Savings vs. Investing
What is one key difference between saving and investing?
Saving: short-term goals; low risk
Investing: long-term goals; higher risk and return potential.
Name two types of investments.
Stocks, bonds, real estate, mutual funds, ETFs.
What does “risk” mean in investing?
The chance you could lose some or all of your money.
What is the formula for simple interest?
A = P (1 + rt),
where
A= Final Amount, I = interest, P = principal, r = rate, t = time.
What is compound interest?
Interest calculated on both the principal and the accumulated interest from previous periods.
Name one short-term goal that saving (rather than investing) is more suitable for.
Example: Buying a new phone, going on a holiday, or purchasing school supplies., etc.
What type of investment is usually considered low-risk: stocks, bonds, or real estate?
Bonds are typically lower risk compared to stocks or real estate.
What is the general relationship between risk and return?
Higher risk = higher return (and loss)
Lower risk = lower but safer returns.
If you invest $1,000 at 5% for 2 years, what is the total amount (A) using the formula A = P(1 + rt)?
A = 1,000 × (1 + 0.05 × 2) = 1,000 × 1.10 = $1,100
What does the “r” in the compound interest formula stand for?
r is the annual interest rate expressed as a decimal (e.g. 5% = 0.05).
You want to buy a laptop in 6 months. Would saving or investing be a better strategy, and why?
Saving — because it's a short-term goal and you need quick, safe access to your money.
Match this investment to its risk level and return: mutual fund.
Moderate risk, moderate return — it's a bundle of investments, so less risky than individual stocks.
You are offered two investments: one with low return and no risk, and one with high return but high risk. Which might suit a 20-year-old planning for retirement, and why?
The high-risk, high-return option may be better because there’s time to recover losses and grow wealth long term.
A savings account earns 4% simple interest per year. What is the total amount after 3 years on a $2,000 deposit?
A = 2,000 × (1 + 0.04 × 3) = 2,000 × 1.12 = $2,240
How much money do you have if you $1,000 invested at 5% for 2 years, compounded annually. Round to the nearest dollar.
A = 1,000 × (1 + 0.05)^2 = 1,000 × 1.1025 = $1,103
Give one reason why investing may not be suitable for short-term goals.
- Can lose value in the short term due to market fluctuations, making them risky if you need the money soon.
- Harder to access
You have a low risk tolerance. How might you choose to invest a $10,000 portfolio? Give two examples.
Bonds, mutual funds, ETF's.
What personal factors should someone consider before deciding how much risk to take when investing?
Age, income, financial goals, time until they need the money, and personal comfort with risk.
You invest $1,000 at 5% simple interest. After 1 year you have $1,050. After 2 years you have $1,100. What’s happening to your money each year?
You earn the same amount ($50) each year.
Why does compound interest grow faster than simple interest over time?
Because you earn interest on your interest — the amount grows faster the longer it’s invested.
A friend says, “Saving and investing are the same because you still end up with more money.” How would you explain the difference using risk and time horizon?
Saving keeps your money safe with little growth, while investing involves higher risk for potentially higher returns over time. The key difference is the time frame and level of risk involved.
Compare real estate and ETFs in terms of liquidity, risk, and potential return. Which would suit a long-term investor better? Explain.
Real estate is less liquid (harder to sell), potentially higher return, but higher upfront costs.
ETFs are more liquid, lower risk, and easier to diversify. ETFs may suit long-term investors who want steady growth.
You have $10,000 to invest. If your goal is safety and stable returns, what two investment types would you choose and why?
Bonds and savings accounts — because they offer lower risk and more predictable returns.
Two people invest $5,000. One gets 4% for 4 years, the other 3% for 5 years. Who ends up with more money, and by how much?
Person 1: A = 5,000 × (1 + 0.04 × 4) = 5,000 × 1.16 = $5,800.
Person 2: A = 5,000 × (1 + 0.03 × 5) = 5,000 × 1.15 = $5,750.
Person 1 earns $50 more.
Compare two people: one invests $5,000 at 6% for 10 years; the other waits 5 years and then invests $5,000 at 6% for 5 years. Who ends up with more, and by how much?
Person 1: A = 5,000 × (1.06)^10 ≈ $8,954; Person 2: A = 5,000 × (1.06)^5 ≈ $6,691. Person 1 earns about $2,263 more by starting earlier.