LESSON 6

SAVINGS AND INVESTMENTS

TOPICS
1. Savings
2. Investments
3. Types of Investment
LEARNING OUTCOMES
At the end of the lesson, you should be able to:
1. Define savings and investment;
2. Identify different types of investment; and
3. Explain the importance of savings and investment for the family.

A Study on Filipino Financial Literary

Making enough money to cover basic expenses counts a lot in allowing people to have
leftover cash at the end of each month. However, results of a new World Bank survey
suggest education may have a significant effect in household financial security. The World
Bank said its recent baseline survey on financial inclusion in the Philippines showed most
Filipino families’ incomes were eaten up by basic necessities every month. As expected,
this represents a significant hurdle in the amount of savings Filipino families can set aside.
About 55 percent of families said the money they were making every month barely
covered expenses. Of the families that report saving money, only half keep their cash in
banks. Results of the World Bank survey on financial inclusion for the Philippines mirrored
the outcome of a similar assessment made by the central bank this year.

But the World Bank report takes its results further, noting that respondents who say they
save regularly are more likely to have money left at the end of every month, less likely to
borrow, and less prone to overspending. Results cut across income levels. “We’re not
claiming causality, but there’s a strong correlation,” World Bank senior financial sector
specialist Mylenko said at a press conference. To measure financial literacy, respondents
were asked if they were familiar with basic terms concerning money such as interest
rates, the purpose of insurance, compound interest and risk diversification. Respondents
who knew more about financial terms were found to be more responsible with their
finances, the World Bank said.

Respondents who passed the World Bank test were 24 percent less likely to buy things
they could not afford, 11 percent less prone to over-borrowing, and 20 percent more
likely to having money left after paying for basic necessitates. Similar results were found
for respondents who said their finances were planned out. The World Bank asked families
if they followed plans on how their money would be used. Nearly half or 45 percent of
respondents said they didn’t plan their monthly finances, while the rest regularly or
occasionally had plans. Respondents who budgeted their money regularly or occasionally
were 12 percent less likely to overspend, 5 percent less likely to borrow money they
couldn’t afford to pay, and 9 percent more likely to having savings at the end of every
month. World Bank’s Mylenko said the survey results meant policymakers should focus
on financial literacy education. Interventions may include getting financial literacy into the
basic education curriculum. “The area of financial education came into light after the
global financial crisis. It became really clear that a lot of the reasons for the malfunction
came from lack of awareness of risks,” she said.
https://business.inquirer.net/201111/financial-literacy-affects-spending-saving-habits

TOPIC 1: SAVINGS

When a person takes a decision to save/invest it would in other words mean

deployment of funds to earn additional income. In macro sense, savings are used for
investment to lead to additional capital and growth of income. Investment used for
savings in physical sense means purchase of physical assets like consumer goods,
houses, real estate, precious metals savings in financial assets leads to further growth of
production and income. It is parting with owned funds for income in form of interest,
dividend etc. when savings are utilized to purchase of securities, financial instruments or
claims on future income.

Importance of Savings and Investment:

The importance of savings in development is well-known. The traditional interest in
savings is that, at the aggregate and household levels, it is the main determinant of
investment. Investment, of course, is acknowledged as the primary engine of economic
growth. This can be easily demonstrated, by running a simple regression between gross
domestic savings and investment. At the household level while investments and income
prospects may also be important as determinants of savings, protection against income
shortfalls may be more relevant particularly if there are borrowing constraints and/or
social security is not well developed. Savings is the vehicle for consumption smoothing
as argued in the celebrated life-cycle hypothesis. Recently saving, on a regular basis, has
been found to enable households to move out of slum areas (Lall et al. 2005). Both of
these macroeconomic and microeconomic concerns are evident in the case of the
Philippines. The savings rates in the country are low, even lower than Indonesia, which
has lower per capita income (Orbeta, 2005). This had been identified as one the main
reasons why the country has not grown as fast as her neighbors. Low household savings
also exposes families to the risk of income shortfalls.

This study is part of a series of studies conducted by the author to understand the
implications of large family size on household welfare. The general motivation for these
studies is to understand the relation between poverty, vulnerability and family size.
Saving is an important instrument for consumption smoothing and reducing
vulnerability to income shortfall. Understanding the role of children and family size on
household savings behavior is an important step in understanding the relationship
between poverty, vulnerability, and family size. The study estimates savings functions
using data from the 2002 Annual Poverty Indicator Survey (APIS) augmented by
barangay level data from the 2000 Census of Population and Housing. The estimation
challenge is that given the old-age security motivation of children plus the quantity-
quality hypothesis of bearing children, the number of children is endogenous to the
savings equation, which could lead to biased results if ignored. The study finds that the
impact of children on household savings is, on average, negative. In addition, this impact
is regressive with bigger depressing effects among poorer households. The study is
organized as follows. The next section presents a brief review of related literature. This
is followed by a discussion of methodology and estimation concerns. A description of
the data set and the variables used are also presented in this section.
Filipinos have a different concept of financial and retirement planning. Many are
content with the principle of “isang kahig, isang tuka” or having just enough to tide you
over until the next pay period. In short, Filipinos will earn just enough money for daily
expenses. Arguably, most of us are not able to save, prepare for retirement, or plan for
financial security. 

How Filipinos Save their Money:

Go to the mall and observe how most Filipinos still prefer to pay in cash than through
debit or credit cards. In other countries, you can survive a day without cash. But in the
Philippines, cash is being used for most transactions and expenses. In fact, only two
percent of households in the Philippines had credit cards according to a recent survey by
the Bangko Sentral ng Pilipinas (BSP).
The same survey showed that 86% of Filipinos don’t have bank accounts. The reason is
either they don’t have enough money to keep one or they don’t trust banks. More than
half of Filipinos get their income from wages and salary. Some are self-employed, while
others rely on remittances from relatives working abroad or financial support from
other households. Earnings are mostly spent on food and beverage expenses in the
household, as well as rent, transportation, education, leisure, health, and utilities. At
the end of the month, there’s almost nothing left, giving rise to the expression “dumaan
lang sa palad ang pera.” Indeed, there’s much to note about the Filipino spending
habits.

Objectives of Saving - The objectives of savings differ from person to person. However,
the objectives can broadly be defined as (1) Income (returns) (2) Safety (3) Liquidity or
Marketability (4) Capital appreciation and (5) Hedge against inflation.

TOPIC 2: INVESTMENTS

Investing is an act of committing money or capital to an endeavor with the expectation

of obtaining an additional income or profit. This means putting the money to work for
you to maximize your earning potential.

Investing is the act of allocating resources, usually money, with the expectation of
generating an income or profit. You can invest in endeavors, such as using money to
start a business, or in assets, such as purchasing real estate in hopes of reselling it later
at a higher price.

Understanding Investing
The expectation of a return in the form of income or price appreciation with statistical
significance is the core premise of investing. The spectrum of assets in which one can
invest and earn a return is a very wide one. Risk and return go hand-in-hand in investing;
low risk generally means low expected returns, while higher returns are usually
accompanied by higher risk. At the low-risk end of the spectrum are basic investments
such as Certificates of Deposit; bonds or fixed-income instruments are higher up on the
risk scale, while stocks or equities are regarded as riskier still, with commodities and
derivatives generally considered to be among the riskiest investments. One can also
invest in something as mundane as land or real estate, while those with a taste for the
esoteric - and deep pockets - could invest in fine art and antiques. Risk and return
expectations can vary widely within the same asset class. For example, a blue chip that
trades on the New York Stock Exchange will have a very different risk-return profile from
a micro-cap that trades on a small exchange.
The returns generated by an asset depend on the type of asset. For instance, many
stocks pay quarterly dividends, bonds generally pay interest every quarter, and real
estate provides rental income. In many jurisdictions, different types of income are taxed
at different rates.
In addition to regular income such as a dividend or interest, price appreciation is an
important component of return. Total return from an investment can thus be regarded
as the sum of income and capital appreciation. As of March 2019, Standard & Poor's
estimates that since 1926, dividends have contributed nearly a third of total equity
return while capital gains have contributed two-thirds.

How are investment decisions are taken?

These decisions are taken by an individual from his income, wealth and preferences. An
investor with a younger age will be inclined to take a decision where returns will be
high. He will not be afraid of taking some amount of risk. On the other hand, a middle
aged person will want to reduce some amount of risk and will be inclined to some
amount of safety. An old aged senior citizen will want to minimize his risk and pay more
attention to safety. The decisions to save will also depend upon the intervals of earning
income. An individual who earns monthly income will be inclined to invest for capital
appreciation. A businessman will save for tax planning. The decisions to invest will also
differ by Gender. Males will be prepared to accept high degree of risk, while females
would be inclined towards safety and reluctant to accept risk. Farmers and farm
laborers who have uncertain income that too accruing after a long interval from
6months to 12 months are more likely to avoid risk These decisions will also depend
upon the strength of the family. A joint family cannot afford to take risk whereas a
nuclear family can involve in risky investments.

TOPIC 3: TYPES OF INVESTMENTS

While the universe of investments is a vast one, here are the most common types of
investments:

Stocks - A buyer of a company's stock becomes a fractional owner of that company.

Owners of a company's stock are known as its shareholders, and can participate in its
growth and success through appreciation in the stock price and regular dividends paid
out of the company's profits.

Bonds - Bonds are debt obligations of entities such as governments, municipalities and
corporations. Buying a bond implies that you hold a share of an entity's debt, and are
entitled to receive periodic interest payments and the return of the bond's face value
when it matures. Bonds are also considered as a defensive investment, because they
generally offer lower potential returns and lower levels of risk than shares or property.
They can also be sold relatively quickly, like cash, although it’s important to note that
they are not without the risk of capital losses.

Funds - Funds are pooled instruments managed by investment managers that enable
investors to invest in stocks, bonds, preferred shares, commodities etc. The two most
common types of funds are mutual funds and exchange-traded funds or ETFs. Mutual
funds do not trade on an exchange and are valued at the end of the trading day; ETFs
trade on stock exchanges and like stocks, are valued constantly throughout the trading
day. Mutual funds and ETFs can either passively track indices such as the S&P 500 or the
Dow Jones Industrial Average, or can be actively managed by fund managers.
Investment trusts: Trusts are another type of pooled investment, with Real Estate
Investment Trusts (REITs) the most popular in this category. REITs invest in commercial
or residential properties and pay regular distributions to their investors from the rental
income received from these properties. REITs trade on stock exchanges and thus offer
their investors the advantage of instant liquidity.

Alternative Investments - This is a catch-all category that includes hedge funds and
private equity. Hedge funds are so called because they can hedge their investment bets
by going long and short stocks and other investments. Private equity enables companies
to raise capital without going public. Hedge funds and private equity were typically only
available to affluent investors deemed "accredited investors" who met certain income
and net worth requirements. However, in recent years, alternative investments have
been introduced in fund formats that are accessible to retail investors.

Options and Derivatives - Derivatives are financial instruments that derive their value
from another instrument such as a stock or index. An option is a popular derivative that
gives the buyer the right but not the obligation to buy or sell a security at a fixed price
within a specific time period. Derivatives usually employ leverage, making them a high-
risk, high-reward proposition.

Commodities - Commodities include metals, oil, grain and animal products, as well as
financial instruments and currencies. They can either be traded through commodity
futures - which are agreements to buy or sell a specific quantity of a commodity at a
specified price on a particular future date - or ETFs. Commodities can be used for
hedging risk or for speculative purposes.

Other Types of Investments

Once you are familiar with the different types of assets you can begin to think about
piecing together a mix that would fit with your personal circumstances and risk
tolerance.
 
Growth investments. These are more suitable for long term investors that are willing
and able to withstand market ups and downs.
 
Shares. Shares are considered a growth investment as they can help grow the value of
your original investment over the medium to long term. If you own shares, you may
also receive income from dividends, which are effectively a portion of a company’s
profit paid out to its shareholders. Of course, the value of shares may also fall below
the price you pay for them. Prices can be volatile from day to day and shares are
generally best suited to long term investors, who are comfortable withstanding these
ups and downs. Also known as equities, shares have historically delivered higher
returns than other assets, shares are considered one of the riskiest types of investment.
 
Property. Property is also considered as a growth investment because the price of
houses and other properties can rise substantially over a medium to long term period.
However, just like shares, property can also fall in value and carries the risk of losses.
It is possible to invest directly by buying a property but also indirectly, through a
property investment fund.
 
Defensive investments. These are more focused on consistently generating income,
rather than growth, and are considered lower risk than growth investments.
 
Cash. Cash investments include everyday bank accounts, high interest savings accounts
and term deposits. They typically carry the lowest potential returns of all the
investment types. While they offer no chance of capital growth, they can deliver regular
income and can play an important role in protecting wealth and reducing risk in an
investment portfolio.
 
Fixed interest. The best known type of fixed interest investments are bonds, which are
essentially when governments or companies borrow money from investors and pay
them a rate of interest in return.

Comparing Investing Styles

Active versus Passive Investing - The goal of active investing is to "beat the index" by
actively managing the investment portfolio. Passive investing, on the other hand,
advocates a passive approach such as buying an index fund, in tacit recognition of the
fact that it is difficult to beat the market consistently. While there are props and cons to
both approaches, in reality, few fund managers beat their benchmarks consistently
enough to justify the higher costs of active management.

Growth versus Value - Growth investors prefer to invest in high-growth companies,

which typically have higher valuation ratios such as Price-Earnings (P/E) than value
companies. Value companies have significantly lower PE's and higher dividend yields
than growth companies because they may be out of favor with investors, either
temporarily or for a prolonged period of time.

FINANCIAL COPING MECHANISMS

Developments surrounding the coronavirus pandemic (COVID-19) have become the
theme of 2020. While people try to cope with this 'new
normal', they are also confronted by the day to day realities
and concerns about their personal financial stability. In a
recent published consumer expectations survey by the
Bangko Sentral ng Pilipinas (BSP) early this year, more
Filipinos are now setting aside funds for unforeseen
expenses, with 73.9% of respondents saying they keep their
money in banks. However, with yet another extension of the
enhanced community quarantine, savings kept by a
significant portion of the population is expected to dwindle further.  COVID-19 is already
changing the way Filipinos save, so how do you make your finances cope?

Separate bills account from savings account.

You probably have a bank account or an e-wallet which
serves as your primary source for bills payments or for
transferring money to loved ones, especially at this time.  If
you consider this same account as your savings where you
tend to deduct money regularly, then it's best to rethink how
you manage your funds.
Keep your actual savings at a different bank so it will be
easier to track. The emergence of digital banks like ING Philippines makes opening a
savings account at the comfort of your home simple, easy and convenient. All you have
to do is download the mobile app, fill in the details requested, upload an ID and you're
good to go in just 10 minutes!
Re-evaluate bank’s interest rate on savings.
Most retail banks in the Philippines have interest rates on savings accounts that
typically range from just 0.10% to 0.25% per annum (p.a.). Even if you are a
regular saver, this will not get your money far. The main thing to remember
when it comes to savings' interest rates is that the higher, the better, and the
faster your money will grow for a future spend. As an example, all ING Savings Account
clients will continue to enjoy the 4% interest rate p.a. for balances of up to P10 million.
This is almost 16 times higher than the interest rates of most retail banks. Plus, no
minimum deposit and no maintaining balance required to earn interest.

Skip the unnecessary charges for digital transactions.

Hidden fees and other charges hinder the growth of your savings
and often, these are deducted from your current balance. Currently,
most interbank transfer fees are waived until the duration of the
ECQ, so that's one thing to be thankful about. Some applications
such as transferring money to other banks have always been free of
charge and it’s intended to stay that way. Another convenient option
is to deposit your check via online applications. As the world
continues to adjust to the situation, Filipinos are looking for a trusted banking partner in
securing their savings or growing their emergency funds quickly. No better timing than
now to make your money truly work for your future.

Introduction to Saving and Investment Behavior of Households

Introduction Investment from Savings - Only when there is an excess of income over
current consumption needs, there is a chance for saving out of income. It can be
expressed as YC=S', where Y stands for income and E stands for expenditure and S is
Savings. When people save a part of their current income, they sacrifice that part of
current consumption so as to make that available at a future date. Interest on saving is a
reward for sacrificing current consumption. A question arises as to 'Why People Save?' A
simple answer to this question is either to enjoy a secure future with the money saved
or to make fabulous returns on the money saved by investing it in earning assets.

Savings are for future use. There are two types of savings (1) Autonomous, which is
independent of Income (Y) or consumption expenditure (C). People just decide to save
certain amount of money; regardless of their current income or consumption
expenditure (C) because they wish to meet some of the emergencies such as sickness or
other emergent needs and (2) Induced means people are induced to save a part of their
current income rather than spending it right now. This can be achieved by offering
attractive rate of interest or return for a future date or offering tax concessions.
Normally, the amounts saved for category (1) can be explained as 'precautionary motive
behind holding money' as defined by Keynes and when it is saved with the purpose of
returns, appreciation etc., it falls under category (2) it will be called as 'Speculative
motive behind holding money by way of saving. Let us now have a look at the
theoretical definitions of money:

How Filipinos Plan Their Retirement

Seemingly, most Filipinos don’t have a concrete financial plan for their future
retirement. BSP showed that retirement or insurance plans cover only one out of four
Filipinos, and majority of it are purely work-based programs. While people aspire for
financial security, there remains a huge gap between how much they’re saving and how
much they actually need to cover their years in retirement. For a lot of Filipinos, day-to-
day expenses, major life events, and untoward incidents take priority over preparing for
their retirement. So, they push back saving for the future to accommodate expenses
that arguably need more immediate attention. This can also be attributed to the “tsaka
na lang” or the procrastination attitude that Filipinos are known for.

For a lot of Filipinos, it’s hard enough to pay for their basic needs, much more think
about saving for the future. But, this is now always the case. Often, it’s the lack of
discipline and the “bahala na” attitude that prevent Pinoys from saving and preparing
for retirement. Another factor to consider that contributes to the Filipino’s lack of
savings and retirement planning is financial literacy. According to the S&P Global
Financial Literacy survey, only 25% of Filipinos are financially literate. Simply put, only a
fourth of Filipino adults are aware of the financial options available to them.

What Filipinos Should Do:

Saving for retirement all comes down to discipline, patience, and hard work. Put your
money in smart investments that will provide you financial security through time.
1. Set your financial SMART goals.
2. Include your family in your plans.
3. Create a budget.
4. Get out of debt.
5. Spend less than what you earn.
6. Invest a portion of your income.
7. Build a long-term savings plan.
8. Diversify your investments.
9. Increase your income.
10. Create a retirement fund.

Task/Activity

A. Written Work. Discuss comprehensively in a separate bond paper.

1. Discuss the saving practices you observe with the family.
2. Does changing age structure also influences household saving rate? Explain.
3. Explain: “In investing, risk and return are two sides of the same coin; low risk
generally means low expected returns, while higher returns are usually
accompanied by higher risk.”

ADB Institute Discussion Paper No. 47 Children and Household Savings in the Philippines
Aniceto C. Orbeta, Jr. March 2006
https://www.adb.org/sites/default/files/publication/156684/adbi-dp47.pdf

https://www.bpi-philam.com/en/bancassurance/finance-and-insurance/the-filipino-
style-in-saving-and-retirement-planning.html

https://business.inquirer.net/201111/financial-literacy-affects-spending-saving-habits
Financial literacy affects spending, saving habits
By: Paolo G. Montecillo - @inquirerdotnet
Philippine Daily Inquirer / 12:22 AM October 22, 2015

https://www.gmanetwork.com/news/cbb/content/736220/rethinking-filipinos-savings-
behaviour-at-the-height-of-covid-19/story/

https://sg.inflibnet.ac.in/bitstream/10603/174960/14/09_chapter%201.pdf