What is the difference between
savings and investments?
Savings and investments compared
Savings
Investments
Earn interest – typically <5%
Return in form of capital
growth, dividends or both
Higher return than from
savings
Risk that investment falls in
value
Investment solutions:
Shares/’equities’, funds, unit
trusts, investment trusts
Longer term than
savings
Money can only increase due
to interest
Secure
Low risk: Low reward
Savings solutions: Deposit
account, bond
Capital growth v Income generating
Capital growth
• Shares / Equities
- Part ownership of company.
- Potential for capital growth if co
does well and increases in value
• National Savings and Investment
(NS&I)
- Very safe as Government issues
them.
- Capital gain likely to be lower
• Property
- Historically prices mover
upwards.
- Prices vulnerable to economic
mood.
Income generating
• Bank interest
- Many bank accounts pay
interest on your money.
• Dividends: sharing some of the
companies profit on a 2x
yearly basis. Not certain.
• Bonds: invest in these and you
are effectively lending your
money. Receive fixed interest
on your bond.
• NS&I: Income bonds and
pensioners guaranteed income
bonds pay income in the form
of interest.
What Is AER?
The return on savings is the interest that the provider pays
the account holder and is expressed as an annual
equivalent rate (AER), such as 2.2% AER.
The AER is the interest that will be earned on the money
in one year and takes into account how often the provider
pays the interest (for example, monthly or annually)
Return from investments – Shares
(capital growth)
 You buy 100 shares in Marks and Spencer for £3
each
 Cost is £300
 A year later they cost £4 each.
 £400 - £300= £100 ‘capital growth’
 Alternatively, they cost £1 each
 £100 - £300 = £200 loss
 Only get the benefit of growth, or suffer the loss,
if you sell the shares. Otherwise ‘paper gain/loss’
Return from investments – Dividends
(income generating)
Dividend is a share of profits.
You buy 100 shares in Marks and Spencer for
£3 each
Marks and Spencer pay a dividend of 10p per
share.
You receive £10 in dividends paid to you by
cheque/BACS
Companies do not have to pay dividends.
What borrowing solutions can you
think of?
Loan accounts
Credit arrangements
Mortgage loans
Personal loans
Overdrafts
Credit cards
Store cards
Factors to consider:
What time
period do you
have to pay it
back?
What interest
rate will you
pay?
What could
you use this
solution to
purchase?
What are the
advantages and
disadvantages
of each
solution?
Product
Typical purchase
Time period/Interest rate
Advantages
Disadvantages
Mortgage
Home purchase
Typically up to 25 years. Some
lenders offer 35-40 years.
Typical rate 7%
Have to pay legal and other fees
Spreads cost of borrowing
over long time period
Large financial commitment
Personal loan
Car, household
improvements
3-15 years typically. Can be up
to 25 years.
Maximum £25,000
Rates range from 7.5% - 19%
Can choose amount and
time period to repay.
Can budget for payments.
Set payments each month
Overdraft
Your choice. Unexpected
expenses?
As and when you need it.
Range of rates 13.5% - 19%
typical
Flexible
Expensive. Interest and fees.
Credit card
Your choice
As and when you need it.
Range of rates 15% - 20% typical.
Can be higher
Flexible. Required to repay
minimum only
Expensive. Can spend too
much easily.
Store card
Limited to certain shops
As and when you need it.
Rates 25-30%
Special offers.
Expensive. Limited to
certain shops.