Savings and how money grows

Key topic

Saving is simply one of the important financial tasks you will be asked to perform throughout your lives. Saving is as important as making money. Saving can serve a number of functions including, saving to invest, saving for a rainy day, saving for a better future and so on. If you fail to save money, you will almost certainly face financial hardship down the line. Therefore, today we will discuss all the basics of saving.

Learning objectives

• Be aware that financial emergencies are part of life
• Develop proper saving habits
• Discover the ways in which you grow your money
• Be ready to plan your financial future

Conditions affecting your financial game plan

If it’s one thing that the global financial crisis of the previous decade and the current pandemic taught us all is the fact that nothing should be taken for granted in today’s world. One day you are earning high and the next you are earning low; one day you are earning a salary and the next you are without a job. Hopefully, this will not be the case for any of you but it is a reality and a possibility that one day you may find yourself in this position.

The best way to tackle this situation is to be prepared for it.  In such a case, the best possible treatment is to have an emergency fund in place which should be allocated according to your financial needs. We will discuss all these concepts as we go along, so don’t worry if you don’t fully understand the meaning right now.

Your financial game plan will be affected by several factors in your life as you grow up. It could be the need to finance your own education in college, meaning that you will have to create financial resources for your education, usually by working your way through college, or taking out a student loan, which you will have to repay as you go along. Home ownership is another big issue, which will come up at a later stage in your life. You will need to plan on how to finance this need, as well as other personal and family needs such as the need to purchase a new car, or take a vacation, or start a business and so on.

The bottom line here and the take-home message is that you need to be prepared for any unexpected occurrences, or occurrences that come with growing up; the best way to be prepared is to have a well-balanced budget, a fully functional savings plan and the determination to be fully disciplined in the long term in order to avoid financial risks.

Saving

Savings refer to money you put aside for future use, rather than spending it immediately. In addition to the benefits of saving up for future purchases, delaying an impulse purchase also helps you decide whether it is something you really need, or a waste of money you will regret shortly after buying.

One of the most common mistakes that many people make, especially when they have a good-size income, is failing to understand the need to implement a saving strategy; this strategy is important for your financial security, but also necessary for financial growth, which will allow you to enjoy a lifestyle upgrade, later down the road in your life, or take corrective action in the case of possible financial setbacks or errors of the past. Setting aside money each month builds a foundation for establishing future benefits and even wealth.

If your weekly allowance is for example $50 and your spending needs are only $30, it means that each week you can save up to $20. In a month that is $80. The piggy-bank example is perhaps the wisest example for people of all ages to follow. If you start saving at the beginning of the school year, you will have saved at least $350 by Christmas time.

Remember, you will continue to service your needs throughout each week, but at the same time you will reach a point when you have this extra cash in hand, come Christmas time. You could use half to buy yourself a great pair of playing shoes, without asking for it from your parents, or you could buy your parents a small present to show your love and appreciation. You don’t have to spend all your savings at once. Remember to save, even from your savings. You could even plan to attend a summer sports camp, using your own money and not having to worry about your parents’ response. Wouldn’t that be great?  In real life, it works the same way, more or less.

Different types of saving

Saving money should not be confused with investing money and understanding the difference is vital. Your savings are money which you will put into the safest places or products which you can easily access at any time, such as savings and checking accounts or certificates of deposit; this money is usually FDIC (Federal Deposit Insurance Corporation) insured, meaning that if the bank goes bankrupt the federal government will reimburse you for your savings up to $100,000.  When you have enough money saved for emergencies and safety, you can then start investing. When you invest, you have the opportunity to earn more money, but you also have a greater chance of losing money because the money you invest is not insured.

You can follow some simple steps to develop your saving strategy:  For short-term savings, you usually want to put your money somewhere safe and any interest you earn on it is just icing on the cake. Deposit accounts, like savings accounts and checking accounts, are covered by the Federal Deposit Insurance Corporation. You should start saving money according to what you want to do with it.

We suggest you divide and allocate your savings into three basic categories: emergency, personal savings and long-term savings. You will reach a stage in your life where you will hopefully earn enough money to be able to save and have different saving schemes. You will also reach a point in your life, where you will be responsible for others (e.g., your family) and you will be in the exact same position that your parents are in today.

Your emergency savings must be your priority and must reach the point where they equal to approximately a year’s worth of your living expenses. Having emergency savings can reduce your worry in case any unexpected problems arise.

Your personal savings are important for the overall quality of your life. As you grow up, if you choose to have a family and kids, you will become responsible to provide to them the same, if not more, that your parents are providing for you right now. It can be about a vacation that you had hoped for in a long time, or an international tournament that you want to go to and you have the chance to combine vacation with accompanying the team to another country. It can be used for a purchase that adds true value to your life.

Your long-term savings account will be the backbone of your saving strategy and this is where you will hold the money that will be invested for a better financial future. Deposit money into this account every month.  You should make it a priority to deposit money in this account first, before you buy anything else. Your long-term savings is the money that will give you financial security to plan your future, whether this is paying for college tuition, or creating your own business, or paying for your new car, or having an extra cushion just in case.  Having smart goals in mind makes the choice to save—rather than spending—much easier.

Saving while earning is one of the most important financial goals you should set and perhaps it is not a bad idea to discuss with your parents the possibility of starting from now. If you feel that practice makes perfect, why not join your parents and participate in the family savings plan now, using the money you receive from your allowance, from gifts and special occasions etc.

Saving can indeed be challenging, but it gets easier over time. Don’t forget that savings are the key to calling your own shots and also the key to a better quality of life. Start your savings plan now and enjoy the benefits every day of your life in the future.

Interest rates: Growing your money

If you are wondering how your savings and money will grow, the answer is rather simple and it’s called interest and compound interest.

Interest is calculated as a percentage of a balance (sum of money), which is paid periodically for the privilege of using this money. The amount is usually quoted as an annual rate, but interest can be calculated for periods that are longer or shorter than one year. You should remember that interest applies if you have money and lend it, for example deposit your money in the bank that is a form of lending your money to the bank for use, or if you borrow money from the bank, which means that you have to repay the bank the amount that you borrowed, plus extra money that is the interest the bank sets for its own profit.

When you decide to start a savings fund (sooner than later) you will deposit the funds in a savings account, which effectively translates to you letting the bank use your money (lend it out or invest it). In exchange, you’ll expect to earn interest. If you are not going to earn anything, you might be tempted to spend the money instead, because there’s little benefit to waiting. But with interest, you benefit from saving your money. This interest usually depends on the bank rate, the amount you save and the time period you choose to keep your money saved. A higher rate or a longer-term saving, results in you making more money.

Compound interest basically means “interest on the interest” and is the reason many investors are so successful.  Compound interest (or compounding interest) is interest calculated on the initial principal (initial amount of money), which also includes all of the accumulated interest of previous periods of a deposit or loan. Compound interest will make a sum grow at a faster rate than simple interest, which is calculated only on the principal amount.  By taking advantage of compound interest, you can end up with significantly more than your original savings and be on your way to achieving your lifetime financial goals.

We will take a look at an example of the power of compound interest.  Let’s say you save $1,000 per year for 10 years and you receive an interest of 5% per year.

As you can see from the above example, at the end of 10 years your total deposit of $10,000 has a compounded interest yield of $3,206.75.  Not bad right?

Action Steps – Exercise 1 (20 minutes)

• What would happen if you saved $10,000 per year for 10 years at 5% per year?
• What would happen if you saved $1,000 per year for 5 years at 10% per year?
• Please respond to the following statements with a True or False (T/F):

1. 1. One of the most common mistakes that many people make, especially when their income is of a good standing, is to save money for a rainy day ___
   2. Emergency savings are a good idea because they can be used in case you lose your job ___
   3. Interest is calculated as a percentage of a balance, which is paid periodically for the privilege of using this money and tends to be expressed as an annual rate ___
   4. Compound interest is interest calculated on the initial principal, which also includes all of the accumulated interest of previous periods of a deposit or loan ___
   5. Your long-term savings can be used in case of a health emergency ___

Answer sheet

Now, let’s watch a 2-minute short video which illustrates the concept of compound interest. Don’t worry if you haven’t fully understood it. A lot of adults don’t fully grasp it either.

Compound Interest Explained

Lesson wrap-up

Today we discussed the concept and process of saving. We covered a lot of ground. We began by defining saving and point out its importance. We then outlined three different types of savings (personal, emergency and long-term), before moving to interest rates. We discussed what compounding interest is and how it can help you grow your money.

At this point we will wrap up today’s lesson.  First, we will go over the learning objectives of this lesson and we want your feedback as to whether they have been achieved and then we will address any questions you may have.  Please feel free to ask anything you’d like in relation to today’s lesson and we would love to hear how the concepts we discussed today relate to you and your life!