As a teenager it is very important to understand some key concepts from the financial world that surrounds you. Understanding them basically helps you make better financial decisions.
Developing good money management habits such as saving and budgeting in your adolescent years, prepares you for the future. As an adolescent, you may be thinking that these habits do not have to be considered right now because your parents or guardians take care of all your financial needs. But if you delay focusing on them, it can cost you having a great financial start in the near future, because saving consistently as early as possible, can add up over time and help achieve your short and long-term goals.
Remember….You are not too young to be a financially capable person!
Saving & Budgeting
Saving and budgeting can be considered the most essential financial tools required for financial freedom and success. They are as important as a foundation is to a house, an engine to a car or pillars to a building!
So what exactly is saving? There are many definitions available; however, it simply refers to “the portion of income not spent on current expenditures” . In other words, “saving means not spending your money straight away, but putting it away so you can spend it later”.
The main reasons for savings are:
1) To develop a positive habit of saving
2) To be prepared for major life events such as furthering your education (e.g. tuition expenses, books etc.)
3) To cope with emergencies
4) To assist with post-secondary school expenses such as clothing, food and shelter as you may be job hunting
5) To instill a sense of independence in yourself as you transition into a young adult
6) To improve your credit rating so that you can access a loan such as a mortgage to help you in the future
Saving your money at home is good, but it isn’t safe and most importantly it does not help your money grow. Therefore, it is more prudent to save your funds in a secure place such as a financial institution of your choice, so that interest can be earned and it is not under the threat of loss due to theft, natural disaster and/or misplacement. Utilization of a financial institution reduces the chance of losses, theft or even the temptation to spend on the latest gadget or entertainment.
Given that you may not be of legal age to open an account on your own, there are special provisions in place which allow your parent/guardian to do so on your behalf.
Remember, piggy banks and mattresses may be a good start to savings, but a smart saver knows the benefits of opening an account! If you haven’t already done so, what are you waiting on?
Believe me it’s exciting to watch your money grow. Get hooked on saving today!
Where can you save? – Financial Institution
There are a number of different financial institutions to choose from. The term Financial institution is used for banks, trust companies, credit unions and other investment companies that deal secure, invest and lend money.
(i) Commercial Bank (Bank)
Banks offer a wide range of services such as:
• Savings accounts
• Loans to individuals and businesses
• Issue Debit, ATM and credit cards
• Banks have a license to take your money.
Financial Tip: In Trinidad and Tobago your savings (savings accounts) with a bank are insured up to $125,000, this means that if the Bank experiences financial difficulty, your money is safe.
(ii) Credit Unions
Credit unions are membership organisations that are formed by people living in a particular community; employees of a business or members of a religious or other organisation. 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 member and 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 amongst them. Only members of a credit union can deposit or withdraw money.
A credit union operates by taking money from its members, on one hand, and lending to its members on the other. The credit union uses your shares as collateral for the loan. Once the credit union makes a profit, it is shared among all members. The share of the profits that a member receives is called a dividend. Profits are calculated after the credit union deducts operating expenses such as salaries, rent and maintenance bills.
(iii) Mutual Funds
A mutual fund is a form of collective investment because it pools money from various persons and invests it in various financial instruments. Persons who purchase mutual funds are called investors as they purchase units in the fund.
The funds are managed by a fund manager and its returns are shared among the fund holders as dividends after operating expenses are deducted. Mutual funds pay higher interest than deposits because there is some chance or risk that the money invested may make a loss. The possibility of getting a higher return or growth on their money encourages people to invest.
(iv) The Stock Market or Stock Exchange
The Stock Exchange provides a place for people to buy and sell shares in companies that are listed on the register. When you purchase a share in the company you become a part owner. That means you receive money (dividends) if the company makes profits. There is the risk however, that if the company makes a loss, no dividend will be paid. You can also sell your shares on the stock exchange.
The price of your shares can go up or down depending on the profitability of the company. If the price of your share is higher than what you paid for it you have made a capital gain. Stock exchanges operate under strict rules, regulations and guidelines.
A bond is simply a loan provided to the government or a private company to help them raise money or capital to finance projects. When the government or a 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 bond matures or comes to an end. Bonds generally pay higher rates of interest than savings because they may be held by the government for as long as 5, 10 or 20 years.
In general, the longer the period for which the bond is kept the higher the rate of interest paid. Investing in a bond is a good way of setting aside money for future use.
It is not as easily accessible as savings and earns a higher rate of interest. Government bonds are risk free which means that you should always get your money back at the end of the loan. Corporate or business bonds carry some risk. The company may be unable to repay the loan if it does not do well.
What is the difference between Saving and Investing?
Saving is simply putting aside money which will not be spent. As previously mentioned, occasionally, persons save to have available funds to meet emergency expenses or towards a specific goal. Most financial institutions have savings account plans where your money will earn interest and be safe. When you place money in a financial institution, you usually expect to have the amount you have not used available for use and to earn some interest. Because there is little or no risk associated with saving money, you earn lower returns than if you had invested the money.
Investing is putting your money to use so that it can earn higher interest. Generally, money for investment purposes is put away for longer periods of time than savings. You usually hope to make a greater return on your money but the risks are also greater. When you take more risk or invest for a longer period of time you are paid more interest. Purchases of mutual funds, shares and real estate or housing are all forms of investment. The value of an investment may increase, decrease or stay the same. If the value decreases you may not get back the full capital (money) that you put into the investment.
What is the Risk and Return on an investment?
The amount of money you have to save or invest.
Risk is another name for chance or uncertainty. One type of risk you face is the chance that the value of your investment may decline. The more uncertainty there is about the investment, the higher the risk and the higher the interest that will be paid. An investment in a new company normally carries a higher interest because there is no proof of how well this company will perform, so the investment is more risky. Investing for longer periods also carries higher interest because it is more difficult to predict events further into the future.
The amount of money you get back on your capital. A general rule is that you get a higher rate on more risky investments.