Saving and Investing
What this domain tests
Saving and Investing tests compounding, risk and return, diversification, liquidity, inflation, and the accounts people actually use. Expect Rule of 72 calculations, APY comparisons, and questions about emergency funds versus long-term investing.
Core rules
- Compounding earns returns on returns; time matters more than a small difference in rate.
- Rule of 72: doubling time is about 72 divided by the annual return. At 6%, money doubles in roughly 12 years.
- Risk and return travel together. Higher expected return means higher chance of loss, and money needed within a few years belongs in liquid, stable savings.
- Diversification spreads risk; a low-cost index fund holds many companies at once.
- Fees compound too. A 1% annual expense ratio can consume roughly a quarter of a 30-year return.
- Deposit insurance: FDIC for banks and NCUA for credit unions cover $250,000 per depositor, per institution, per ownership category. Investments are not insured.
- Capture any employer 401(k) match first; it is an immediate return. Roth contributions are after-tax; traditional contributions are pre-tax.
Worked example
Save $200 a month at 6% nominal annual interest compounded monthly for 10 years. Monthly rate = 0.5%, periods = 120. Future value factor = ((1.005^120 minus 1) divided by 0.005), about 163.88, so the balance is about $32,776. You contributed $24,000; roughly $8,776 is growth. Start 10 years later and you lose that growth, not just the contributions.
Traps
Comparing an APR loan to an APY savings account; ignoring inflation (4% nominal with 3% inflation is about 1% real); chasing last year's top fund; investing an emergency fund in stocks; cashing out a 401(k) and owing income tax plus a 10% penalty before age 59 and a half.