7. Dealing With Unforeseen Events Flashcards
1
Q
How might a person’s life cycle differ from what they expected?
A
- events might happen but not at expected time
- events might happen but not quite in the way they expected
- events might not happen at all
- events that they have not planned might happen
2
Q
Why do financial plans need to be flexible?
A
- it is not possible to draw up a separate budget for every possible combination of events that might happen during their lifetime
- but some flexibility needs to be present if an unfavourable event occurs so they will be at least partially prepared for it
- they must also be prepared to alter their plan + their priorities when there are major changes e.g. life changing events such as divorce, redundancy or illness
3
Q
What problems are less of a problem financially?
A
- getting a promotion at work or making a windfall profit on an investment
- a sudden increase income can also cause difficulties
4
Q
How to allow flexibility in plans?
A
- save some money for a ‘rainy day’ - an emergency, something that people don’t expect but which might happen + which will require money if + when it happens
- if unfavourable events occur, the person will have reduced stress of worrying about how to manage if they did + the money is still there for other uses
- anticipating events is part of the skill of risk assessment - if there is a likelihood of something happening, a person should be able to assess how likely it is to happen + what positive or negative effect it might have on them - then they can make sure their planning covers this
5
Q
When are financial plans less flexible?
A
- plans that are laid down over a long period of time are less flexible than short term ones
- some financial products require a customer to be locked into a savings scheme or a loan for a period of time - so they might have the choice to suspend deposits or loan payments or there will may be big penalties if they do
- non-flexible savings + investments -> e.g. fixed term bonds, life assurance policies + personal pension funds
- non-flexible loan products -> e.g. hire purchase, fixed interest mortgages
6
Q
Why does health need to be considered in a budget?
A
- they may be paying for private healthcare insurance but they may need to think of how flexible it is + whether it will continue to meet their changing needs
- private healthcare schemes are expensive + they need to consider whether they will always be in a position to pay premiums
- it is a good idea for a family to have an emergency recovery plan
7
Q
What is a limited company?
A
- it means that the liability of the business for debt is limited to the amount of money that can be raised by selling the business assets
- owners (ie share holders) don’t have to sell their personal assets to settle business debts
- but if a business is not a limited company (e.g. a partnership or sole trader) the owners can be required to use their personal possessions to pay business debts - could involve losing their house or their personal investments
8
Q
What do owners of a non-limited company need to consider?
A
- anyone running a business that does not have limited liability needs to know the current position of their business - what the values of its assets + liabilities are + what it’s cash position is
- they must be careful if they see that the business is getting near to being insolvent- the value of the total assets is less than the value of its total liabilities
- they also need a sense of where they want the business to go in the next few years + whether they will need to invest more money into it
9
Q
What is the challenge with small businesses?
A
- harder to get bank loans, so many family businesses have to use personal savings
- this means that they have less money to finance their lifestyle
- they need to take this situation into account when drawing up their flexible budget
10
Q
What is ‘what if’ calculations
A
- ‘what if’ is a function on a spreadsheet whereby the user can set out a table of calculations + then change one of the variables to see ‘what’s the effect will be on the final result ‘if’ certain changes happen
- several variables impact borrowing repayments + savings goals
11
Q
What variables impact the ‘what if’ calculation?
A
- interest rates
- the rate of inflation
- exchange rates
- benefits
12
Q
Impact of change in interest rates?
A
- interest rates generally change when the BofE decides to make changes in the bank rate - but providers interest rates may not change immediately + by the same amount as the change in bank rate, but in time they usually move up or down to reflect the change
- an increase in interest rates is a problem for anyone repaying a loan with a variable rate of interest because their repayments will increase
- it is good news for savers because they will earn a better return on their deposits
- a decrease in interest rates has the opposite effect
- nobody can predict interest rates in the future as if depends on many economic factors but both borrowers + savers need to be aware of the risk + plan accordingly
13
Q
Impact of interest rate changes on planning with mortgages
A
- a person who borrows money via a variable rate 25 year mortgage might feel confident that they can meet their repayments at current interest rate levels but they need to consider how they will manage if the rate increase
- this is especially important if they have taken out their mortgage at a time when interest rates are very low
- they need to do two sets of forecasts + monthly calculations
14
Q
Impact of changes in rate of inflation
A
- if a persons income rises more slowly than prices, they suffer a fall in their real standard of living + are not able to buy the same amount of goods + services
- since the credit crisis, there has been a fall in real wages in the uk + this is because peoples wages + salaries on average have been increasing more slowly than prices
- inflation is especially a problem for people on fixed incomes (retired people living off annuity) - some annuities are inflation linked + these people are less badly affected (although with other things being equal this annuity yields a lower monthly amount than one that is not inflation linked)
15
Q
How to factor inflation into financial plans?
A
- need to do it especially in long term plans
- they should assume an average rate of inflation, perhaps around 2% to 3% + increase their income + expenditure by this amount each year
- it would be wise to raise expenditure by a higher percentage than income in order to give a margin for error
16
Q
Impacts of changes in exchange rates
A
- exchange rates only affect when they are abroad or for some reason recieve income and/or expenditure in a foreign currency
- if the pound sterling falls in terms of another currency (e.g. US dollar or euro) it is worth less
- changes in exchange rates will affect the cost of a foreign holiday - paying for flights + accommodation in sterling but they will need spending money while you are there
- this will affect the holiday budget
17
Q
How should people plan with exchange rates?
A
- if someone’s financial plan involves a foreign holiday, it is wise to increase the cost by a small percentage each year to reflect adverse exchange rate movements
- it is also possible for sterling to gain value + the holiday will cost less
18
Q
How has the exchange rate changed?
A
- 2020 -> £1 = 1.10 euros
- the pound fell considerably in the value after 2016, when the brexit referendum was held
19
Q
Impact of benefits on financial planning?
A
- some people are reliant on state benefits
- the amount a person is entitled to receive depends on the policy of the govt. that happens to be in power
- this makes long term planning difficult because people don’t know what will happen to benefit rates or entitlements in the future
- a change of govt. might mean changes in social security policy -> this is a medium term risk
- e.g. universal credit is replacing six existing benefits with a single monthly payment for people who are out of work or on a low income
20
Q
Examples of changing benefits?
A
- disability living allowance -> available for people with disabilities who have difficulties walking or getting around or need help to look after themselves
- it is being replaced for claimants aged 16 to state pension age with Personal Independence Allowance (PIP)
- PIP benefit requires people to be assessed to see how much they need - designed to help people with long term ill health or disability to pay for extra costs that their condition incurs
- it is not subject to tax or affected by employment status
21
Q
How much debt is the UK population in?
A
- every day 313 people in England + wales are declared insolvent or bankrupt
- citizen advice in England + wales dealt with 1,949 new debt problems everyday during 2021
- 85% of personal borrowing is secured loans - mortgages
