Financial education: differences between financial products

We can divide financial products into three categories:

• Savings: checking and savings accounts, deposits, and other.
• Investment: pension plans, mutual funds, and stocks.
• Financing: credits and loans, mortgages, etc.

The most common in our daily lives

The Bank of Spain regularly conducts studies on financial skills containing data on the most common products among the Spanish population. Its latest study found that these products were credit cards, personal loans, and savings accounts, in that order, followed by insurance products, mainly life and health insurance.

Bank accounts are the most essential product and can be checking or savings accounts. They are a type of deposit (i.e., we deposit our money in an entity) called “demand deposits,” because they give us immediate access to our funds.

Traditionally, the difference between the two is that in a checking account funds are withdrawn by check, while in a savings account a passbook is used. Today this difference is not significant as both tend to use cards for making payments.

Checking accounts are the most common and we link them to our income (salaries, pensions, and other), direct debits, credit and debit payments, etc. The small differences between checking and savings accounts typically lie in the type of products—e.g., loans and repayments—that we can link to them and, in some cases, the interest rate we receive for holding funds in them, which are somewhat higher in the case of savings accounts, although very low compared to other savings products.

Unlike the checking and savings accounts we have seen, deposits are usually for a fixed term that is set forth in our contract with the entity. This means that, during this term, we will not be able to withdraw the money deposited unless we are willing to pay a fee.

It is a savings tool with little or no risk and simple characteristics that are suitable for everyone. We give our money to the entity for a set period of time, and at the end of this period we get the same amount back plus the agreed interest. The interest rates offered by fixed-term deposits are generally higher than those found in savings accounts.

When we need funding for a large or unforeseen expense, it is common to resort to loans or credit. Generally, personal loans are used to finance needs such as a car purchase, renovations, studies, travel, etc.

In the case of a loan, we receive the amount of money requested or agreed with the entity in a single payment at the beginning of the contract. From that moment on, we begin to pay it back in the agreed installments, together with the interest and fees set forth in the contract. The monthly installment amount will mainly depend on three elements: money requested, repayment period, and interest rate.

Consumer credit is a type of loan that ranges from 200 to 75,000 euros and gives us access to money in the amount and time we need for the duration of the contract, and not just in a lump sum at the beginning as in the case of loans.

Although—just like with a loan—we have to repay the money borrowed in installments, plus interest and fees, consumer credit allows us to partially or fully repay the amount before maturity and, if so agreed, receive that amount again.

A pension plan is a type of financial product which we would place somewhere between savings and investment, that allows us to make occasional or regular contributions to a fund that will be invested, within the agreed risk profile, by the entity that manages the plan.

These contributions benefit from significant tax deductions, unlike other investment funds.

The aim is that, when the time comes (e.g., retirement), we can withdraw both the total capital contributed and the return it has generated over the term we have kept the pension plan active.

We can all inevitably suffer the unintended consequences of various risks at some point in our lives, whether it be a minor road accident, a broken appliance in our home, or more complex issues such as a long-term illness. Whatever the type of risk and its consequences, there is a financial product that protects us: insurance.

This method of protecting ourselves from unforeseen risks involves regularly paying an amount to an insurer in return for, if necessary, compensation or assistance whenever a situation arises that is set forth in the policy (the contract we enter into with the insurer). The insurer is responsible for repairing or compensating all or part of the damage caused.

If we have a small amount of savings that we want to invest, a simple financial product that we can consider is the so-called mutual fund. This diversified investment method has a much lower risk profile and is less complex than other products.

It is a collective investment instrument made up of both individuals and companies. The money provided through contributions is managed by an entity (e.g., a bank) that decides how to invest it and manages the shares and profits from the operations based on the contributions of each stakeholder.

Credit and debit cards are the most common and most numerous financial products available, and we use them frequently in our day-to-day lives. Even so, there is still confusion about what characteristics differentiate credit and debit cards.

Both cards are convenient tools for making payments and withdrawing money, and they are generally much safer than carrying cash. The main difference is that, in the case of debit cards, they act as a method of payment linked directly to the funds available in the linked account. This means that our funds are debited directly at the time of payment; if there are no funds available, the payment cannot be made. The amount of the purchase or the money withdrawn at an ATM is immediately debited from the account.

Credit cards, on the other hand, are a payment method that has an associated credit limit defined by (or agreed with) the card issuing bank. This means the card holder can make a payment (up to the agreed limit) independently of the actual funds available in their account at the time of payment. The debt can be settled in full at the end of the month or partially by paying a set installment. While credit cards allow for flexibility, such as paying in installments, they may also incur interest payments when charges are past due.  The fees charged for the use of the card must be stated in the contract, and any changes must always be communicated in advance.

It is important to use cards safely, so here are some useful tips:

• Never write down your PIN on the card or keep it close to the card, such as in your wallet or purse.
• Likewise, do not leave your card number in plain view or give it to a stranger.
• Do not use a PIN that is easy to guess, such as your birthday, ID, or similar.
• Always keep your receipts and compare them with the charges listed on your monthly statement. If you receive any charges that you do not recognize, report them immediately to your bank.
• Write down your bank’s telephone number or use your bank’s website/app to report the loss of your card.
• Securely store and/or destroy all documentation containing your name and card number, such as receipts.
• Lastly, remember that your bank will never call you asking for your PIN, so be suspicious and never give it to anyone!

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