3.1 Savings and Investments
Types of Savings
- Savings Account: Deposit money, earn low interest rate, flexible withdrawal via ATM/online banking.
- Fixed Deposit Account: Savings deposited for a specific period (e.g., 1, 3, 6, 12 months) at a higher interest rate. Certificate issued. Early withdrawal forfeits interest.
- Current Account: Used for business/personal purposes, payments made via cheque, no interest earned (or very low), subject to service charges.
Types of Investments
- Shares (Equities): Buying ownership in a company. Yields returns in dividends and capital gains (selling at higher price). Involves risk.
- Unit Trust: Managed by professional fund managers who pool money from investors to invest in a diversified portfolio. Moderate risk.
- Real Estate: Purchasing land or buildings. Yields returns in rental income and capital appreciation. Low liquidity, high capital required.
Interest Calculations for Savings
1. Simple Interest: Interest calculated only on the principal amount over a given time.
$$I = P r t$$
Where:
- $I$ = Interest amount
- $P$ = Principal (initial deposit)
- $r$ = Annual interest rate (expressed as a decimal, e.g., $3\% = 0.03$)
- $t$ = Time in years
Total Balance ($A$): $A = P + I = P(1 + rt)$
2. Compound Interest: Interest calculated on the original principal and accumulated interest from previous periods.
$$A = P \left(1 + \frac{r}{n}\right)^{nt}$$
Where:
- $A$ = Matured value (total amount)
- $P$ = Principal
- $r$ = Annual interest rate (decimal)
- $n$ = Number of compounding periods per year (e.g., annually $n=1$, semi-annually $n=2$, quarterly $n=4$, monthly $n=12$)
- $t$ = Time in years
Return on Investment (ROI)
ROI measures the performance/profitability of an investment:
$$\text{ROI} = \frac{\text{Total Return}}{\text{Initial Investment}} \times 100\%$$
$$\text{Total Return} = \text{Income (Dividends/Rent)} + \text{Capital Gain (or Loss)}$$
Dollar-Cost Averaging (DCA)
Investing a fixed amount of money at regular intervals regardless of the share/unit price. Helps average out the cost per unit over time.
$$\text{Average Cost Per Unit} = \frac{\text{Total Investment Amount}}{\text{Total Units Purchased}}$$
3.2 Credit and Debt Management
Key Terms
- Credit: A contractual agreement allowing a buyer to obtain goods/services before payment, based on the trust that payment will be made in the future.
- Debt: An obligation or liability owed by one party (borrower) to another (creditor).
Credit Cards vs Personal Loans
- Credit Card Advantages: Convenience, emergency cash, reward points/cashback, interest-free grace period (usually 20 days).
- Credit Card Disadvantages: High interest rates on unpaid balances (15%–18% per annum), late payment penalties, risk of overspending.
Credit Card Finance Charge Calculation
If full payment is not made within the grace period, finance charges apply to the outstanding balance:
$$\text{Finance Charge} = \text{Outstanding Balance} \times \frac{\text{Interest Rate per annum}}{365} \times \text{Number of days}$$
Minimum Monthly Payment: Usually $5\%$ of the total outstanding balance, or a minimum of $\text{RM} 50$, whichever is higher.
Loans and Flat Interest Rates
1. Flat Rate Loan (e.g., Hire Purchase / Car Loan): Interest is calculated on the original principal throughout the loan period.
$$I = P r t \quad \text{and} \quad \text{Total Repayment} = P + I$$
$$\text{Monthly Installment} = \frac{P + I}{t \times 12}$$
2. Reducing Balance Loan (e.g., Housing Loan): Interest is calculated monthly on the remaining outstanding principal balance. As principal decreases, interest charged decreases.