Flashcards in Section A - Understand the importance of managing personal finance Deck (127):
What are the functions of money?
1) Unit of Account
2) Means of Exchange
3) Store of Value
4) Legal Tender
What is unit of account?
It allows us to place a monetary value on goods or service.
What is means of exchange?
It allows us to trade
What is store of value?
It allows us to use it in the future as it keeps its value.
What is legal tender?
It is a legal recognition form of payment.
What are the factors that influence the view of money?
1) Personal attitudes
2) Life stages
4) Life events
5) External influences
6) Interest rates
Explain the financial needs of a child.
Limited needs, mainly reliant on parent.
May want to buy sweats or toys.
Explain the implications of the financial needs of a child.
1) Money received from presents may be spent as attitude will be that this is to buy things you want.
2) May be encouraged to save or parents or grandparents may set up a savings account for you into which they make regular payments.
3) May rely on pocket money.
Explain the financial needs of an adolescence.
Want to be more independent.
Slightly less reliant on parents as want to socialise away from family.
Explain the implications of the financial needs of an adolescence.
1) May look for a part time job
2) Still partially reliant on pocket money
3) More likely to receive cash as gifts and may be willing to save up smaller amounts in order to make bigger purchases.
Explain the financial needs of a young adult.
University or starting a career
Looking to be more independent
Buying a car and buying or renting a flat or house
Looking to settle down and maybe get married or start a family.
Explain the implications of the financial needs of a young adult.
1) May take a student loan if going to university.
2) Borrow money to pay for a car or purchase one on a finance deal.
3) May be looking at taking out a mortgage.
4) Need to earn money to support self and others.
5) Eligible for credit and debit cards.
Explain the financial needs of a middle aged person.
Start saving for children's futures, e.g. university, weddings, etc.
Look to improve own lifestyle, e.g. new car or move house.
Enjoy having access to additional money to spend on luxuries such as foreign holidays.
Explain the implications of the financial needs of a middle aged person.
1) Savings accounts for specific purposes.
2) Paying a mortgage.
3) Planning for own future through pensions and retirement plans.
4) Likely to be the stage of life when income peaks but matched with high expenditure.
Explain the financial needs of an old aged person.
May downsize, e.g. move from family home to a smaller retirement home.
Fewer financial needs for assets but may be higher for services such as health care.
Explain the implications of the financial needs of an old aged person.
1) Mortgage payments stop or become lower.
2) Less income as reliant on a pension rather than a salary.
Why is planning expenditure important?
It ensures that you avoid over spending which will put you at risk of financial difficulties both now and in the future.
What will a poor credit rating affect?
The ability to borrow money in the future.
How would you remain solvent
Set financial targets and goals.
What is the advantage of savings
They will help provide a safety net for the future, for example to provide insurance against loss or injury.
Expenditure can help counter the effects off...
Give an example of inflation
If you spent £150,000 buying a house today the value of the house would increase. If you left £150,000 in a savings account the amount would go up because of inflation but the spending power of your savings would go down.
What are the common principles to be considered in planning personal finance?
1) Avoid getting into debt
2) Control costs
3) Avoid legal action and/or repossession
4) Remain solvent
5) Maintain a good credit rating
6) Avoid bankruptcy
7) Manage money to fund purchases
8) Generate income and savings
9) Set financial targets and goals
10) Provide insurance against loss or illness
11) Couter the effects of inflation
Explain what cash is.
Notes and coins in a wide range of denominations.
Explain what a debit card is.
Issued by banks with payments for goods and services being deducted directly from a current account.
Explain what a credit card is.
Issued by financial institutions allowing customers to delay payments for goods and services.
Explain what a cheque is.
A written order to a bank to make a payment for a specific amount of money from one person’s account to another account.
Explain what an electronic transfer is.
Payment is transferred directly from one bank account to another.
Explain what a direct debit is.
An agreement made with a bank allowing a third party
to withdraw money from an account on a set day to pay for goods or services received, e.g. pay a gas bill.
Explain what a standing order is.
An agreement made with a bank to transfer a xed sum of money to a third party account on a set date on a regular basis, e.g. pay £30 for a phone contract each month.
Explain what a pre-paid card is.
Money is uploaded onto a card with transactions then being withdrawn to reduce the balance.
Explain what a contactless card is.
Cards containing antennae allow money to be transferred when the card touches a contactless terminal.
Explain what a charge card is.
Issued by financial institutions allowing customers to delay payments for goods and services for a short period of time; the balance must be paid off in full when a statement is issued.
Explain what a store card is.
Issued by a retail outlet so that customers can delay payments for goods and services (similar to a credit card but only accepted by stores specified).
Explain what mobile banking is.
The ability to carry out financial transactions using mobile devices such as phones or tablets.
Explain what Banker's Automated Clearing Service (BACS) faster payment is.
A system that allows the transfer of payments directly from one bank account to another.
Explain what Clearing House Automated Payment System (CHAPS) is.
A system that allows the transfer of payments directly from one bank account to another.
What are the advantages of cash.
Most widely accepted form of exchange
Physical not virtual
Consumers feel confident when using
Makes budgeting easier
What are the disadvantages of cash.
Can be lost or stolen Threat of counterfeit
Only really appropriate on purchases up to a certain amount
Cannot be used online.
What are the advantages of debit card
No need to carry cash
Secure method of payment with low risk of theft
Offers a degree of protection on purchases
Suitable for online transactions.
What are the disadvantages of debit card
Short time lapse between making
the transaction and the money being withdrawn from the customer’s account may result in overspending
Not accepted or appropriate for small transactions
What are the advantages of credit card.
Allows a period of credit that is interest free, e.g. one month
Most cards are widely accepted
Loyalty schemes are often offered, e.g. collect points or cash back
Offers a degree of protection on purchases
Suitable for online transactions
What are the disadvantages of credit card.
Interest is charged on balances not paid off within a month
Can encourage a customer to overspend and get into debt
Interest is charged on cash withdrawals
A limit will be set on the amount of credit allowed.
What are the advantages of cheque.
Low risk form of payment as the cheque can only be cashed by the named payee
Widely accepted for face-to-face and postal transactions
No need to provide change as can be written for an exact amount.
What are the disadvantages of cheque
Expensive for the consumer if the bank refuses to clear the cheque, i.e. it 'bounces'.
The time delay between writing the cheque and it being cashed could cause a consumer to go overdrawn.
Viewed as old fashioned.
Easy for the consumer to make errors when writing the cheque which will create problems for both the consumer and the recipient.
What are the advantages of Electronic transfer
Almost instantaneous Provides a record of payment No additional costs incurred
Easy to use for one-off and more frequent transactions
What are the disadvantages of electronic transfer
Risk of loss if the transfer is incorrectly set up
Not appropriate for face-to-face transactions
What are the advantages of direct debit
An easy way to make regular payments, e.g. utility bills Amount paid can vary to ensure the payment matches the amount required by the vendor Quick and easy to set up
What are the disadvantages of direct debit
If the payer makes a mistake and takes too much it is the payee’s responsibility to claim back the money
The payer determines the amount paid each time making it dif cult for the payee to plan and budget
What are the advantages of a standing order.
The same amount is paid each time making it easier for the payee to plan and budget
Easy both to set up and to cancel
No need to remember to make regular, standard payments
What are the disadvantages of a standing order.
Payments are taken regardless of the customer’s balance which could lead to the unplanned use of an overdraft facility
Payments will continue to be made unless cancelled
What are the advantage of pre-paid card.
Can set a budget in advance to avoid overspending
If lost or stolen the loss is limited to the remaining balance
An effective way of controlling the amount spent by children and where money is spent, e.g. upload money for school lunches or transport
What are the disadvantage of pre-paid card.
No protection if lost
Sometimes requires an initial fee to purchase or set up the card, e.g. Oyster travelcards
What are the advantages of a contactless card
Gaining in popularity
Secure method of making payments.
What are the disadvantages of a contactless card
Often only accepted for relatively small transactions
Still not widely accepted as seen as new technology
What are the advantages of a charge card
Reduces risk of running up debts
Allows a short period of credit
Avoids the need to carry cash
Often offers additional perks.
What are the disadvantages of a charge card
Must be paid in full each month
Often an annual fixed fee is applied
What are the advantages of a store card.
Allows a short period of credit that is interest free, e.g. one month.
Often offers loyalty schemes, discounts and special promotions or privileges.
What are the disadvantages of a store card.
Only accepted in issuing store or linked associations.
Interest is paid on outstanding balances
Can encourage overspending and result in a consumer getting into debt- particularly if they hold multiple cards.
What are the advantages of mobile banking
Convenient as can be used at any time and place
What are the disadvantages of mobile banking
Features are still limited and hence mobile banking does not offer all of the functionality of Internet banking
What are the advantages of Banker's Automated Clearing Service (BACS) Faster Payment
Faster payments allows almost instant transfer that are guaranteed within 2 hours.
Can be accessed in a number of ways including in a branch, over the telephone and online
No additional costs
What are the disadvantages of Banker's Automated Clearing Service (BACS) Faster Payment
Faster payment is not offered by all banks or branches and the customer may therefore have to default to BACs which can take three days to transfer payments
A limit is set on the amount that can be transferred in any single transaction
What are the advantages of Clearing House Automated Payment System (CHAPS)
Transfers can be made the same day assuming instructions are received prior to a set time, e.g. 2 pm at Barclays
There is no limit on the amount that can be transferred in a single transaction
What are the disadvantages of Clearing House Automated Payment System (CHAPS)
Normally, there is a fixed charge per transaction regardless of the amount transferred
What are the features of a current account?
1) Rate of interest paid on any positive balance
2) Rate of interest charged on a negative balance
3) Overdraft limit
4) Charges on unauthorised overdrafts
5) Additional incentives.
What are the different types of current accounts?
2) Packaged, premium
Explain what a standard current account is.
This is the normal account offered to customers with a reasonable credit rating.
It includes standard features such as the ability to pay and withdraw money, cheque book, debit card, interest payments on positive balances and a pre-agreed overdraft limit.
Explain what a packaged, premium current account is.
This account offers additional features to a standard account, for example car and house insurance, credit card protection, breakdown cover and cash back on certain transactions. The bank may have additional charges for these accounts so it is important that you check whether you are being offered a good deal or not.
Explain what a basic current account is.
This account offers only limited features designed for those customers who may otherwise find it difficult to open a bank account due to poor credit ratings. A basic account will not offer an overdraft and will not pay interest on positive balances.
Explain what a student current account is.
This account is designed speci cally to meet the needs of learners. Common features include an agreed overdraft limit and incentives to join the bank, for example free rail cards or cash. Banks are keen to attract learners because once a young person has joined a bank they tend to stay with that bank for life. However, this is less often the case now due to the availability of information on the Internet and the ease with which banks can be changed.
What are the advantages of a standard current account?
No charges on credit balances Offers the holder a wide range of
facilities including a cheque book, debit/cash card and possibly an overdraft facility
Convenient for receiving regular payments, e.g. wages and making regular withdrawals
What are the disadvantages of a standard current account?
Potentially high charges on the use of an overdraft facility Standard features only, i.e. no additional perks
What are the advantages of a packaged, premium current account?
No charges on credit balances
Offers the holder a wide range of facilities including a cheque book, debit/cash card and possibly an overdraft facility
Convient for receiving regular payments, e.g. wages and making regular withdrawals.
Offers the holder additional perks at a packaged price cheaper than acquiring them individually.
What are the disadvantages of a packaged, premium current account?
Additional monthly charge is frequently applied
The package offered may not offer value for money or meet the
needs of the individual account holder
What are the advantages of a basic current account?
Available to customers with a low credit rating
Offers an easy first step for individuals to gain access to basic banking facilities, i.e. the ability to pay in and withdraw cash.
What are the disadvantages of a basic current account?
Limited facilities, e.g. no debit card or overdraft facility
What are the advantages of a student current account?
Course fees and student loans can be easily handled.
Bonuses offered are designed to meet the needs of learners, e.g.
discounts on travel or small lump sum cash payment
What are the disadvantages of a student current account?
Overdraft facilities could encourage overspending
Charges for overspending are high Limited facilities
What are the different types of borrowing?
2) Personal Loan
3) Hire purchase
5) Credit Card
6) Payday Loan
What is hire purchase?
This allows you to have use of an item immediately but pay for it in regular instalments.
What are the advantages of an overdraft?
Interest is charged only on the amount outstanding Can be paid off without penalties
An overdraft facility can be prearranged and only used if needed
Provides a short term solution to cash flow problems
What are the disadvantages of an overdraft?
When used, interest charges are often high Additional penalty charges for going over a pre- arranged limit are often very high
Not the cheapest form of borrowing
The ease with which these can be obtained could encourage overspending
What are the advantages of personal loans?
Regular, pre-agreed payments make planning and budgeting easy
As a general rule these would only be issued to individuals who can prove their ability to make the repayments
Useful when looking to purchase a speci c item of medium to high value, e.g. a car or home improvement
What are the disadvantages of personal loans?
May have to be secured against an asset which means if payments are missed the asset may be taken to cover the outstanding debt
Not really suitable for short term loans
What are the advantages of hire purchase?
Spreads the cost of an expensive item over a period of time
Credit is secured against a specific item
Often allows a customer to afford something now
that they could not otherwise afford, e.g. four years’ interest free on furniture
What are the disadvantages of hire purchase?
Interest charges may be higher than other traditional loans
Ownership of the asset may legally be kept by the seller until the final payment is made
Agreements can be manipulated to make a purchase seem deceptively appealing.
What are the advantages of mortgages?
Allows the customer to spread the cost of expensive items over a long period of time.
Interest rates, depending upon the deal, can sometimes be fixed or tracked against a standard rate of interest reducing the risk of fluctuations.
What are the disadvantages of mortgages?
Interest payments, although sometimes fixed for a short period of time, can vary - this affects the borrower's ability to repay or meet other expenses.
Failure to meet repayments may lead to a loss of a home and affect their credit rating.
Penalties may be applied to early repayment.
What are the advantages of credit cards?
The credit card holder can pay above the minimum rate if they wish and hence speed up the rate of payment and reduce interest incurred.
Can be used for items of multiple sizes and value, to a limit, without the need to secure against an asset.
Provides some protection on purchases.
What are the disadvantages of credit cards?
Can encourage overspending, sometimes on unnecessary purchases, and can lead to debt problems
Interest rates are often higher than on a personal loan
What are the advantages of payday loans?
Help solve immediate short term cash flow problems.
Relatively easy to secure.
What are the disadvantages of payday loans?
Interest rates are very high and the cumulative amount to be repaid can quickly spiral out of control
What are the different types of savings and investments?
1) Individual Savings Accounts (ISA)
2) Deposit and Savings Accounts
3) Premium Bonds
4) Bonds and Gilts
What are Individual Savings Accounts?
Savings account where the holder is not charged income tax on the interest recieved.
What is a premium bonds?
A gov shame that allows individuals to save up a set amount by buying bonds. The bond holder does not receive interest on their savings but each bond is placed into a regular draw for cash prizes.
What are the advantages of Individual savings accounts?
Tax is not charged on interest earned allowing the saver to keep all of the rewards for saving
Interest rates are sometimes slightly higher than in alternative savings accounts
What are the disadvantages of Individual savings accounts?
Notice is often required to make withdrawals and according tot he agreement there may be a limit set on the number of withdrawals made.
If the saver makes more withdrawals than set out in the agreement then the penalty may cancel out the tax savings
There is a limit set on the annual amount that can be placed in an ISA
What are the advantages of a deposit and savings account?
Interest is earned on positive balances.
Accounts sometimes require regular deposits of a set amount forcing the saver to follow a savings plan
What are the disadvantages of a deposit and savings account?
Interest earned is taxed
The percentage rate of interest paid on savings
is likely to be lower than interest to be paid on borrowing, therefore the bene ts of savings are lost if the customer is borrowing at the same time
What are the advantage of premium bonds?
Chance of winning substantially more than could be earned in interest
Can be easily withdrawn with no loss or penalty
What are the disadvantage of premium bonds?
No guaranteed return on investment Maximum amount reviewed annually by the government
The amount invested, assuming zero or low returns, loses value due to inflation
What are the advantages of bonds and gilts?
Regular fixed returns
Spreads risk across a range of markets
What are the disadvantages of bonds and gilts?
Risk of losing some or all of the value of the investment if the bond or guilt value falls Interest payments may not be received if the issuer is unable to make payments
What are the advantages of shares?
Share prices fluctuate offering a potential high reward Shareholders’ returns can include dividend payments and an increase in share value
As part owners in a business there may be additional bene ts including discounts and special offers
For some investors share ownership is more than just a way of saving – it is a pastime and creates interest
What are the disadvantages of shares?
Share prices uctuate offering a potential high risk
There is no guarantee of any reward or return as all of an investment can be lost
What are the advantage of pensions?
Encourages individuals to save throughout their working life for retirement
Depending upon the policy, an individual’s savings may be boosted by an employer’s contributions increasing the nal value of the saving
Regular payments are deducted, sometimes at source, meaning the individual is tied into making the regular contributions
What are the disadvantage of pensions?
Movement between jobs may mean that one policy stops and another starts, thus reducing the overall cumulative value of the savings
Final outcome is dif cult to predict
If compulsory payments are deducted this may affect short-term living standards
What are the risks of savings?
• Low or zero risk as money saved is guaranteed to be available in the future
• In ation can reduce the spending power of money saved
What are the rewards of savings?
• Interest payments
• Financial security/peace of mind
What are the risks of investment?
• Investments can go wrong and all or some of the value may be lost
• No guarantee of a return
What are the rewards of investments?
• If successful, there is potential for a high nancial return (significantly higher than could be earned in interest)
• Can be exciting! Some people will invest in shares, antiques, art or foreign currencies, for example, in the hope of high returns
What are the different types of insurance?
2) Home and Contents
3) Life assurance and insurance
What is life assurance?
Is an ongoing policy today a lump sum upon death
What is life insurance?
Is a policy for a set period of time to pay a lump sum if you die within that time period.
What is the advantages of car insurance?
Meets legal requirements
Protects self against theft or damage
Protects against damage caused to a third party
What is the disadvantages of car insurance?
Premiums can be high depending upon assessed level of risk, e.g. expensive for young drivers
Normally there is an excess that must be
paid, e.g. rst £500 of all damages is still the responsibility of the car owner
What is the advantage of Home and Contents insurance?
Protects against damage which may otherwise be too expensive to repair resulting in the loss of a home.
Contents are protected both when inside the house and outside.
What is the disadvantage of Home and Contents insurance?
Premiums are an additional expense to home ownership
Some items cannot be replaced due to a value
beyond the financial worth, e.g. a painting or inherited piece of jewellery
What is the advantages of Life assurance and insurance?
Provides peace of mind to family following the bereavement of a homeowner.
What is the disadvantages of Life assurance and insurance?
If the policy holder does not die within the period of life insurance no payment is made
What is the advantages of travel insurance?
Provides protection for personal belongings when away from home
Covers medical costs when on holiday
Protects against cancellation and sometimes delays
What is the disadvantages of travel insurance?
The person suffering the loss is likely to have to pay upfront to replace items or cover medical costs and then reclaim later
An additional cost when travelling abroad
What is the advantages of Pet insurance?
Avoids expensive vet fees
If vet fees are too high, there may be no alternative to having the pet put down – insurance can avoid this
What is the disadvantages of Pet insurance?
An additional monthly expense to protect against the unexpected
What is the advantages of Health insurance?
Some compensation is provided when ill which can reduce the nancial burden and stress allowing the patient to concentrate on recovery rather than nancial worries
If used to fund private care, this often results in quicker treatment and better facilities