Fradel R.

Fragio
10th Group: Savings and Investments

Sources of Savings and Investment

I. What are Savings?

Savings, according to Keynesian economics, are what a person has left over
when the cost of his or her consumer expenditure is subtracted from the amount
of disposable income earned in a given period of time. For those who are financially
prudent, the amount of money left over after personal expenses have been met can be
positive; for those who tend to rely on credit and loans to make ends meet, there is no
money left for savings. Savings can be used to increase income through investing in
different investment vehicles.
Saving - process of setting aside a portion of current income for future use, or
the flow of resources accumulated in this way over a given period of time. Saving may
take the form of increases in bank deposits, purchases of securities, or increased cash
holdings. The extent to which individuals save is affected by their preferences for future
over present consumption, their expectations of future income, and to some extent by
the rate of interest.
Saving is important to the economic progress of a country because of its relation
to investment. If there is to be an increase in productive wealth, some individuals must
be willing to abstain from consuming their entire income. Progress is not dependent on
saving alone; there must also be individuals willing to invest and thereby increase
productive capacity.

A. Understanding Savings
Savings comprise the amount of money left over after spending.
For example, Sasha’s monthly paycheck is $5,000. Her expenses include a $1,300
rent payment, a $450 car payment, a $500 student loan payment, a $300 credit
card payment, $250 for groceries, $75 for utilities, $75 for her cellphone and $100 for
gas. Since her monthly income is $5,000 and her monthly expenses are $3,050, Sasha
has $1,950 left over. If Sasha saves her excess income and faces an emergency, she has
money to live on while resolving the issue. If Sasha does not save her extra money and
her expenses exceed her income, she is living paycheck to paycheck. If she has an
emergency, she does not have money to live on and must secure payments for her bills.

1
Fradel R. Fragio
10th Group: Savings and Investments

Key Definition
Savings refers to the amount left over after an individual's consumer expenditure
is subtracted from the amount of disposable income earned in a given period of time.
Savings can be used to increase income through investing in different
investment vehicles.

B. Savings Account
Savings accounts are a safe place to store cash and can earn around
2% interest. They can also help you save for longer-term needs. A savings
account is a place where you can store your money securely while earning interest. Unlike
investment accounts, they are federally insured, which means up to $250,000 of the
money in your account would be covered if the bank failed (Based internationally).

(Armstrong, T.,2019. Retrieved from: https://www.nerdwallet.com/blog/banking/savings-

accounts-basics/)

Savings account according to Imoney, is a type of bank account that offers

consumers the protection of their funds while earning a low, stable interest rate usually
between 0.5% to 1% annually (Philippine-based rate). (E.g.The Philippines National Bank
(PNB) for example offers 0.5% interest rate on peso-denominated savings accounts and 0.75%
for foreign currency-denominated accounts.) The money in savings accounts is highly liquid,
meaning it can be withdrawn anytime it is needed. Many people find savings accounts
unprofitable due to its low interest rate as compared to time deposit accounts were much
higher rates of interest can be earned.
C. Benefits of a Savings Account
Protection. Your money is safe-kept in the bank and is protected under the law. All
Philippine banks are members of Philippine Deposit Insurance
Corporation (PDIC) and savings deposits are insured and secured up to
a maximum amount of PHP500,000 per person. In the event of a bank’s
failure, the PDIC will pay depositors their savings amount subject to the
maximum amount.
Liquidity. The money in your savings account is very liquid, which means it is easily
withdrawn as cash without any penalty. Liquidity is useful especially in
times of emergencies when extra funds are needed to make up for
shortfalls in cash.
Convenience. Your savings account can be used to electronically transfer funds to
friends, and can be used as a payroll account by companies. You can
withdraw cash anytime, using ATM machines around the country.
2
Fradel R. Fragio
10th Group: Savings and Investments

Earn Some Interest. Your savings account earns interest although the rate is
usually lower than many other investment types. Still, it sure beats the
interest (zero!) earned by hiding your cash under the pillow.
Source: Imoney (2013). Savings Account in the Philippines. The Basics. Retrieved from:
https://www.imoney.ph/articles/savings-account-in-the-philippines-the-basics/)

Savings Account can be accessed through banks.

D. Bank Savings
Bank savings vehicles come with federal insurance of up to $250,000 per depositor
(American-based).
A checking account offers unrestricted access to money with low or no monthly
fees. Money is transacted through online transfers, automated teller
machines (ATMs), debit card purchases or by writing personal checks. A checking
account pays lower interest rates than other bank accounts.
A savings account pays interest on cash not needed for daily expenses but
available for an emergency. Deposits and withdrawals are made by phone, mail or at a
bank branch or ATM. Interest rates are higher than on checking accounts.
A money market account requires a higher minimum balance, pays more
interest than other bank accounts and allows few monthly withdrawals through check-
writing privileges or debit card use.
A certificate of deposit (CD) limits access to cash for a certain period in
exchange of a higher interest rate. Deposit terms range from three months to five years;
the longer the term, the higher the interest rate. CDs have early-withdrawal penalties
that can erase interest earned, so it is best to keep the money in the CD for the entire
term.
Source: Kagan,J. (2019). Personal Finance. Budgeting and Savings. Retrieved from:
https://www.investopedia.com/term/s/savings.asp

II. Where do savings come from?

“Saving money is the first step to grow your money. But, simply saving is an
unproductive exercise. To create wealth, investors should go further and invest that
saving,” says Priya Sunder, director and co-founder, Peak Alpha Investment.

3
Fradel R. Fragio
10th Group: Savings and Investments

1. Household Savings:

Household saving is defined as the difference between a household’s disposable

income (wages, income of the self-employed and net property income) and its
consumption (expenditures on goods and services.)
Source: Ventura, A., 2018. Economic Data. Household Saving Rate 2018. Retrieved
from: https://www.gfmag.com/global-data/economic-data/916lqg-household-saving-rates

The household sector is the largest contributor to domestic saving. Household

savings can be divided into three parts, as follows:
(a) Physical Assets: The physical assets include housing, machinery, furniture,
fixture and real estate.
(b) Financial Assets: This takes the form of currency, bank deposits, shares and
debentures, claims on government, mutual funds, national savings
certificates, life insurance funds and provident and pension funds.

(c) The Unaccounted Savings of the Household Sector: The unaccounted savings
of the household sector are always kept in the form of gold, silver
and durable goods on which information is very scanty. However,
on the basis of estimates the proportion of these assets is placed
in a range of 3 to 10 per cent of the GNP in any year.

2. Government Savings

Government savings come from surpluses of public enterprises and other public financial
institutions.

Total national saving is measured as the excess of national income over consumption and
taxes and is the same as national investment, or the excess of net national product over the parts
of the product made up of consumption goods and services and items bought by government
expenditures. Thus, in national income accounts, saving is always equal to investment. An
alternative measure of saving is the estimated change in total net worth over a period of time.

3. Private Corporate Savings

In developed countries, the corporate sector has contributed, significantly to national

savings. Savings from private Institutions.

Private investment is derived at by subtracting public construction from gross fixed capital
formation.

Source: Aziz, H., 2011. Philippines: Private Sector Development: Challenges and Possible Ways
to Go No.5 pg 3-4. Asian Development Bank. Retrieved from:
https://www.adb.org/sites/default/files/publication/28987/sea-wp5-philippines-psd.pdf

4
Fradel R. Fragio
10th Group: Savings and Investments

Table 1. Philippines Personal Savings

Personal Savings in Philippines increased to 4683570.21 Million PHP in October from

4662729.41 Million PHP in September of 2019. Personal Savings in Philippines averaged
2299164.91 Million PHP from 2001 until 2019, reaching an all-time high of 4689905.96 Million
PHP in August of 2018 and a record low of 1124351.04 Million PHP in April of 2005. (Bangko
Sentral ng Pilipinas, 2019).

Source: Trading Economics 2019. Philippines Personal Savings. Retrieved from:

https://tradingeconomics.com/philippines/personal-savings

5
Fradel R. Fragio
10th Group: Savings and Investments

III. What are Investments?

An investment is an asset or item acquired with the goal of generating income or
appreciation. In an economic sense, an investment is the purchase of goods that are
not consumed today but are used in the future to create wealth. In finance, an
investment is a monetary asset purchased with the idea that the asset will provide income
in the future or will later be sold at a higher price for a profit.
An investment always concerns the outlay of some asset today (time, money,
effort, etc.) in hopes of a greater payoff in the future than what was originally put in.

Source: Chen, J., 2019. Investing: Investments. Retrieved from:

https://www.investopedia.com/terms/i/investment.asp

A. Understanding Investment

Investing is putting money to work to start or expand a project - or to purchase

an asset or interest - where those funds are then put to work, with the goal to income
and increased value over time. The term "investment" can refer to any mechanism used
for generating future income. In the financial sense, this includes the purchase of bonds,
stocks or real estate property among several others. Additionally, a constructed building
or other facility used to produce goods can be seen as an investment. The production of
goods required to produce other goods may also be seen as investing (Investopedia.com,
2019).
Taking an action in the hopes of raising future revenue can also be considered an
investment. For example, when choosing to pursue additional education, the goal is often
to increase knowledge and improve skills in the hopes of ultimately producing more
income. Because investing is oriented toward future growth or income, there is risk
associated with the investment in the case that it does not pan out or falls short. For
instance, investing in a company that ends up going bankrupt or a project that fails. This
is what separates investing from saving - saving is accumulating money for future
use that is not at risk, while investment is putting money to work for future
gain and entails some risk.

B. Investment Banking

An investment bank is a large financial institution that works primarily in high

finance. They help companies access capital markets (stock and bond market, for
instance). This allows corporations to raise money for expansion or other needs.
Source: Kenon, J., 2019. Personal Finance: What is an Investment Bank?. Retrieved from:
https://www.thebalance.com/what-is-an-investment-bank-357318

6
Fradel R. Fragio
10th Group: Savings and Investments

An investment bank provides a variety of services designed to assist an individual

or business in increasing associated wealth. This does not include traditional consumer
banking. Instead, the institution focuses on investment vehicles such as trading and asset
management. Financing options may also be provided for the purpose of assisting with
these services.
Investment banking is a specific division of banking related to the creation of
capital for other companies, governments and other entities. Investment banks
underwrite new debt and equity securities for all types of corporations, aid in the sale of
securities, and help to facilitate mergers and acquisitions, reorganizations and broker
trades for both institutions and private investors. Investment banks also provide guidance
to issuers regarding the issue and placement of stock.
C. Where do Investments come from?

1) Banks
These firms play an important
role by helping companies, and
government entities make educated
financial decisions and raise needed
capital (Investopedia, 2019).

A typical investment bank has a

number of sources of revenue, the most
common of which are:

Trading. an investment banks

undertakes market making activities Source: https://www.123rf.com/photo_10877692_diagram-of-
investment-sources.html
whereby it stands ready any time a client
requests it to quote a bid price or an offer price (or both at the same time) on different
types of securities and derivatives. For example, if the client wants to buy a swap, the
bank will assume the role of a counterparty (swap seller), and if the client seeks to sell a
swap, the bank will act as a swap buyer. Market making is all about capturing the bid-ask
spread, i.e., the difference between the price at which the bank stands ready to buy (bid
price) and the price at which it stands ready to sell (ask, or offer price). Trading income
takes the form of realized and unrealized profit and losses.
Commissions. investment banks generate revenue from agency transactions
where they act as intermediaries between different market players. More specifically,
banks receive a percentage of the transaction value as their compensation for bringing
transaction parties together.
Asset management. investment banks receive fees from asset management
activities such as the management of assets on behalf of their clients (portfolio
management, sale of mutual funds, etc).
Securities. investment banks generate revenue from securities-related activities
such as advisory fees from mergers and acquisitions (M&As), dividends and interest from
investment accounts, and so on.

7
Fradel R. Fragio
10th Group: Savings and Investments

Underwriting. investment banks are well-known for their active role in

underwriting security issues (initial public offerings). For their services, they receive
underwriting income.
Interest. other sources of income for investment banks include margin interest
and interest from investment accounts. Income from margin interest is what a bank
charges a client borrowing against the value of its securities to finance purchases (buying
on margin).

Source: https://www.investment-and-finance.net/investment-banking/tutorials/sources-
of-revenue-for-investment-banks.html

2) Venture Funds or Capital

Venture capital is a form of private equity and a type of financing that

investors provide to startup companies and small businesses that are believed to
have long-term growth potential. Venture capital generally comes from well-off
investors, investment banks and any other financial institutions. However, it does
not always take a monetary form; it can also be provided in the form of technical
or managerial expertise. Venture capital is typically allocated to small companies
with exceptional growth potential, or to companies that have grown quickly and
appear poised to continue to expand (Chen, J., 2019)
Source: https://www.investopedia.com/private-equity-and-venture-cap-4689780

3) Family and Friends

According to a survey, friends and family invest more than $60 billion every year.
Moreover, around 38 percent of the startup owners gather funds from their kith and kin
and the average investment value is around $23,000.
There is no better way to raise money than to seek the help of your own family
members or friends. They can be an ideal option to give your business a head start. If
you have reliable family members who are willing to invest, it can be a valuable resource
and a long-term opportunity, especially because their main motivation will be to provide
support and show loyalty toward the founder rather than expecting a high return on
investment.

It is basically a close circle of those individuals who have a strong affinity with your
brand or with you.

However, it is very important that these investments are officially set down in
writing. All the documentation should be signed by the investors with their consent to the
fact that there is a risk that they might not get their cash back.

8
Fradel R. Fragio
10th Group: Savings and Investments

Source: Alvarez, Elian D., (2017). Angel Investors and Friends and Family – The key
Source of Funding. Retrieved from: https://magazine.vunela.com/angel-
investors-friends-and-family-the-key-source-of-funding-2654c57cc412

4) Institutional Investors

Institutional Investors are large

institutions that trade securities in the
market in large quantities on behalf of
their investors. Since the number of
investors in such an entity is large, the
size of the trades is automatically large
and are able to enjoy preferential
treatment and lower commissions in the
market as compared to the retail
investors.

Types of Institutional Investors

Type #1 – Hedge Funds
This type of Institutional Investors are investment funds that pool in money from
various investors and invest on their behalf. They are usually structured as limited
partnerships with the fund manager acting as the General Partner and the investors acting
as Limited Partners. The distinctive features of hedge funds are that there is no limit
imposed by the regulators on the usage of leverage.
Also, they invest mostly in Liquid Assets. The most important characteristic of
Hedge Funds is that it often takes a long and short position or a hedged position in
securities. They also use numerous other risk management techniques for neutralizing the
risk.

Type #2 – Mutual Funds

Mutual Funds are pooled investment vehicles that buy securities with capital
pooled in by multiple investors. The main advantages of Mutual Funds are that they are
professionally managed.
Investors without any proper knowledge can avail the benefit of getting
professional management of their funds through this fund. The investment is done in
liquid assets that are traded in the market.
Mutual Funds are well diversified and provide investors protection in case particular
security underperforms. At the same time, mutual funds charge some fees to every
scheme which is deducted from the client’s account.

Type #3 – P/E Funds

Private Equity funds are pooled investment vehicles with a structure of a Limited
Partnership and a fixed term of usually 10 years. These funds provide equity financing to

9
Fradel R. Fragio
10th Group: Savings and Investments

private entities that are unable to raise capital from the public. These investments are
illiquid in nature.
P/E funds often indulge in venture capital financing, wherein they provide capital
to up and coming entities in which they see the huge hidden potential. The minimum
investment size with P/E funds is usually high and this option is available to only HNIs.
P/E funds carry high risk and therefore investors expect a high return on their
investment. The high risk is associated with the non-public nature and small size of the
investee companies.

Type #4 – Endowment Funds

This type of institutional investors is investment pools established by a group of
founders or principals for specific needs or for the general operating processes of an
entity. They often take the form of Non-Profit Organisations and foundations.
They are generally used by universities, hospitals, and charitable organizations
where the principals make donations to the fund. The investment income, as well as a
small part of the principal, is available to the organizations for use.

Type #5 – Insurance Companies

Insurance Companies also fall under the category of Institutional Investors. They
collect premiums regularly and the claims are paid often irregularly. The premium that
they earn needs to be deployed and hence they invest in securities.
The claims are paid out of this investment portfolio. Since the size of insurance
companies is generally large, the size of their investments is also large.

Source: WallStreetMojo (2016). Portfolio Management in Finance – Institutional Investors.

Retrieved from: https://www.wallstreetmojo.com/institutional-investors/

5) Government Grants

A public subsidy offered to a recipient for business or personal purposes. The subsidy is
not expected to be paid back, and may be used for research, business development, education
or other endeavors that are anticipated to support a common cause. The grant offering
typically includes conditions that must be met, such as reporting performance or results.

Source: http://www.businessdictionary.com/definition/government-grant.html

6) Angel Investors

Angel investors are wealthy individuals who provide capital to help entrepreneurs and
small businesses succeed. They are known as "angels" because they often invest in risky,
unproven business ventures for which other sources of funds—such as bank loans and formal
venture capital—are not available.

Source: Angel Capital Association, January 2006, retrieved

from: http://www.angelcapitalassociation.org/. "About ACA."

10