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LIBF Unit 2 > Topic 6 - Financial Planning and Informed Choices > Flashcards

Topic 6 - Financial Planning and Informed Choices Flashcards

1
Q

How long would a regular short-term plan run for?

A
  • up to just over a year
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2
Q

How long would medium-term plans run for?

A

can be achieved after a few years.

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3
Q

How long could long term plans last?

A

many years
- can be running multiple at once

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4
Q

What should be considered to make an informed choice about financial products? 3

A
  • wants and aspirations
  • the risk/reward spectrum of the customer
  • the risk/reward spectrum of the product
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5
Q

What factors effect the products chosen by any individual depend partly on their risk profile? 3

A
  • personality, risk attitude
  • financial situation
  • age
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6
Q

Why are wants and aspirations relevant to making informed financial choices?

A

because customers must consider why and to what extent they want to buy financial products

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7
Q

What factors does the extent people practice self- insurance dependant on? 4

A
  • whether there is a new or operational obligation to insure the risk
  • the cost of the insurance when balanced with the risk
  • perception of degree of the risk
  • ability to access insurance
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8
Q

What are the 2 main decisions concerning the product group and the product brand?

A
  • risk associated with a particular type of product
  • risk profile in specific brand
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9
Q

Why might saving be considered a risk? 3

A
  • saving too much can leave less money for current consumption
  • saver handing money to a provider to look after in the hope of return but the provider may fail as a company etc
  • sum of money may be eroded over years due to inflation
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10
Q

What risks could occur when borrowing?

A
  • making a commitment to repay out of their future income
  • variation of interest charges can cause inability to afford repayment
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11
Q

What risks are associated with insurance?

A

if the company fails may be unable to pay compensation and loses cover.

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12
Q

What should a customer be aware off about a financial provider? 4

A
  • how safe and stable the provider is
  • the reputation it has for good and reliable servives
  • how it is regulated
  • how it can be accessed
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13
Q

How can you make an informed choice of product and provider? 7

A
  • consider the strength of their wants or aspirations
  • think about the benefit they will ferive from fulfilling it
  • look at risk profile according to financial circumstances
  • consider risk profile of the product they’re intending to buy
  • consider risk profile of the provider selling it
  • find out the charges and penalties, how flexible it is and the terms and conditions
  • consider the extent which it fits within their own vvalues
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14
Q

What is the most important factor when someone is choosing a financial product?

A

to match the solution to the circumstnaces

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15
Q

What makes a product suitable in terms of the plan? 5

A
  • intended purpose
  • timescale
  • affordability
  • attitude to risk
  • how the product fits into the overall product mix
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16
Q

What are the products that relate to medium- long term financial requirements? 3

A
  • savings and investments
  • borrowing
  • insurance
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17
Q

Why do people save and invest in the medium and long term?

A

because they’re aiming to spend the money eventually on a particular item or life event, or to provide for their own children’s future.

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18
Q

What does the amount someone saves depend on? 4

A
  • income
  • amount of current consumption in their short term plans
  • necessity of saving
  • attitude to saving?
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19
Q

Why does ‘income’ effect the amount someone saves?

A

the amount of discretionary spending a person is able to pursue is limited if on a low income thus is unlikely to have the means to allocate money to spending

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20
Q

Why does ‘the amount of current consumption’ effect the amount someone saves?

A

because saving means giving up current consumption, the more people consume in the short term, the less they can save for the longer term.

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21
Q

Why does ‘necessity of saving’ effect the amount someone saves?

A

someone desperate to buy an expensive item and cannot access a loan is forced to save up of rat over a number of years

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22
Q

Why does ‘peoples attitude to saving’ effect the amount someone saves?

A

saving over a long period because its a sensible thing to do is an attitude and form of habit that can be learned from a young age

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23
Q

Why do people borrow in the medium and long term?

A

To finance an item of expenditure that is too large for them to afford now or because it would take too long to save up for it and they want to have it now

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24
Q

What is the amount someone borrows dependent on? 5

A
  • income
  • other expenditure, especially mandatory and necessary items
  • time period of the loan
  • necessity of borrowing
  • peoples attitude to borrowing
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25
Q

Why would ‘income’ effect the amount someone borrows? 2

A
  • it determines how much they’re able to repay after a given period
  • determines how much a provider is willing to lend them
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26
Q

Why would ‘other expenditure, especially mandatory and necessary items’ effect the amount someone borrows?

A

the more someone spends on other items, the less they can afford to borrow

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27
Q

Why would ‘time period of the loan’ effect the amount someone borrows?

A

the longer the period, the more they can borrow and repay

28
Q

Why would ‘necessity of borrowing’ effect the amount someone borrows?

A
  • depends on the cost of the item relative to their income
  • depends on nature of life events or aspirations the products is used for
29
Q

Why would ‘peoples attitude to borrowing’ effect the amount someone borrows?

A
  • many don’t like the idea of being in debt over a long period of time.
  • if someones is only borrowing at not saving, their monthly income is just enough to cover their normal expenditure and the repayments on their long term basis
30
Q

Why would people save and borrow at the same time?

A
  • achieve a balance between the amount they save and the amount they repay on their loans.
  • of they get into financial trouble, they give priority to paying the loans so as not to lose their property or to get a poor credit record
31
Q

What is Joint demand?

A

when two products are bought together because they’re complimentary.
- purchase of one product necessitates the purchase of another

32
Q

Give 4 examples of financial product pairs

A
  • personal loan to buy a car and motor insurance
  • fixed term savings bond and an instant access savings account
  • interest only mortgage and investment product to cover the payment of the capital
  • a mortgage to buy a home and a personal loan to buy the furniture to put in the home
33
Q

Why would ‘a personal loan to buy a car and motor insurance’ be considered a product pair?

A

the demand for the personal loan is derived from the demand for the car.
- the law requires owners to have a third-party motor insurance but may decide to buy comprehensive motor insurance if the car is new

34
Q

Why would ‘A fixed term savings bond and an instant access savings account’ be considered a product pair?

A
  • the saver agreed to leave the money in a bond for a fixed number of years, giving up access to the money in return for a higher rate of interest
  • but may have to retain a certain amount in an instant access account so funds can be drawn upon emergency
35
Q

Why would ‘an interest only mortgage and an investment product to cover the payment of capital’ be considered a product pair?

A
  • customer pays interest throughout the term of the mortgage but at the same time must buy an investment product that is designed to grow and produced capital sum owed at the end of the mortgage period
  • loan product paired with a savings product
  • savings product accumulated over a period of time in order to eventually pay off the interest only mortgage
36
Q

Why would ‘a mortgage to buy a home and a personal loan to buy the furniture to put in the home’ be considered a product pair?

A
  • involves a lot of other purchases
  • having to pay a deposit on a home and afford other products isn’t always feasible thus many take out a loan to pay for luxury goods
37
Q

What is competitive demand?

A

The purchase of one products excludes the purchase of another
- situation in which 2 or more products fill the same need or want thus are in competition with each other for the customers money.

38
Q

Give 4 examples of products which may be in competition

A
  • savings products v borrowing products
  • Different types of products under the same product heading
  • different product brands under the same product heading being offered for sale by a different provider
  • Different product brands under the same product heading being offered for sale by different providers
39
Q

Why might ‘saving products and borrowing products’ be considered and instance of competitive demand?

A

all products compete for the limited resources of a consumer
- a person who allocates money to be put into a long-term savings account cannot use said money to repay a loan
- ceteris paribus suggests this will work in the reverse

40
Q

Why might ‘different types of product under the sane product heading ‘ be considered and instance of competitive demand?

A

this is in reference to different types of products e.g. savings or borrowings.

41
Q

What are some differences that can be present between different savings products?3

A
  • some can be savings purely or some can be investments, receiving or losing capital gain. Thus having different levels of risk
  • may have different maturity dates, interest rates, terms and conditions
  • increasing the amount of competition between products by means of product differentation
42
Q

What is product differentiation?

A

finding ways of making one brand look different from others
- e.g. add ons

43
Q

What are financial add ons?

A

additional features used to make a product look more attractive

44
Q

Why might ‘different products under the same product heading being offered for sale by different providers’ be considered and instance of competitive demand? 3

A
  • some products may be similar, having the same interest rates time period and or conditions
  • may have extra add ons
  • brand can effect where consumers choose to manage their money
45
Q

Why might ‘different product brands under the same product heading being offered by the same provider’ be considered and instance of competitive demand? 2

A
  • large providers don’t offer one savings account or one type of mortgage.
  • providers may have brands with different features with different target markets containing people who are similar.
46
Q

What are 2 factors peoples financial decisions can be influenced by?

A
  • internal factors
  • external factors
47
Q

How are peoples financial decisions effected by internal factors? 2

A
  • personal priorities, health, state of mind etc are e.g.
  • affect only a person and their family
48
Q

how are peoples financial decisions impacted by external factors which originate from outside a person?

A
  • beyond a consumers control to an extent and can effect people in terms of wht=at they want to save for or if they require borrowing a loan
49
Q

How are peoples wants and aspirations impacted by external factors? 3

A
  • affects plans and ability to succeed In plans
  • makes a difference to financial planning but people don’t have control over this.
  • many can be economical factors however some are legal and or social influences
50
Q

What is inflation?

A

Sustained increase in the general price level

51
Q

How does inflation affect an individual

A

the extent to which their income can keep pace with price increases due to inflation
- if it lags behind they may find themselves unable to fullfill savings or spending plans or to make loan repayments

52
Q

How does inflation affect savers?

A
  • money loses value as prices rise
  • position of dependent on whether the interest rate they are receiving covers the rate of inflation
53
Q

Since the GFC, what is the status of interest rates?

A
  • Very low
  • savings accounts not receiving enough money in interest to compensate for rising prices of goods they want to buy with their savings
54
Q

How are savings affected buy inflation rates rising faster than interest rates

A

interest rates are losing in ‘real’ terms because;
- the purchasing power of their money is falling and they can buy less real goods and services with this money

55
Q

How are borrows affected by inflation

A
  • money borrowed loses value and borrowers gain to thus extent
  • but interest paid is higher due to an increase in interest rates that are certainly higher than the rate of inflation
56
Q

How does inflation affect a decision on whether to finance a purchase by saving up for an item or borrowing an item?

A
  • deciding to save raises the risk of prices rising by the time they’re able to afford it
  • borrowing money may be better as this provides the opportunity to buy the product at current pricing
57
Q

How do interest rates change?

A
  • according to the economic and financial cnondition of the country
  • Bank changes its bank rate according to whether it wants to slow down or speed up the economy
58
Q

What does the bank rate affect? 2

A

rates providers pay on savings and charge on loans.
- saving and borrowing decisions are dependent on current level of interest rates and also how people expect interest rates to change in the future.
- also closely connected with inflation

59
Q

What does it mean if economic activity is low? 4

A
  • the country slows down
  • causing a decrease in competition in export markets
  • less demand for goods to be produced
  • causing fewer workers to be required
60
Q

how is someones savings and borrowings affected by unemployment?

A

Becoming redundant or being unable to be recruited cause people without jobs to claim benefits which are significantly less than an income.
- forced reduction in spending means less money allowed to be put towards saving meaning any current saving accounts can loose interest
- forced reduction in income may also mean inability ti borrow money as they would be unable to repay any loans

61
Q

What is the key indictor of the state of an economy?

A

House pricesd

62
Q

What do house prices indicate in a growing economy?

A
  • increased demand causes house prices to be buoyant
63
Q

What do house prices indicate in a slow economy? 3

A

increased uncertainty about the future cause house prices to fall
- can be convenient for first time buyers to enter the property ladder
- bad because a greater risk of losing jobs thus inability to make mortgage repay,ments

64
Q

What are the 5 external factors that can impact financial decision?

A
  • inflation
  • interest rates
  • unemployment
  • house prices
  • prices of financial assets
65
Q

Why does the price of financial assets impact financial decisions?

A

Some people invest in stocks and shares as part of their portfolio

66
Q

How does a change in the price of financial assets impact financial decisions?

A

a fall means you get less for shares if sold; and if companies aren’t doing well, receiving lower dividends occur

67
Q
A

LIBF Unit 2 (9 decks)

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