Republic of the Philippines

PANGASINAN STATE UNIVERSITY

San Carlos City Campus
San Carlos City, Pangasinan

MACROECONOMICS
BSE Social Studies
2nd Semester AY 2020-2021

Discussant: Bea Bianca R. Mamaril

Date:

I. Topic: Savings and Investments

II. Objectives:
a. Define savings and investments；
b. discussed the propensity to save and rule of 72；and
c. explained the difference and similarities of savings and investments.

III. Overview
The words savings and investments are frequently use interchangeably, but when it comes
down to it, we should be doing both to secure our financial future. No one is born knowing how to save or
to invest. Every successful investor starts with the basics. A few people may stumble into financial
security—— a wealthy relative may die, or business may take off. But for most people, the only way to
attain financial security is to save and invest over a long period of time.
A shared characteristics of both saving and investing is the utmost importance that they play
in our lives. If you are not doing either, the time to get started is now. This may require changes in
spending, tracking, and in the utilization of your income, but it can and should be built into your plan. A
general rule of thumb is saving should be short term while investing should be long term. Keeping that in
mind, let’s review the differences. Also, keep in mind for both saving and investing that when risk goes
down, liquidity goes up and vice versa.

IV. Discussion

Savings and Investments

•Savings

Saving is setting aside money you don’t spend now for emergencies or for a future purchase. It’s money
you want to be able to access quickly, with little or no risk, and with the least amount of taxes. Financial
institutions offer a number of different savings options. Saving means different things to different people.
 Republic of the Philippines
PANGASINAN STATE UNIVERSITY
San Carlos City Campus
San Carlos City, Pangasinan

To some it means putting money in the bank. To others it means buying stocks or contributing to a
pension plan. But to economists, saving means only one thing—consuming less in the present in order to
consume more in the future.

•Propensity to Save

There are 2 ways in calculating propensity to save.

1. Average Propensity to Save （APS）

APS is defined as the ratio of saving and income at any point of time.

Symbolically

APS=S/Y

where S=savings

Y= income（disposable income）

2. Marginal Propensity to Save （MPS）

MPS is defined as the ratio of change in saving and change in income. Over a period of time. MPS is a
rate of change in saving vis-a-vis income.

Symbolically

MPS=ΔS/ΔY

where ΔS=current period saving-last period saving

ΔY=current income-last period income

Note：MPS in always less than 1.

Example：If income changes from 1000 to 1500 and saving changes from 200 to 250, then calculate APS
and MPS.

Answer：MPS=ΔS/ΔY= 250-200/1500-1000= 50/500= 5/50= 1/10=0.1

We can calculate APS for both time period. In the first time period, S=200 and Y=100

So, APS=S/Y =200/1000= 0.2

In the second time period,

APS=S/Y = 250/1500 = 1/6 = 0.16

•Types of Savings
 Republic of the Philippines
PANGASINAN STATE UNIVERSITY
San Carlos City Campus
San Carlos City, Pangasinan

1.Compulsory saving schemes for all salaried employees.

•The accumulated amount with interest is returned to employee on retirement.

2.Voluntary

Example：Banks

•People save for many reasons；

*Future Needs

*To have available money for unexpected bills

*Achieve long-term financial goals

•Investments

An investment is an asset or item that is purchased with the hope that it will generate income or will
appreciate in the future. 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 be sold at a higher price for
a profit.

•Nature of investment
In macro economics investment can be categorised as autonomous and induced.
Autonomous investment is that part of investment which is fixed and most needed to carry out production
activity. It is independent of the level of income or value of output generated in the production process.
On the otherhand induced investment is that part of investment by firms which is influenced by the level
of income and profit motive. It may so happen that when income of firm increases, the firm gets
encouragement to increase its business activity and accordingly invest more in capital stock. Hence it is
called induced investment.

•Rate of Return

*The term return is the profit or income generated by savings and investing.

*Total return on investment expressed as a percentage of the amount of money invested.

*Investments usually earn higher rates of return than savings tools.

Formula： TOTAL RETURN/AMOUNT OF MONEY INVESTED=RATE OF RETURN

Example：Jacob saved $2,200 in a money market deposit account. After 1 year, she has a return of $110.
What is Jacobs’s rate of return？

TOTAL RETURN/AMOUNT OF MONEY INVESTED=RATE OF RETURN

 Republic of the Philippines
PANGASINAN STATE UNIVERSITY
San Carlos City Campus
San Carlos City, Pangasinan

$110/$2,200=.05=5%

•Rule of 72

*Allows a person to easily calculate when the future value of an investment will double the principal
amount. Albert Einstein credited for discovering the mathematical equation for compounding innterest,
thus the “Rule of 72”.

Formula：72/Interest Rate=Number of years needed to double the principal investment

For example, if your account earns:

1%, it will take 72 years for your money to double (72 / 1 = 72)

3%, it will take 24 years for your money to double (72 / 3 = 24)

6%, it will take 12 years for your money to double (72 / 6 = 12)

9%, it will take 8 years for your money to double (72 / 9 = 8)

12%, it will take 6 years for your money to double (72 / 12 = 6)

• Investments all about

When you make an investment, you are giving your money to a company or enterprise, hoping that it will
be successful and pay you back with even more money. Examples are the stocks and bonds.

Stocks and Bonds

Many companies offer investors the opportunity to buy either stocks or bonds. The example below shows
you how stocks and bonds differ. Let’s say you believe that a company that makes computers may be a
good investment. Everyone you know is buying one of their computers, and your friends report that the
company’s laptops rarely break down and run well for years. You either have an investment professional
investigate the company and read as much as possible about it, or you do it yourself. After your research,
you’re convinced it’s a solid company that will sell many more computers in the years ahead. The
computer company offers both stocks and bonds. With the bonds, the company agrees to pay you back
your initial investment in ten years, plus pay you interest twice a year at the rate of 4% a year.If you buy
the stock, you take on the risk of potentially losing a portion or all of your initial investment if the
company does poorly or the stock market drops in value. But you also may see the stock increase in value
beyond what you could earn from the bonds. If you buy the stock, you become an “owner” of the
company. You wrestle with the decision. If you buy the bonds, you will get your money back plus the 4%
interest a year. And you think the company will be able to honor its promise to you on the bonds because
it has been in business for many years and doesn’t look like it could go bankrupt. The company has a long
history of making computers and you know that its stock has gone up in price by an average of 6% a year,
plus it has typically paid stockholders a dividend of 3% from its profits each year.

•Differences and Similarities of Savings and Investments

 Republic of the Philippines
PANGASINAN STATE UNIVERSITY
San Carlos City Campus
San Carlos City, Pangasinan

To start, the biggest and most influential difference between saving and investing is risk. You save when
you put money into a savings account like a money market account or Certificate of Deposit (CD). It has
little risk of loss of funds but also has minimal gains. When you save, you are usually able to pull that
money out when you need it (or after a period of time). When you invest, you have the potential for better
long term gains or rewards, but also the potential for loss.

You risk more in investing for a larger return, but your potential loss can be large as well. It is important
to review your goals to figure out which option is best for each one, saving or investing. Done incorrectly
could cost you a lot of money in fees or loss of potential income earned through investing. Another
difference is interest, or money made. In investing, we want our investments to make us money, while the
goal of saving is to keep our money safe, making very little return. A CD is a popular savings tool. This
tool is can be relatively short term, ranging from a few months to many (7 or more) years. While in the
CD, your money is safe and grows at a slightly bigger interest rate than in a regular savings account, but
accessing it before the term of the CD is over could mean paying fees and penalties. Make sure to find the
best rate on a CD by comparing options from a number of institutions. You can save money each month,
but long term, those savings will not pay in retirement and most likely will not pay for your children's
college, making investing equally important. This should remind us how important both are, especially
when done together.

Saving and investing have many different features, but they do share one common goal: they’re both
strategies that help you accumulate money.

“First and foremost, both involve putting money away for future reasons,” says Chris Hogan, financial
expert with Ramsey Solutions and author of Retire Inspired.

Both use specialized accounts with a financial institution to accumulate money. For savers, that means
opening an account at a bank or credit union, such as Citibank. For investors, that means opening an
account with an independent broker, though now many banks have a brokerage arm, too. Popular
investment brokerages include Charles Schwab, Fidelity and TD Ameritrade, as well as online options
like E*Trade.

Savers and investors both also realize the importance of having money saved. Investors should have
enough in a bank account to cover emergency expenses and other unexpected costs before they tie up a
large chunk of change in long-term investments.

As Hogan explains, investing is money that you’re planning to leave alone “to allow it to grow for your
dreams and your future.”

V. Insights/Key Takeaways
•Saving money typically means it is available when we need it and it has a low risk of losing value.
•Investing typically carries a long-term horizon, such as our children’s college fund or retirement.
•The biggest and most influential difference between saving and investing is risk.
•Saving and investing can work hand-in-hand to help you achieve your financial goals.
 Republic of the Philippines
PANGASINAN STATE UNIVERSITY
San Carlos City Campus
San Carlos City, Pangasinan

•Saving may be best for achieving short-term goals and setting up a rainy day fund.

•Investing can help you achieve your long-term goals by potentially outpacing inflation.

•Even in a very weak market scenario, you may be able to get a better potential outcome with investing
than you would with just saving.

VI. References:
https://www.smartaboutmoney.org/Courses/Money-Basics/Investing/The-Difference-Between-Saving-and
-Investing#:~:text=Saving%20is%20setting%20aside%20money,or%20for%20a%20future%20purchase.
&text=Investing%20is%20buying%20assets%20such,to%20achieve%20long-term%20goals.

https://www.econlib.org/library/Topics/HighSchool/SavingandInvesting.html

https://www.investopedia.com/articles/investing/022516/saving-vs-investing-understanding-key-differenc
es.asp

https://www.google.com/amp/s/www.cnbc.com/amp/2020/01/28/what-the-rule-of-72-is-and-how-it-works
.html

https://www.google.com/amp/s/www.bankrate.com/investing/saving-vs-investing/amp/