Do we learn the ABCs and improve our financial knowledge?
Financial education is often perceived as difficult or boring. Instead, it is a precious tool especially for daily choices. In everyday life many people find themselves in difficulty when managing their money which is often linked to the achievement of personal goals and financial aspects.
For many people it is difficult to set aside small sums. For others, although it is not impossible to save money, investing is extremely complicated.
What does this difficulty depend upon? Upon many factors, among these the lack of basic financial skills, or poor financial education is certainly one.
This is precisely the objective of the Museum of Saving: a phygital space (physical and virtual) that also uses digital tools to create awareness of the correct management of money. An edutainment journey where everyone can become familiar with the basic concepts of personal economics and financial instruments in an interactive and fun way. You can learn some of the most effective methods to manage money well!
The saver’s ABC: a guide on ways to save
An “instruction booklet” certainly cannot be missing from the Museum of Saving’s toolbox: The saver’s ABC. This guide includes five fundamental concepts selected on the occasion of the first World Investor Week (WIW). Basic elements that help you make informed savings and investment choices. To achieve the goals and stages of our life, we always need to consult the right guide.
PLANNING
Planning is a useful tool for achieving set goals, not only in professional life, but also in private life. Like when preparing a surprise dinner for someone we love, planning is essential to achieving the desired result. In fact, it is necessary to analyze the needs of the loved one, plan the cooking times of the dishes and perhaps modify the menu to satisfy all the guests.
Similarly, even in the financial field, planning is a way to guide choices efficiently. You must first of all understand what your needs and expectations are to select the most suitable financial instruments for achieving your objectives, for example purchasing a house or planning your retirement.
TIME HORIZON
In finance, the time horizon is the period of time during which you give up using your money to invest it and obtain a return. For example, if we want to buy a new car, we can decide to save the money necessary for the purchase, even if it will take time. If instead we decide to invest them, we could obtain a return that will help us reach our goal faster.
Usually, when it comes to investments, three time horizons must be kept in mind, also based on the objectives: short, medium and long term.
- The short term is the investment period of less than one year;
- The medium term is the period between twelve and sixty months;
- The long term goes beyond sixty months.
RETURN
Return is a term used in finance to indicate the profit you obtain by investing your money in financial instruments. The return is the reward you get for investing your money. It is expressed as a percentage and on an annual basis, in order to make it easier to compare the different investment opportunities.
Let’s think for example about the purchase of a second house to rent: the return in this case will be made up of the monthly fee that we will collect, but not only that. In fact, if we decided to sell it, we would obtain an additional return given by the difference between the purchase price and the selling price.
In short, we would have received a “prize” for investing our money!
RISK
However, it may happen that the value of our rented property undergoes changes over time, therefore forcing us to lower the rent, or to resell the house at a very low price compared to the purchase price. In this case the return on our investment would be minimal. This happens because every time we invest, we take a risk. In life, as well as in financial investments, we subject ourselves to uncertainty because we cannot predict all the circumstances that could increase or decrease a return.
Risk, therefore, is implicit in any financial activity: riskiness is the exposure to losses and gains: in fact, there is no investment with a positive return that is not risky.
When we travel, for example, one type of risk we subject ourselves to is getting sick, so what can we do? We take all possible precautions, we get vaccinated, we use all the strategies necessary to reduce the possibility of getting sick.
Even in investments, risk cannot be eliminated, but it can be mitigated with different strategies, for example diversification.
DIVERSIFICATION
Diversification is a way of managing the risk of our financial portfolio, where by portfolio we mean the set of investments. In simple words, diversifying means purchasing different financial assets whose performance, and therefore return, is not correlated.
Investing in a wide range of financial assets can protect your portfolio from significant losses. For example, if you only invest in stocks from a single sector, such as technology, a decline in the market could cause a sharp decline in the value of your portfolio.
We could say that diversifying is like approaching a dish full of different foods. Choosing just one type of food could be boring and unbalanced from a nutritional point of view, just as focusing only on one type of investment could lead to a high risk of losses. Opting instead for a variety of different foods means getting a complete, balanced and healthy meal!