds
Corporate Bonds
UITF (Unit Investment Trust Funds)
Mutual Funds
Stocks
Business-
the money put in business
Non Financial-
derive its value from the traits that are physical
Financial Instruments-
these are assets that could be traded or
exchanged
Type by Income Generation
Fixed Income- the interest payments are regular of fixed
Treasury Bills
Treasury Bonds
Corporate Bonds
Variable- the returns are not guaranteed and may differ
UITFs
Mutual Funds
Stocks
Treasury Bills-
financial instruments that are issued by the government when they need money
for a short period of time
Treasury Bonds-
obligations issued by the government usually have longer maturity. Some
have 2 to 25 years or even 5 to 30 years depending on the terms given by the government
Corporate Bonds-
Bonds- issued by companies usually with the aim of raising funds for certain projects
UITF (Unit Investment Trust Funds) –
an open-ended pooled trust fund denominated in pesos or any acceptable currency, which is
operated and administered by a trust entity and made available by participation
(https://www.uitf.com.ph/faqs.php)
Mutual Funds-
these are funds pooled by various investors to be managed by professionals to
be invested in securities
Stocks-
this is the share of ownership of a corporation
Risk Tolerance
refers to the level of risk that one person could take.
Importance of Knowing Risk Tolerance
-it helps in determining what type of investments will you take
-determine the strategy you can use enable to achieve financial goals
-understand personal risk tolerance you can balance both mental and financial worries
Factors that Affect Risk Tolerance (CFI, 2024)
Timeline
Goals
Age
Portfolio size
Investment Comfort Level
Types of Risk Tolerance
Aggressive, Moderate, Conservative
Aggressive-
the risk that is involve is high but have better results. People with high
level of tolerance have more experience when it comes to investing.
Moderate-
people who would like to have their money grow with not much losing.
The opportunities and risks are being weigh in along with the goals.
Conservative-
those who are only willing to accept little interest to no change in the
investment.
Establishing and Investment Risk Profile
- Determine your investment goals
- Assess your risk tolerance
- Rank your investments based on their potential return and risk
- Make sure you are comforatble with the level of risk you are taking
- Regularly review and update your investment risk profile as needed
Difference between Saving and Investing
SAVING
- involves setting money aside in safe, liquid accounts
- includes checking accounts, savings account, treasury bills, and money market accounts
- provides capital for investing
INVESTING
- can increase capital
- includes stocks, bonds, and real estate
- involves buying an asset in hopes of earning a return
