Saving vs. Investing: In-Depth Study Notes

Chapter 12: Savings
12.1: Saving vs. Investing

  • Saving

    • Main Purpose: To set aside money for anticipated future use or short-term goals.

    • Risk Level: Practically no risk, especially with FDIC-insured accounts.

    • Access: Funds are highly liquid and can be withdrawn easily.

  • Investment

    • Main Purpose: To grow money over the long term through appreciation or income generation.

    • Risk Level: Involves some risk with potential for loss; liquidity is generally lower.

Silicon Valley Bank (SVB)

  • What Happened?: SVB collapsed due to large investments in long-term bonds that lost value when interest rates rose, coupled with rapid customer withdrawals (bank run), leading to a liquidity crisis.

  • How does the FDIC work?: The Federal Deposit Insurance Corporation (FDIC) protects depositors' money in insured banks up to 250,000250,000 per depositor, per bank, per ownership category. It ensures stability and public confidence in the financial system.

12.2: Steps to Saving

  • Decide what you are saving for: Define clear financial objectives.

  • Set a specific goal: Establish precise, quantifiable targets.

  • Break long-term goals into short-term goals: Divide large objectives into smaller, manageable targets.

  • Save regularly and consistently: Develop a habit of consistent saving, often through automatic transfers.

  • Put your savings to work: Explore options like high-yield accounts or investments to grow savings.

  • Keep savings goals in mind: Regularly review progress and stay motivated.

12.3: Earning by Saving

  • Calculating Interest: The return on saved money or cost of borrowing.

    • Paid monthly

    • Paid quarterly

    • Paid annually

    • Stated interest rate: The advertised annual interest rate, often called nominal interest rate.

    • Annual Percentage Yield (APY): A more accurate measure of annual return including the effect of compounding interest.

    • Simple Interest: Interest calculated only on the principal amount (I=P×R×TI = P \times R \times T).

    • Compound Interest: Interest calculated on the principal and on accumulated interest (A=P(1+r/n)ntA = P(1 + r/n)^{nt}).

    • Factors Affecting Interest Earned: Depends on principal, interest rate, time, and compounding frequency.