Personal Finance: A1-A4

Question 1

A1- What are the Functions of money? (4)

Answer 1

• Unit of account
• Store of value
• Means of exchange
• Legal tender

Question 2

What factors affect the role of money? (6)

Answer 2

• Personal attitudes (risk taker/risk averse)
• Life stages
• Culture
• Life event
• External influences and trends (high/low income)
• Interest rates (high: saving, low: spending)

Question 3

Common principles of planning personal finance: (11)

Answer 3

• Avoid debt
• Avoid bankruptcy
• Avoid legal action/repossession
• Control costs
• Remain solvent
• Maintain a good credit rating
• Generate income/savings
• Manage money to fund purchases
• Provide insurance against loss/illness
• Counter the effects of inflation
• Set financial targets/goals

Question 4

A2 - Cash

Answer 4

Advantages:
- Most widely accepted form of exchange
- Makes budgeting easier
- Consumers feel confident when using

Disadvantages:
- Can be lost/stolen
- Cannot be used online
- Only appropriate for small purchases

Question 5

Debit card

Answer 5

Advantages:
- Secure method of payment = low risk of theft
- Widely accepted
- Suitable for online transactions

Disadvantages:
- May results in overspending
- Not accepted/ appropriate for small transactions

Question 6

Credit card

Answer 6

Advantages:
- Most cards are widely accepted
- Suitable for online transactions
- Offers a degree of protection on purchases

Disadvantages:
- Can encourage a user to overspend and get into debt
- A limit will be set on the amount of credit allowed
- Interest is charged on balances not paid off within a month

Question 7

Cheque

Answer 7

Advantages:
- Low risk form of payment as cheque can only be cashed by the named payee
- Widely accepted for face to face/ postal transactions = secure
- No need to provide change as it can be written for an exact amount.

Disadvantages:
- Viewed as old fashioned
- Time delay between writing cheque and being cashed out could cause consumer to be overdrawn.

Question 8

Electronic transfer

Answer 8

Advantages:
- Provides a record of payment
- No additional costs incurred
- Easy to use use for one off/ frequent transactions

Disadvantages:
- Risk of loss if the transfer is incorrectly set up
- Not appropriate for face to face transactions

Question 9

Direct Debit

Answer 9

Advantages:
- Easy way to make regular payments
- Quick and easy to set up

Disadvantages:
- The payer determines the amount paid each time, making it difficult for the payee to plan and budget

Question 10

Standing order

Answer 10

Advantages:
- Easy to set up/ cancel
- Same amount is paid each time = easier for payee to plan/budget

Disadvantages:
- Payments will continue to be made unless cancelled
- Payments are taken regardless of customer’s balance- unplanned use of an overdraft facility

Question 11

Pre-paid card

Answer 11

Advantages:
- Can set a budget in advance to avoid overspending
- If lost/ stolen, the loss is limited to the remaining balance
- Effective way of controlling the amount spent by children- lunch money

Disadvantages:
- No protection if lost
- Sometimes requires an initial fee to set up/ purchase e.g oyster travel cards

Question 12

Contactless card

Answer 12

Advantages:
- Gaining in popularity
- Secure method of making payments

Disadvantages:
- Often a limit - small transactions
- Still not widely accepted as seen as ‘new technology’

Question 13

Charge card

Answer 13

Advantages:
- Reduces risk of theft
- Avoids the need to carry cash
- Allows a short period of credit

Disadvantages:
- Must be paid in full each month
- Often an annual fixed fee is applied

Question 14

Store card

Answer 14

Advantages:
- Often offer loyalty schemes, discounts and special promotions/ privileges
- Allows a short period of credit that is interest free

Disadvantages:
- Can encourage overspending and result in getting into debt
- Only accepted in issuing store/ linked associations

Question 15

Mobile banking

Answer 15

Advantages:
- Convenient- can be used at any time/place
- Secure

Disadvantages:
- Features are still limited
- Does not offer all of the functionality of internet banking

Question 16

Bankers automated clearing system (BACs) / Faster Payments

Answer 16

Advantages:
FP - allows almost instant transfers that are guaranteed within 2 hours
- Can be accessed in a number of ways; in a branch, over the telephone, online

Disadvantages:
- FP is not offered by all banks/ branches
- BACs can take 3 days to transfer payments
- A limit is set on the amount that can be transferred in any single transactions

Question 17

Clearing house automated payment system (CHAPs)

Answer 17

Advantages:
- Transfers can be made the same day assuming instructions are received prior to a set time E.g 2pm at Barclays
- No limit on amount that can be transferred in a single transaction

Disadvantages:
- Normally, there is a fixed charge per transaction regardless of the amount transferred

Question 18

A3 - Current accounts

Answer 18

Used to:
~ Wages paid into
~ Pay cheques into and out of
~ Pay bills/ other frequent expenses
~ Withdraw cash

Features:
~ Rate of interest paid in any positive balances
~ Rate of interest charged on any negative balances
~ Overdraft limit
~ Charges on unauthorised overdrafts
~ Additional incentives

Question 19

Standard current account

Answer 19

Advantages:
~ widely available
~ overdraft facility
~ range of services
Disadvantages:
~ limited additional benefits
~ charges on overdrafts can be high

Question 20

Packaged, premium current account

Answer 20

Advantages:
~ additional features to a standard account
~ range of services
Disadvantages:
~ fee/additional charge
~ generic rather than tailored to individual needs

Question 21

Basic current account

Answer 21

Advantages:
~ allows those who might find it difficult to open a bank account to open one e.g those with a poor credit history
Disadvantages:
~ limited features
~ no overdraft
~ no interest on positive balances
~ May attach a stigma

Question 22

Student current account

Answer 22

Advantages:
~ student loans can be paid in
~ overdraft can help/ be useful for students
Disadvantages:
~ might have interest charges in overdrafts

Banks are keen to attract learners- once a young person has joined a bank, they are likely to stay with that bank forever

Question 23

A4 - Overdraft

Answer 23

Advantages:
- only pay for the money borrowed
- only borrowed when required, allowing flexibility
- quick/ easy to arrange

Disadvantages:
- only available for a current account
- bank can call it in at any time
- interest is charged

Question 24

Personal loan

Answer 24

Advantages:
- Quick and easy to secure
- Improved cash flow
- Fixed interest rates allow individuals to budget
Disadvantages:
- Often expensive interest repayments
- Can be charged a penalty for early repayment

Question 25

Hire purchase

Answer 25

**Advantages:** - Immediate use of item - Spreads the cost over a period of time **Disadvantages:** - May add interest - Payments have to be made or item will be repossessed

Question 26

Mortgage

Answer 26

**Advantages:** - Spreads the cost - Makes it possible to buy items such as a house, which would not be feasible otherwise **Disadvantages:** - Payments may be subject to change - interest rates - Normally require a deposit- e.g 10% of house value

Question 27

Credit cards/ balance transfers

Answer 27

**Advantages:** - Good backup/ alternative to using cash - Can claim insurance on goods/services - Spreads the cost **Disadvantages:** - Interest is usually very high - There is a fee for transferring balances

Question 28

Payday loan

Answer 28

**Advantages:** - Solves short term cash flow problems - Quick access to funds - Suitable for an emergency **Disadvantages:** - high rates of interest - Needs to be repaid quickly - can escalate out of control if not paid on time

Question 29

Individual savings account (ISA)

Answer 29

**Advantages:** - Bank will pay interest - interest is not taxed - all interest is yours **Disadvantages:** - A set amount has to be paid in each month - A limit is set on how much you can save each year - A period of notice has to be given before savings can be withdrawn

Question 30

Deposit and savings account

Answer 30

**Advantages:** - Interest is paid on positive balances - the value of savings will increase as a result of interest received, assuming withdrawals are not made **Disadvantages:** - Funds cannot be withdrawn immediately - Interest is taxed, however government only tax up to a certain amount E.g £1000

Question 31

Premium bonds

Answer 31

**Advantages:** - Each month, bonds are entered into a prize draw - opportunity to win up to £1million **Disadvantages:** - Interest is not paid on the saving - unlikely to win any prizes

Question 32

Bonds and gilts

Answer 32

**Advantages:** - A fixed rate of interest is paid on the loan **Disadvantages:** - If a company gets into financial difficulty, they might not be able to pay you back

Question 33

Shares

Answer 33

**Advantages:** - Shareholders receive a share of the profits called dividends- if share prices increase they can sell them for more than they bought them for = profit **Disadvantages:** - Share prices can go in both directions - an investor can lose money and dividends are not guaranteed- RISKY

Question 34

Pensions

Answer 34

**Advantages:** - Pensions mean you will still have an income when you stop working - some employers pay into your pension as well E.g teacher pension **Disadvantages:** - Paying into a pension means you get less wages each month

Question 35

Risk and rewards of saving vs investment

Answer 35

*Saving:* * low risk - money won’t lose value- money is in a secure place * limited reward- limited to the current rate of interest *Investment:* * high risk- money could be lost * rewards can vary- higher shares could mean rewards are high

Question 36

Health insurance

Answer 36

**Features:** - Annual health check - Private consultations - Accommodation and nursing care **Advantages:** - May be seen quicker than in the NHS - May include drugs/ treatment not included in the NHS **Disadvantages:** - NHS provides comprehensive health cover for all - Cost is high

Question 37

Car insurance

Answer 37

**Features:** - Damage or theft - damage to a 3rd party - hire car **Advantages:** - Legal requirement - pays for repairs to own car + hire car - reduced premiums for safer drivers = no claim’s discount **Disadvantages:** - Premiums can be high for groups deemed high risk (young and old) - excesses often apply

Question 38

Home and contents insurance

Answer 38

**Features:** - New for old- items replaced if stolen - repairs paid for if caused by accidents E.g storms/ floods **Advantages:** - Covers items when outside the home E.g laptops - replacing stolen/ damaged items can be expensive **Disadvantages:** - Excesses often apply - compulsory for some mortgages

Question 39

Pet insurance

Answer 39

**Features:** - Vets fees - Operations - Annual health check **Advantages:** - Vets fees/ operations can be expensive - peace of mind **Disadvantages:** - Exclusions may apply - excesses often apply

Question 40

Travel insurance

Answer 40

**Features:** - Medical expenses paid when abroad - holiday cancellation costs - lost baggage **Advantages:** - Repatriation costs (to bring you back home) - millions of pounds of expenses can be covered **Disadvantages:** - Excesses often apply - May need to meet replacement costs then claim these back

Question 41

Life assurance

Answer 41

**Features:** - small regular monthly payments made to the named beneficiary for their whole life when the policy holder dies **Advantages:** - compensates for the loss of a breadwinner when the policy holder dies - this insurance will act as their income for the rest of the family **Disadvantages:** - Some policies are not linked to inflation so may not be worth as much as when it was put in

Question 42

Life insurance

Answer 42

**Features:** - large lump sum paid to the beneficiary when the policy holder dies **Advantages:** - If the policy holder dies, their family/ named beneficiary will get a lump sum of money to pay off a mortgage/ remaining debts **Disadvantages:** - once money is spent, it’s gone- may need to be used to pay off a mortgage so no extra money left for family