Finance - Functions and role of Money Flashcards
Unit of Account
- Money serves as the common base of comparison that people use to present prices and record debts.
- Money also provides a measure by which we can value different goods and services.
Means of Exchange
- In today’s economy we use notes and coins as money, rather than barter as a medium of exchange.
- Money enables goods and services to be exchange, transactions to be settled and debt to be paid.
- Money avoids the problems of barter, principally the double coincidence of wants which is inefficient and would stifle specialization and division of labor.
Store of Value
- Money acts as a store of value overtime.
- It enables individuals to transfer spending to future time periods secure in the knowledge that will have a future value
Legal Tender
- Accepted to buy goods and services
- Money allows individuals to pay for goods and services late, despite their consumption taking place now
FACTORS AFFECTING THE ROLE OF MONEY - (Personal Attitudes)
- Personal attitudes towards risk and reward, borrowing, spending, and saving.
FACTORS AFFECTING THE ROLE OF MONEY - (Risk averse or Risk Taker)
- Some people are willing to take more risk. E.g. To spend all their money or gamble.
- Others will be more cautious and want to save money to ensure security in the future.
FACTORS AFFECTING THE ROLE OF MONEY - (Life Stages)
CHILDHOOD:
- Features: Zero or low income.
E.g. pocket money, gifts, savings.
- Financial Needs: Most needs are met by parents. E.g. food - Implications: Likely to spend money received. Planned savings by parents.
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FACTORS AFFECTING THE ROLE OF MONEY - (Life Stages)
- ADOLESCENCE:
- Features: Want greater
independence. May start to earn.
Looking into the future. Saving
for university or driving lessons. - Financial Needs: Higher
expenditure patterns. E,g,
Buying more expensive items or
going out with friends. - Implications: Conflict between
wanting to save now and save
for the future. Still heavily reliant
on parents.
- Features: Want greater
FACTORS AFFECTING THE ROLE OF MONEY - (Life Stages)
MIDDLE AGE:
- Features: Settling down, maybe buying a house, having a family. Hopefully earning a good wage. Self sufficient with dependents.
- Financial Needs: Support self and family. Maybe buy a house or moving up property ladder. Regular incomes and expenditures.
- Implications: Need to earn. Difficult to save for the future but concerned over security at retirement. Likely to spend the majority of income on short to medium terms. E.g. Food, clothing. home. family holiday
FACTORS AFFECTING THE ROLE OF MONEY - (Life Stages)
OLD AGE:
- Features: Loss of income. Reliant on pension. no longer dependents.
- Financial Needs: Day to Day expenditure. Comfortable lifestyle. E.g. Enjoy leisure time.
- Implications - Spending savings. More careful with expenditure. E.g. May downsize house or shop around for groceries.
FACTORS AFFECTING THE ROLE OF MONEY - (Culture)
CULTURE - (including religious and ethical beliefs):
- Different societies will have different opinions on what is right and wrong.
Some societies will talk openly about money, earnings, and wealth whilst others are more reserved or secretive.
FACTORS AFFECTING THE ROLE OF MONEY - (Life Events)
- The personal life cycle varies from person to person such as having a baby, going to university, being made redundant, starting a business.
FACTORS AFFECTING THE ROLE OF MONEY - (External Influences and Trends)
EXTERNAL INFLUENCES - Are the outside of the control of the individual. E,g, You cannot determine them.
- When the economy is in decline the spending power of individuals tends to fall, maybe as a result of job losses.
- People are less willing pr able to spend.
- Banks may be less willing to lend
FACTORS AFFECTING THE ROLE OF MONEY - (Interest Rates)
- Low interest rates encourages borrowing therefore more spending.
- Low interest rates may encourage people to buy on credit.
The reward for saving is low therefore making it less attractive.
Planning Expenditure, Common Principles to be to be considered in planning personal finance:
- Expenditure is the spending of money.
- Example - An outward flow. These are the common principles or guidelines to consider when planning personal finance.
Planning Expenditure, Common Principles to be to be considered in planning personal finance:
TO AVOID GETTING INTO DEBT:
- Debt is when you are spending more than you have. E.g. Expenditure is greater than income.
Debt will increase your costs. E.g. It will have to be paid back with interest.
Planning Expenditure, Common Principles to be to be considered in planning personal finance:
TO CONTROL COSTS:
-By setting budgets you can control your expenditure to ensure it doesn’t spiral out of control.
- Planning in advance can often save money.
Planning Expenditure, Common Principles to be to be considered in planning personal finance:
AVOID BANKRUPTCY:
- Bankruptcy is when an individual legally declare that they are unable to repay their debts.
- Loss of all assets
- Damage to reputation.
- Affects ability to achieve future credit.
Planning Expenditure, Common Principles to be to be considered in planning personal finance:
MAINTAIN A GOOD CREDIT RATING:
- Whenever you apply for credit, whether it be for a bank loam or to buy a car on hire purchase, the creditor will review your credit rating.
- The assesses the degree of risk
Planning Expenditure, Common Principles to be to be considered in planning personal finance:
AVOID LEGAL ACTION OR REPRESENTATION:
- If you failed to make agreed payments the creditor can take legal action, this will be expensive and can damage your reputation.
Loans taken out against an asset. E.g. a house. If payments are missed the bank can repossess the asset. E.g. Take away the house form you.
Planning Expenditure, Common Principles to be to be considered in planning personal finance:
REMAIN SOLVENT:
- To be solvent means to be able to meet your debts.
Planning Expenditure, Common Principles to be to be considered in planning personal finance:
TO MANAGE MONEY TO FUND PURCHASES:
- There will nearly always be time gap between income and expenditure.
- Expenditure needs to be planned so that purchases such as food can be afforded at the end of every month, quarterly bills such as electricity can be paid every three months.
Planning Expenditure, Common Principles to be to be considered in planning personal finance:
GENERATE INCOME AND SAVINGS:
- Interest is paid on savings and therefore generates income, the size of savings therefore increases
- Money can be invested to generate income
- Income may be invested in assets that will be appreciate.
CVC
- Stands for Corporate Venture Capital
- CVC is a subset of venture capital
CVC funding comes from large corporate, who invest in smaller businesses that are relevant and beneficial to the parent group.
Debit Card
- Payment card, which draws funds from a linked business bank account
-Its usually used for covering everyday work-related expenses, such as supplies, travels, equipment, or meals
Interest Rates
- Interest represents the cost you incur for borrowing money.
- Its what banks reward you for depositing money with them.
- Interest rates are typically expressed as a percentage of the total amount of money you borrow or save over the year.
APR
- Stands for Annual Percentage Rate
- This refers to the total cost of your borrowing for a year
- It includes the standard fees and interest you have to pay.
Chip and Pin
- A method of paying for goods and services using a credit card and a secret number instead of s signature.
Different Ways to Pay
CASH (notes and coins)
Advantages:
- Confidence
-Widely acceptance
- Small denominations
Easy to control expenditure
Disadvantages:
- Risk of loss or theft
-Physical transactions only
-Inappropriate for large items of expenditure
Different ways to pay
DEBIT CARDS (Allows you to make purchases by card with the money being taken directly from a current account)
Advantages:
- Secure
-Widely accepted
-Can withdraw cash from various places
Disadvantages:
- Need to monitor spending and bank balance
-If overspend can be costly
Different ways to pay
CREDIT CARDS (Make purchases on credit. E.g. pay now and pay later. Repayments are made following the issue of a statement with a minimum amount)
Advantages:
- Allows you to defer and spread payment
- Widely accepted
-Used online or in store
Disadvantages:
- Interests is charges on the outstanding balance
- If overspend can be costly
Different ways to pay
CHEQUE (A paper transaction giving a bank permission to transfer payment from your account to another account)
Advantages:
- Secure method of payment
-Widely accepted
- Appropriate for postal transactions
Disadvantages:
- Maybe charged for each cheque processed
Costly if cheque is not honored due to insufficient funds
