Personal Finance

Personal Finance

The Difference Between Regular Savings and Lump Savings

A regular savings account requires one to pay a pre-determined amount of money every month, usually ranging between £ 25-250 (Garman and Forgue 2011). Even though minimum and maximum payments may be different, they may be as little as £ 10 or even higher than £400. Such accounts usually have tight regulations; if one does not make the, minimum payment every month, the account may be shut, or one could be subjected to a penalty like a low interest rate.

In regular savings, one can only make a limited number of withdrawals and some type of accounts may state that exact amount that one should pay each month. Other accounts, are more dynamic and flexible (Garman and Forgue 2011). On a positive note, consistent savers are subject to the best interest rates that can be offered. This is a crucial factor and should be carefully examined since some regular-savings accounts can have return rates that are not better than those of easy-access accounts (Garman and Forgue 2011). Nonetheless, a regular savings account can be a good way for a novel saver to learn the practice of putting money way every month. The chance of losing the headline interest rate can be a sufficient threat to assist individuals to keep saving. Further, these accounts are useful for anybody who wants to put money in a savings account in small quantities, or simply a person seeking a structured method to save over a certain duration.

Lump sum saving is typical the vehicle chosen for individuals who have large amounts of cash to invest and the belief that the time is ripe to do so (DeBie and Burger 2010). For instance, those who receive a bonus at a particular time of the year, or families that have received an abrupt windfall. Many accounts have a minimum set amount of £ 1,000. As such, they are suitable for people with large sums of money to save. If two accounts advertise the same interest rate, one will earn more if he/she can be able to pay in a lump sum than making monthly deposits (DeBie and Burger 2010). For instance, if a firm states an amount of £3,600 invested in a fixed bond rate over one year at an interest of 2.55%. It would earn an interest of £73.444 in one year (after taxes). However, if one pays £300 per month into an account with the sane interest rate, the total return would be £39.99.

There are some fixed-rate bonds that issue a higher interest rate in return for people who agree to lock away the cash for a pre-determined period. They are suitable if one is saving for a certain goal or have a large lump sum since they permit large savings of up to £5 million in some scenarios (DeBie and Burger 2010). However, they usually have penalties, and if one withdrawals money before the set-time, no interest will be received. Some accounts offer fixed rate over terms that are fixed, while others enable instant access. The latter is more suitable if one thinks they will need to use the money. There investors who attempt to time the market, saving lump sums when the interest rates are high. Nonetheless, this is very difficult to forecast, even for professionals. Therefore, some individuals set clear limits, like saving a lumpsum when the interest rate being offer is more than 5%.

The Different Circumstances for Investing

The foundation of any effective investment strategy is a good comprehension of one’s objectives, the related timescales, and what one is prepared to go through to realize those objectives. To do this one needs to consider certain issues as states below:

Is one saving for a rainy day or for a specific purpose?

Everybody tries to set something aside for emergencies and to save for something special. However, if one is saving for something specific like a house or a child’s university fees, there should be a difference in times of duration and amounts being saved.

What is the impact of inflation?

If one is saving for a particular thing in the future, it can be hard to determine the effect of inflation on the calculations. However, failing to account for inflation means that one will fall short of their set target (Houston 2010).

What are the various types of risk and how much risk is one willing to take?

There are certain issues related to risk that one should consider like the type of account and the amount to be saved. These considerations are important to comprehend the correct level of risk and if there are other types of risk that one should consider (Houston 2010). It may include the risk of death or illness and its effect on one’s family, the risk of interest rates increasing, or the risk of inflation. Risk profiling tools are usually utilized to identify one’s susceptibility to volatility and one’s ability to endure losses to the investment.

Which types of assets should one invest in?

The most applied method of regulating the risk in investments is through diversification, commonly referred to as not putting all eggs in one basket (Houston 2010). By investing in a broad range of various kinds of assets, all of which behave in discrete ways at different intervals, one is decreasing the effect that any single type of asset may contain (Houston 2010). The amount of cash that is put into each kind of asset is perhaps the single most critical decision that one will make when developing a portfolio. In the realms of academics, it is recognized that asset allocation has the single largest effect on both the net return and volatility of an investment.

Passive or Active Investing?

Active and Passive investing are the two different methods of investing money. Active investing applies the use of a fund manager on one’s behalf (Houston 2010). One pays him/her and therefore anticipates him/her to outperform the market through a comprehension of the sector where he/she works. This fund manager is expected to add value (Houston 2010). Passive investing does not involve the use of a fund manager but rather uses a computer software that traces and underlying index like the FTSE Allshare (Houston 2010). It means that one replicates the market instead of outperforming it. One should measure the pros and cons of each to come up with the most appropriate investment strategy.

Considerations and Principal Issues Associated with Personal Borrowing

There are various reasons that may make people to seek a personal loan like paying for education, financing a business, or purchasing an asset. On this account, there are various considerations that one should make. These include:

• The time of borrowing and the purpose of credit.
• The terms and Annual Percentage Rate (APR).
• The ability to repay the debt as fast as possible.
• The methods of reviewing the debt.

Aside from the aforementioned considerations, there are some common sense borrowing habits that one should follow. Whereas the laws that regulate lending may be multifaceted, the principles that guide borrowing are simple and founded on common sense. They include; one should not borrow an amount that he/she cannot repay; one should never borrow for a luxury item when he/she does not have basic necessities; one should prioritize his/her borrowing; one should maintain some borrowing ability in the case of emergencies.

The Components of Personal Borrowing

The Annual Percentage Rate (APR)

The APR is the charge that a lender issues for the use of their capital. It is typically a small percentage of the amount that has been loaned out (Wadhwani 2011). The two types of APR are fixed or variable (adjustable).

Fixed rates are those that do not change. For instance, if the fixed APR is 7%, it will remain at 7% for the lifetime of the loan. Variable rates can shift over time and are typically determined by a standard market rate, like the prime APR (this is the lowest rate a bank can facilitate at a given period and place to preferred borrowers) (Wadhwani 2011). For example, if one takes a loan with a variable rate of prime +3, it means that he/she will pay three percent more than the set prime rate. The APR for popular student loans usually have low rates.

The Security

Every loan can be either secured or unsecured. This is used to describe whether one is putting up assets, typically referred to as collateral to safeguard the loan. If one has secured their loan, it means that he/she have given the lender a guarantee that they will be repaid in any case by handing them a claim on an asset that he/she owns (Wadhwani 2011). If the loan is not repaid, the lender can take the collateral to recover their investment. This guarantee enables lenders to charge lower interest rate and hands them security that they will recover their money.

Unsecured loans do not require the borrower to give out any collateral. Therefore, the bank has no safeguard if a loan is not paid. (Wadhwani 2011) Almost always, unsecured loans are subject to higher interest rate due to the increased risk. Lending firms at times require that a second person co-signs for such a loan, or pledge to pay back the loan if the borrower cannot do so (Wadhwani 2011). Student loans are advantageous since they do need collateral while still being subjected to a low APR.

The Term

A loan’s term is the duration that the borrower has to service the loan. (Wadhwani 2011) Numerous personal loans are subjected to terms of 1 to 5 years. On the other hand, most student loans are repaid over 10 years. Usually, the longer the term, the higher the APR (Wadhwani 2011). The term is the maximum amount of time that a borrower is given to repay a loan. It should be noted that loans can be fully repaid before the term is over.

References

DeBie, T. and Burger, M., Consumerinfo. Com, Inc., 2010. Personal finance integration system and method. U.S. Patent 7,853,493.

Huston, S.J., 2010. Measuring financial literacy. Journal of Consumer Affairs, 44(2), pp.296-316.

Garman, E.T. and Forgue, R., 2011. Personal finance. Cengage Learning.

Wadhwani, R.D., 2011. The Institutional Foundations of Personal Finance: Innovation in US Savings Banks, 1880s-1920s. Business History Review, 85(3), p.499