Saving and investing are fundamental cornerstones of personal finance. As we learn about savings and investing through studying for unit tests, it’s crucial we grasp key principles that will serve us well in life. This article summarizes principles regarding savings accounts, investment vehicles, asset allocation, risk tolerance, and more. Proper savings and investing habits started early in life will compound over time and contribute greatly to long-term financial security and independence. Let’s explore essential personal finance principles related to savings and investing that every student should understand when preparing for and taking unit tests.
types of savings and investment vehicles to understand
When studying savings and investing for a unit test, be sure you understand the key features and appropriate uses of various savings and investment vehicles. These include savings accounts, money market accounts, certificates of deposit (CDs), stocks, bonds, mutual funds, index funds, ETFs, real estate, and more. Know the relative risk, liquidity, and return profiles. For example, savings accounts provide low risk and high liquidity but low returns. Stocks involve higher risk but may deliver higher long-term returns. Understand how compound growth works over long time horizons with vehicles like stocks.
asset allocation and diversification
A key principle is diversification across asset classes and within asset classes. This reduces portfolio risk by avoiding overconcentration. The percentages allocated to stocks, bonds, cash, etc comprise your asset allocation. Diversification is maximized when investments have low correlations. Know principles of strategic asset allocation using mean-variance optimization. Understand tactical asset allocation shifts in response to market conditions.
assessing personal risk tolerance
When making savings and investment decisions, you must understand your personal risk tolerance. Risk tolerance is your ability and willingness to lose money in pursuit of higher returns. Those with low risk tolerance favor conservative assets like savings accounts and bonds. High risk tolerance allows investing heavier in stocks. Know where you fall on this spectrum. Unit tests may assess this with questions about hypothetical scenarios.
time value of money and compounding
Grasping the time value of money is vital for savings and investing decisions. $1000 today is worth more than $1000 in ten years due to its earning potential. Understand principles of future value and present value calculations. Compounding returns over long periods allows savings to grow exponentially rather than linearly. Starting to save and invest early allows compounding to work its magic.
In summary, mastering key principles of savings and investing vehicles, asset allocation, risk tolerance, time value of money, and compound growth is essential for passing savings and investing unit tests and building lifelong personal finance skills.