Under

Ethiopian TVET System

Basic Account Works Level II

Learning Guide
Unit of Competence: Develop and Use a Savings Plan
Module Title: Develop and Use a Savings Plan
Module Code: EIS BAW2 09 0812
TTLM Code: EIS BAW2 09 0812

LO 1: Discuss the place of saving and investing today

LO 2: Understand risk as it relates to saving and investing
LO 3: Develop your own savings plan
LO 4:Implement your own savings plan

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LO.1 THE PLACE OF SAVING AND INVESTING TODAY
Many people confuse the concepts of saving and investment. It’s important to understand the
difference between saving and investing as a start point.
Saving - you put money away in complete safety, and get it all back plus interest.
Saving takes place when people withdraw from consumption, that is, when they consume less than
their income.
Investing -investment takes place when we purchase new capital equipment or other assets that make
for future productivity.
if you can't afford or don't want to take any risk with your cash, then saving is for you and thus read
on.
Where to invest
Most banks, trust companies, credit unions and investment firms offer a range of investment options
for investing your money. it all depends on what kind of investing you prefer according to risk,
duration, amount and other market factors.
These financial institutions have consultants on hand to help you invest, either as part of the banking
services included with your account or where you'll pay a fee for consulting services. think about
your goals, preferences and comfort zone before investing your money.

1.1. the impact of increasingly high cost of living in society

1. Cost of living
Definition
The amount of money needed to maintain a certain level of living, including basic expenses such as
housing, food, taxes, and healthcare.
Cost of living is often used when comparing how expensive it is to live in one city versus
another.
Price of goods and servicesrequired for keep an average level standard of living. cost of living varies
from place to place, and from time to time..
The average cost of the basic necessities of life, such as food, shelter, and clothing.
The cost of basic necessities as defined by an accepted standard regarded as basic or minimal.
The average expenditure of a person or family in a given period

1.2.
Increasing levels of consumer debt in Ethiopia
Consumer debt
consumer debt is a broad term that covers all types of consumer credit that is currently outstanding.
this type of debt is usually understood to include any and all extensions of credit that have to do with
the purchase of goods that are considered consumable and subject to depreciation over time.
Perhaps the most common type of consumer debt in the world today has to do with credit cards.
When an institution issues a credit card to a new customer, most design call for applying a
specific credit limit to the card. The credit limit represents the maximum amount of credit card
debt that the cardholder can mount up. Any outstanding balance on any credit card is considered
to be consumer debt. .
In the broadest sense, consumer credit includes credit cards, store charge cards, personal loans,
vehicle loans, and other lines of credit. The credit may be for a specific item, as when people
apply for car financing, or it may be an open line of credit as with a credit card that can be used
to buy anything
Financial institutions that originate consumer credit determine how much credit should be
offered and on what terms.
The first factor to identify with each of your debts is to determine whether they are secured or
unsecured..Your car loan and mortgage are both secured debts, because if you don’t pay your

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creditor, they have the right to take your car or home to satisfy the debt. with a secured debt, you
always offer up something that you risk losing if you don’t keep current with your payments.
Unsecured debts don’t have any collateral. if you don’t pay, they can threaten, penalize, and even
pursue legal action, but they can’t take your property to satisfy what you owe – at least not
without suing you first. Most credit card debts are unsecured, which is why creditors send
delinquent accounts to collection agencies to try and get their money if you’re not keeping up
with your obligations.
Typically unsecured debts will have higher interest rates than secured debts, because the
creditors don’t have the reassurance of your collateral if you don’t pay.
Consumer debt as a way to increase domestic production, on the grounds that if credit is easily
available, the increased demand for consumer goods should cause an increase of overall domestic
production
the most common forms of consumer debt are credit card debt, payday loans, and other consumer
finance, which are often at higher interest rates than long-term secured loans, such as mortgages.

1.3. THE IMPORTANCE OF SETTING FINANCIAL GOALS AND DEVELOPING A SAVING

Reaching goals and achieving personal objective are major objectives of the financial planning
process. In order to make plans for the future, you need to know where you are today and where you
want to be in the future.
What are financial goals?
Financial goals are the short-, medium- and long-term objectives you indicate and categories as the
reasoning behind your saving.
 Short-term financial goals are the things you want to afford in one to two years’ time like
saving for an emergency fund, going on holiday or becoming debt free.
 Medium-term financial goals are the more expensive items you need two to five years to save
up for like the purchase of a car or making a deposit on a house.
 Long-term financial goals are the savings you need to put aside for a far longer period of time
so that you will be able to afford your children’s education and your retirement.
Here’s why you need to set financial goals for yourself:
Reason 1: when you know what you are saving for you have purpose.
With clear goals you will have something to save for. cutting out coupons, saving where you can and
sticking to your budget will have more motivation behind it when you know why you are doing it.
Write each of your goals down, add the amount you need to save respectively and perhaps even add a
figure.
Reason 2: you can protect yourself from making new debt.
By assessing your short-, medium- and long-term needs and putting money away for it you can
prevent yourself from making new debt when the time comes.
Reason 3: it allows you to encourage a savings habit.
saving is difficult because it is human nature to want to destroy you every now and again. however,
clear financial goals help further a savings habit that will make it easier. and over time these habits
will grow in its strength, especially after you taste the pleasure of meeting your short-term goals.
Reason 4: it can give you peace of mind.
If you do not have any savings, especially for the education of your children or for your retirement,
you are probably having sleepless nights whenever you think about it. by setting goals, creating a
plan and then following it, you will have peace of mind that you are slowly but surely saving towards
financial security.
Keep in mind: in order for you to be successful in reaching your financial goals, every goal has to be
flexible and feasible

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 LO.2 UNDERSTAND RISK AS IT RELATES TO SAVING AND INVESTING
2.1. The concept of risk and risk versus return
Definition of risk
The chance that an investment's actual return will be different than expected.risk includes the
possibility of losing some or all of the original investment.
Risk and return
Almost all investments carry risk and yield return. Usually, higher the risk higher the return, lower
the risk lower the return. However, a general understanding of this phenomenon is not sufficient to
make appropriate decisions relating to investments.
What is risk?
With respect to investments, risk is simply the chance that your original investment will not grow
as expected, or will even decline in value. all investments involve some level of risk. When
deciding how to invest your savings, it is important to understand the risks associated with any
potential investment to decide if it suits your overall goals and circumstances.

What is return?
Return is the amount you earn on your original investment. return can take many forms,
including interest, dividends, and capital appreciation (increase in value). return is usually
expressed as a percentage — typically a rate of interest or a percentage increase in value.
a return from any investment can be calculated simply by subtracting the amount invested from the
final amount realize.

What is the relationship between risk and return?

 
Risk and return are directly related. The greater the risk of the investment, the greater the
potential return from that investment.Conversely, with very safe, low-risk investments, the return
will likely be low.
 
2.2. An individual's risk profile

Risk profile indicates ability to take risk while investing. The starting point for your investment
strategy is your individual risk profile. Your risk profile assesses your overall tolerance to take
on risk which is influenced by a large amount of factors such as your personal needs and goals,
your current financial situation, the structure of your current investments, your time horizon and
your level of familiarity with investment issues. this forms the basis for your investment strategy
and the recommendation of the optimal portfolio for to meet your long-term goals.
However, markets change, as do your individual needs and it is important that your investment
goals and financial circumstances are periodically reviewed the right one for you.
2.3. The impact of inflation on the earnings power of money
Impacts of inflation can be on?
i) individuals
ii) society
iii) the economy
  Inflation is a rise in the general level of prices over time. it may also refer to a rise in the prices
of a specific set of goods or services. in either case, it is measured as the percentage rate of
change of a price index.

Economists believe that high rates of inflation are caused by high rates of growth of the money
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supply. Views on the factors that determine moderate rates of inflation are more varied: changes
in inflation are sometimes attributed to fluctuations in real demand for goods and services or in
available supplies (i.e. changes in scarcity), and sometimes to changes in the supply or demand
for money.

With inflation, the price of any given good is likely to increase over time, therefore both
consumers and businesses may choose to make purchases sooner than later. this effect tends to
keep an economy active in the short term by encouraging spending and borrowing, and in the
long term by encouraging investments. but inflation can also reduce incentives to save, so the
effect on gross capital formation in the long run is ambiguous.

Inflation also gives central banks room to maneuver, since their primary tool for controlling the
money supply and velocity of money is by setting the lowest interest rate in an economy - the
discount rate at which banks can borrow from the central bank. since borrowing at negative
interest is generally ineffective, a positive inflation rate gives central bankers "ammunition", as it
is sometimes called, to stimulate the economy. as central banks are controlled by governments,
there is also often political pressure to increase the money supply to pay government services;
this has the added effect of creating inflation and decreasing the net money owed by the
government in previously negotiated contractual agreements and in debt.

Thus the inflation impact by the individuals, society, and the economy.
One risk of higher inflation is that it has a regressive effect on lower-income families and older
people in society. This happen when prices for food and domestic utilities such as water and
heating rises at a rapid rate.
Cost of borrowing: high inflation may also lead to higher interest rates for businesses and people
needing loans and mortgages as financial markets protect themselves against rising prices and
increase the cost of borrowing on short and longer-term debt. there is also pressure on the
government to increase the value of the state pension and unemployment benefits and other
welfare payments as the cost of living climbs higher.
High inflation can lead to an increase in pay claims as people look to protect their real incomes.
This can lead to a rise in unit labor costs and lower profits for businesses.

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 LO.3 DEVELOP YOUR OWN SAVINGS PLAN

3.1. Personal savings goals

The seven essential steps will help you create a successful savings plan:
1. Record your expenses
The first step in saving money is to know how much you’re spending. For one month, keep a
record of everything you spend. That means every coffee, every newspaper and every snack you
purchase for the entire month. Once you have your data, organize these numbers by category—
for example: gas, groceries, mortgage and so on—and get the total amount for each.
2. Make a budget
Now that you have a good idea of what you spend in a month, you can build a budget to plan
your spending, limit over-spending and make sure that you put money away in an emergency
savings fund. Remember to include expenses that happen regularly, but not every month, like car
maintenance check-ups.
3. Plan on saving money
Determine how much you can save whether you make $200 or $1,000 a year, you need a picture
of how much you're spending. Once in place, you can determine how much you can 3...allocate
to savings. if you're unsure how much you should be saving talk with an adviser.
Taking into consideration your monthly expenses and earnings, create a savings category within
your budget and try to make it at least 10-15 percent of your net income. if your expenses won't
let you save that much, it might be time to cut back. look for
4. Set savings goals
Setting savings goals makes it much easier to get started. begin by deciding how long it will take
to reach each goal. Some short-term goals (which can usually take 1-3 years) include:
 saving  to cover 6 months to a year of living expenses (in case of job loss or other
emergencies)
 saving money for a vacation  saving to purchase close
 saving to buy a new car  saving to bulled house
 saving to pay taxes  saving to make business
Long-term savings goals are often several years or even decades away and can include:

 saving for retirement

 putting money away for your child's college education

 saving for a down payment on a house

5. Decide on your priorities
Different people have different priorities when it comes to saving money, so it makes sense to
decide which savings goals are most important to you. Part of this process is deciding how long
you can wait to save up for a goal and how much you want to put away each month to help you
reach it. As you do this for all your goals, order them by priority and set money aside
accordingly in your monthly budget. Remember that setting priorities means making choices.

6. Make it habitual

7. Monitor your progress

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Take a few minutes every few months to see your savings goals. if you get a salary increase, add
it to your savings.

3.2. What contribution has a personal budget is towards savings goals

The following strategies can help you build your personal budget
worksheet.
1. Set your goals
Make a list of all the financial goals you want to accomplish over the short and long term. ask
yourself basic questions about why those goals are your priorities, how you are planning to
achieve them and how quickly you need to see the results
2. Know your net income
The first step in creating a budget is to identify the money you have coming in, otherwise known
as your income. Keep in mind, however, that it's easy to overestimate what you can afford if you
think of your total salary as what you have to spend.
3. Make your plan
Start by dividing your net income into
2 broad spending categories: fixed expenses and variable expenses. Some of your expenses, such
as your mortgage, are fixed because they stay the same each month. Other expenses, such as
entertainment or gas for your car, are variables that change from month to month. For both fixed
and variable expenses, you'll want to record how much you spend on each.
You may also want to divide your spending into 3 basic categories: needs, savings and wants.
Needs include fixed and variable costs that are essential to your daily well-being.Savings include
your emergency fund and retirement accounts. Wants covers everything else.
4. Personalize your budget
The great thing about creating a budget is that you can customize it to your own needs
Creating a budget
Follow these 4 easy steps as you start building your personal budget spreadsheet:

1. record your daily spending

2. Plan for next month's expenses and income so you don't get taken by surprise. make sure
to check in with your significant other before making the list final.

3. Look for ways to spend less. Small savings can add up to a lot of money.

4. Find ways to increase your income. have a monthly check-in

Take a look at your spending every month and compare it to your personal budget worksheet to
see how things are going. If you find that you're often going over-budget in some areas out of
necessity, you should consider cutting elsewhere to keep things under control..
3.3. The range of financial product options to maximize earnings
An investment is something you put money into to make your money grow. if you work a part-
time job, that hard-earned cash can be invested, putting your money to work for you.
LO.4 IMPLEMENT YOUR OWN SAVINGS PLAN

4.1. The requirements to open an account

Personal / joint account

 completed account opening form

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  a valid proof of identity of each signatory (current driver’s license/ national id/
international passport/ student id card-for students)

 proof of address – utility bills for the 3 previous months/ site visitation report/ certificate
of residence/ tenancy agreement

 2 passport photographs

 employer’s letter of introduction (for salary account)

 residence permit – if a foreigner

4.2. Relevant (significance) of savings accounts
Unexpected expenses -you never know when an emergency will occur.
Peace of mind

Safety- it is a safe way to accrue money instead of keeping large amounts of money in the
home. in addition, money placed in banks is kept in fire proof safes.
College funds-people with children can set up a separate savings account for their
children as soon as they are born. this account is not attached to their checking account
and is a way for them to save money for their children's college tuition.
Freedom from credit-savings accounts allow you to meet your financial goals without
using credit.
Insured-money set aside in a savings account is insured by the federal government.
Interest-another benefit of a savings account is that the bank pays individual interest on
money kept.

4.3. Adjustments to the savings goal

Adjusting your plan
If the amounts you are now saving falls short of the amount you need to save to reach your goals,
try asking yourself these questions:

 Are you paying yourself first, with a disciplined saving and investment program that
saves at least 10 percent to 15 percent of your net income?

 Could you increase the amount you are saving?

 Could you earn more and spend less?

 Are you spending too much on impulse purchases and neglecting long-term savings
goals?

 Are your goals too motivated?

 Could you change or eliminate any of your goals?

 Could you delay any target dates of your goals?

 What is the impact on you and your family if your goals are not accomplished?
With these questions in mind, take another look at your savings goals worksheet and at your
budget worksheet. Make adjustments in both until your actual savings is equal to your goal
savings. When you have completed your adjustments, you should have a savings plan for the
current year and a forecast for your future.

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It’s important to repeat this exercise annually and adjust as appropriate. if your income increases
— for example, if you receive interest and dividends, unexpected bonuses or find other ways to
accelerate your savings — then you will be able to accelerate your progress toward your goals.
Be prepared to modify your goals if you suffer a setback. The key is to remain flexible.
Your budget is your life. But it’s not static. Sometimes you need to adjust your goal to adjust,
To help keep your budget goal on track

 Involve the entire family. Agree on a budget up front and meet regularly to check your
progress.

 Stay disciplined. try to make budgeting a part of your daily routine

 start your new budget at a time when it will be easy to follow and stick with the plan
(e.g., the beginning of the year, as opposed to right before the holidays)

 Find a budgeting system that fits your needs. (e.g., electronic spreadsheet or physical
ledger)

 distinguish between expenses that are "wants" (e.g., designer shoes) and expenses that are
"needs" (e.g., food)

 build rewards into your budget (e.g., eat out every other week) to keep yourself motivated