Saving and Investing quick check answers
1. What is the difference between saving and investing?
Saving involves setting aside money for the future in a low-risk account, such as a savings account, while investing involves using money to purchase assets in the hopes of generating a return, such as stocks, bonds, or real estate.
2. Name one advantage of saving money.
One advantage of saving money is that it provides a financial safety net in case of emergencies or unexpected expenses.
3. Name one advantage of investing money.
One advantage of investing money is the potential for higher returns, as investments have the possibility to generate income or appreciate in value over time.
4. Name one disadvantage of saving money.
One disadvantage of saving money is that the low interest rates in savings accounts may not provide significant growth or keep up with inflation, resulting in a loss of purchasing power over time.
5. Name one disadvantage of investing money.
One disadvantage of investing money is the potential for loss, as investments are subject to market fluctuations and can result in a decline in value.
6. What is diversification?
Diversification is a risk management strategy that involves spreading investments across different assets, industries, or geographical locations to reduce the impact of a single investment's performance on the overall portfolio.
7. Why is it important to have a diverse investment portfolio?
It is important to have a diverse investment portfolio because it helps to mitigate risk by reducing the reliance on a single investment. Diversification increases the chances of earning positive returns by potentially offsetting losses in one investment with gains in another.
8. What is the rule of 72?
The rule of 72 is a simple formula used to estimate the number of years it will take to double an investment or the time it will take for the value of money to halve based on a fixed interest rate. It is calculated by dividing 72 by the interest rate.
9. How can inflation impact savings and investments?
Inflation erodes the purchasing power of money over time, which means that the same amount of money will buy fewer goods and services in the future. This impacts savings and investments by reducing their real value if the returns earned do not keep up with inflation.
10. What is the difference between a stock and a bond?
A stock represents ownership in a company and provides investors with the opportunity to participate in the company's profits and growth. A bond, on the other hand, represents debt issued by a company or government, and investors who purchase bonds are essentially lending money to the issuer in exchange for regular interest payments and the return of the principal amount at maturity.