When you have a surplus after satisfying your needs, you will want to put away some for the future. You can do this either by saving in a financial institution or by investing.
Saving is when you do not use up all of your income but keep some in an account for the future. While persons may save money in their homes or in a “box” it is safer to keep your savings in a financial institution[1].
Investing refers to the purchase of a financial product or other items of value with an expectation of favourable future returns. In general, terms, investing means committing money in order to make a financial gain.
Other forms of investment are:
- Purchase Shares: you can purchase shares from the following:
- Credit Unions are membership organizations that are formed by persons living in a particular community; employed by a business or sector, or members of a religious or other organization. To become a member, you must purchase shares and open an account. This is done by making deposits into the Credit Union. As soon as you deposit funds into a Credit Union account you become a part owner. A Credit Union is called a cooperative financial institution because its members are the owners of the credit union and profits are shared among them. Only members of a Credit Union can deposit to or withdraw money from their account held with the Credit Union.
Usually Credit Unions operate by taking money from its members, on one hand, and lending it to members on the other hand. Generally, loans are offered at lower interest rates than commercial banks. The Credit Union uses your shares as collateral for the loan.
- The Stock Market or Stock Exchange provides a place for people to buy and sell shares in companies that are listed with the stock market. You can only buy and sell shares on the stock market through companies that are authorised to be stock market brokers. When you purchase a share in a company you become a part owner (share holder). That means that you have a right to attend annual general meetings and to vote. You can also receive money (dividend) if the company makes profits. There is the risk however, that if the company makes a loss, no dividend will be paid. You can sell your shares on the stock market. The price of your shares can go up or down depending on the profitability of the company. If the price of your shares is higher than what you have paid for it then you would have made a gain (capital gain) When the prices of your shares move lower than what you paid then you would have a loss (capital loss).
This is why investing on the stock exchange is for the more experienced investor and for people who can afford to take risk with their money. People who invest on the stock exchange hope to make a lot more money than with saving with banks or investing in mutual funds, because they take more risk.
- Mutual Funds: A mutual fund is a form of collective investment because it pools money from many people and invests the pooled money in various financial instruments. People who place their money with mutual funds are called unit holders. They purchase units in the fund which is managed by a fund manager. The returns from the investments are shared among the unit holders as dividends after deducting operating expenses.
Mutual funds pay a higher return than deposits because there is some chance or risk that the money invested may make a loss. The possibility of getting a higher rate of return on their money encourages people to take the chance and invest in mutual funds.
- Bonds: A bond is simply a loan provided by the government or a private company to help them raise money or capital to finance projects. When the Government or the company issues a bond, it promises to pay you a specified amount of interest for a specified length of time and to repay you the full amount of the loan when the bonds mature or come to an end. Bonds generally pay higher rates of interest than savings because they may be held by government or the company for a long time (as much as twenty years). In general, the longer the bond is held the higher the interest rate paid.
Investing in bonds is a good way of setting aside money for future use. Government bonds are risk free which means that you would always get your money back at the maturity of the bond. Corporate or business bonds carry some risk. The company may be unable to repay the loan if it does not remain profitable.
- Treasury bills: In Guyana, Treasury Bills are issued by the Bank of Guyana. The minimum amount you can invest is $50,000. Treasury bills are issued for 3 months, 6 months and 1 year. Treasury bills usually pay a higher return than an ordinary savings account and are guaranteed by the government. New issues of Treasury Bills are offered on a regular basis. Instead of carrying interest-bearing coupons these bills are sold at a discount below the “par” or “face” value that the holder receives at maturity. For example one may bid at a price of G$90 per G$100 of 91-day Treasury Bills. The discount rate which is defined as the difference between the lower price paid for a security and the security’s face value at issue, can be calculated from the following formula:
((face value-purchase price)/face value) x (356/term) x 100 = discount rate
where “term” is the term-to-maturity (which may be 91, 182 or 364 days depending on the particular issue) but can also refer to the number of days to maturity in the case of a rediscount operation. Using the example above the discount rate will be computed as follows:
((100-97)/100) x (365/91) x 100 = 12.03 %
((face value-purchase price)/purchase price) x (356/term) x 100 = yield
The annualized yield, which is defined as the actual rate of return per year, is calculated as follows:
((100-97)/97) x (365/91) x 100 = 12.41%
The amount of treasury bills offered is published in the national newspapers. Among the information published for each tender are those relating to the issue date, the maturity date, the closing date for tender, the settlement date, and the average discount rate for the previous issue. After submission, bids are accepted on a competitive basis. The higher the offer price, the lower will be the discount rate and thus the more competitive will be the investor’s bid and the greater the chances that the bid will be accepted. As an illustration, let us assume that the Government offers G$1.0 billion of 91-day Treasury Bill to the public and there are three investors; investor A, investor B and investor C each bidding for G$0.5 billion. Let us further assume that investor A, investor B and investor C have submitted offer prices of G$97.01, G$95.51 and G$93.21 per G$100 respectively. From the authorities’ standpoint, based on the formula for the discount rate presented above, investor A would have submitted the most competitive bid, followed by investor B. Since bids are allocated to the most competitive bidders until the amount offered is exhausted, only these two investors would be successful and would be allocated the amounts bid for.
[1] Financial institution is the term used for banks, trust companies, credit unions and other investment companies that deal with money, hold money, invest money and lend money
There is the likelihood that the actual return on investment would be different from the expected return. The investor’s return can either be:
- Greater than the expected return on his investment.
- Less than the expected return on his investment.
- Exactly what was expected, where the actual and expected returns are the same.
- No return on the investment; but the invested amount remains the same or
- Where all that has been invested is lost.
The return on an investment is the profit or loss on that investment. The return is usually expressed as a per cent of the initial investment. For example, if you invested $300 in purchasing a box of pencils and sold all for $360 then you would make a 20% profit. The return expressed as a percentage of the investment is calculated as follows:
(360-300) x 100 = 20%
300
If on the other hand the sale of the pencils only realized $260 then a loss would have been made. The percentage loss would be calculated thus:
(360-260) x 100 = -13.33%
300
The minus sign implies a loss. The percentage loss on the investment is 13.33%.
There is some degree of uncertainty associated with investing money. This uncertainty is referred to as risk. One would expect to be compensated for the risk that they are prepared to take for investing their money. If the risk is considered to be high then they expect the return to be high. If it is low, with little chance of losing the money invested, then the return on the investment will be low.
- SET YOUR TARGETS: choose an amount that you consider yourself capable of saving each month. For example, you may choose to save a percentage of your income (it is recommended to save at least 10% of your monthly income). Also, if you have already worked on your budget, you may choose to include this amount as part of your expenses in your budget. Your budget will allow you to see where and when you can save more! These options will strengthen your commitment and save time.
- MATCH: be sure to match your saving target with your calendar. Months like December might be different than others since you might spend more than usual on buying gifts and dining out, so be sure to set a limit.
- PLAN: A savings goal will keep you motivated. Your plan can be as simple as establishing an emergency fund, or as big as the down payment towards buying a house. Saving allows you to reach your goals.
- PUT YOUR MONEY INTO A SAVINGS ACCOUNT OR INVEST IT: find out about the different types of accounts for saving or investing your money that the commercial banks and other financial institutions (such as credit unions) offer and which is more convenient for your needs. While doing your research, it is recommended that you take notes on the services, costs benefits of the commercial banks or financial institutions that interest you.
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Remember, the more savings you have, the closer you will be towards accomplishing your financial goals.
- GIVE YOURSELF A REWARD: compensate yourself moderately with something you like when you exceed your financial goals!
Saving Tips
Saving money helps us to avoid spending on things we “want” but do not really “need”. This series provides tips on saving in many areas. Some of these tips are simple to accomplish, some will be accomplished with planning, while others will take some amount of discipline to achieve.
Series 1: Starting to Save
You can save much if you can successfully determine your needs from your wants. Needs are those items which are necessary for sustenance: food, clothes, shelter and transportation. Wants are those items that enhance or improve our lives. Once we identify our needs and cater for them then we can determine how much of our wants we would like to satisfy. Remember the wants we sacrifice will result in more savings.
- To start saving, take an inventory on needs and see if you can reduce your spending. Begin with the biggest items first, where there is the potential for savings, and move down the scale to the less expensive items. A moderate saving on one big item (mortgage payment by renegotiating a lower interest rate) combined with savings on the smaller items (food, clothes, etc.) can reap a large reward on your total spending.
- Do not insist on buying “bigger and better” no matter what the cost. Look at your circumstances. A $100,000 double door refrigerator may be adequate for you rather than a $400,000 side by side refrigerator.
- Do not insist on buying strictly branded products since branded products will cost more than the same quality of generic (non-branded) products.
- Try out a product before buying it. This will go a long way in helping to avoid silly purchase of things you rarely or never use. Think before you buy home Gym equipment. Will you use it consistently or is it a fad? How often will you use some of the kitchen appliances such as a juicer or electric knife?
Using these tips will help you reduce unnecessary spending and increase your savings.
Series 2: Tips for Saving Money – Food Items
Purchasing of food items constitutes a major part of household expenses. Since food is a necessary and recurring expense, just saving a small amount each week can add up over the course of a year.
The following tips can be applied when shopping for food items:
- Plan in advance and prepare a list: this will help you determine the quantity of items you need. This will also prevent you from making several trips to the stores.
- Shop with a purpose - deliberate and focused. Turn a blind eye to specials and inducements to buy unless these items are on your list. Buy only what you need.
- Compare prices on brands offered. Food produced by a cheaper brand may be just as good as a more expensive brand.
- Shop at a store that is the cheapest overall. If possible shop at a few stores and compare prices. Some stores will have lower prices on certain type of items compared with other stores.
- Buy in bulk to save on cost; but buy only items which are used frequently so as to avoid spoilage and expiration.
- Stock up on items on sale only if used on a regular basis. Sales promotion is a marketing tool that entices you to buy unnecessary goods. Do not fall in the trap of impulsive buying.
- Purchase fresh meats from the butcher and vegetables from the marketplace. It is usually fresher and cheaper than in stores.
- Buy local fruits and vegetables which are in season since these may be cheaper.
- Never go shopping while hungry. All the snacks and unnecessary foods are less tempting if you are not hungry.
- If possible leave children at home when shopping. Children at a grocery store/supermarket can be budget busters by talking you into buying things that are not budgeted for.
Series 3: Tips for Saving Money - Clothing
Purchase of clothing could consume much of your money particularly if you are overly fashion conscious or have a large family or teenage children.
Follow the tips below when shopping for clothing:
- Establish a budget and stick to it. Determine how much clothing you need and how much money you are willing to spend. Make a commitment to do with less. Most of us do not need, do not use, or really do want much of the clothing we have.
- Do not buy impulsively. Resisting the urge to buy eye catching items. This may be difficult but make sure you do resist the urge.
- Buy separates that coordinate. You can make numerous combinations with a few well matched items. For women, jackets, slacks, shirts and blouses can be mixed and matched to create different outfits. Men can interchange slacks, shirts, ties and jerseys to create a versatile wardrobe at minimum cost.
- If you wear clothes ‘hard’ buy quality. Buying a pair of shoes that is of good quality instead of three pairs of poor quality could save money over the long run.
- Stay away from trendy fashion. Stick to the basics. Trendy fashion has short life but basic clothing has longer life.
- Buy clothing that does not require dry cleaning unless you can dry clean it yourself since dry cleaning cost can be high. Clothing which can be washed and ironed at home would help to cut down on maintenance cost.
- Buy dual purpose clothing. If it can be worn at both the office and at different type of social occasions, the purchase will be much more practical compared to a suit or dress that is single use.
- Compare generic (non-brand) clothing to brand clothing. The quality of generic clothing may be just of good and at a cheaper cost than branded clothing.
- Where possible, buy at sales events the things that you have budgeted for.
- Try clothing for proper fit, and find out about return policy before you purchase clothing. Buy clothing which is comfortable. Do not buy clothing which is a bit tight in the hope of losing weight; which you may not lose in the near future.
Opening a Bank Account
A bank account is very important for monitoring the money you receive and identifying how you spend. It is also safer than carrying your money around or having it at home.
Before opening, this is the first step towards financial independence!
Quick and easy steps:
- Think it through.
- Choose a Bank.
- Go for it.
Now it’s time to open your bank account.
When opening a bank account, you will be asked to provide the bank with some information about yourself. This is mostly done to alert the Bank to any possible risks and comply with certain regulations, such as money-laundering laws. Generally, most banks ask for the following:
- Proof of Identity such as passport, identification card, drivers’ license, proof of address (bill including your name).
- Bank references (if you don’t have this document generally you may submit a letter from a person who knows you).
- The banks require a minimum deposit to open a bank account. Make sure to find out before you go!
Alert: Before signing any document, it is important to read what is stated.
Don’t forget to ask for:
- Minimum deposit required
- Written description of fees (account, ATMs, debit cards, online banking)
- Cheques – number of cheques free of charge per month and minimum balances required
- Information on how to deal with unforeseen situations (e.g. stolen or lost debit card, fraud)
- Bank’s phone number and office hours
After you agree with the terms established by the Bank, you are ready to sign your contract and open your bank account!