Lecture 1-Wealth

Question 1

What is wealth?

Answer 1

• Refers to the total value of assets less any value of liabilities
• Assets=Money, bank savings, investments are all financial capital that contribute to wealth and human capital

Question 2

What is human capital?

Answer 2

collective skills, knowledge, or other intangible assets of individuals that can be used to create economic value for the individuals, their employers, or their community:

-Education is an investment in human capital that pays off in terms of higher productivity.

Question 3

How is wealth different to income?

Answer 3

• Wealth measures the capital value of the stock assets at a given time
• While income represents a regular flow of money

Question 4

How are wealth and income related?

Answer 4

-Income can be set aside to build wealth and the stock of wealth can produce income (for example money in savings can increase due interest)

Question 5

What are the 4 categories of wealth?

Answer 5

-Pension wealth

• Property wealth

• Financial wealth (savings,
shares etc)

• Physical wealth (ornaments,
collectables etc)

Question 6

Different attitudes to wealth from people at different stages of the life cycle

Answer 6

• Savings and borrowing are used to fund education and housing at earlier stages
• Later on income increases which can increase savings and investments which decreases debts and increases wealth
• Wealth in latter stages of the life cycle is used to maintain consumption as there is no regular flow of income

Question 7

Unequal distribution of wealth between people at different stages of their life cycle

Answer 7

-Young people normally posses house, cars,
furniture etc to support their consumption.

– In older age, people start making investments in
property and pensions.

– Older households tend to be more wealthy than
young households.

Question 8

How is wealth unequally distributed around the globe?

Answer 8

• 71% of the world population owns 3% of global wealth

- 0.7% owns more than 45%~ of global wealth

Question 9

6 push factors to create wealth

Answer 9

• Increasing life expectancy
• Gap between life expectancy and health life expectancy
• Falling birth rates and ageing population
• Diminishing role of government in retirement
• Diminishing role of employer
• Diminishing role of family

Question 10

Increasing life expectancy as a push factor in wealth creation

Answer 10

• People living longer due to medical advancements
• Thus, need more economic resources to cover a longer life span
• Retirement age is 65 in the UK, which means that
  retired people will need to finance themselves for 20-
  35 after they reach retirement age.

-Old people may suffer from old age poverty, if they
did not accumulate sufficient wealth during their
working life.

Question 11

Gap between life expectancy and healthy life expectancy as a push factor in wealth creation

Answer 11

-Gap between life expectancy and healthy life
expectancy may increase

– It means people will spend substantial time while
being ill or disabled, owing to old age.

– An estimated 4 million older people in the UK have
limiting illness.

– It will have a direct impact on provision of health and
medical services to public. More financial sources can
reduce dependence on public health benefits.

-Access means-tested state help, for low income and capital individuals who have no choice in the standard of care they may receive

Question 12

Falling birth rates and ageing population

Answer 12

• Birth rates are falling while total fertility rate in 2015 was 1.8 children in the UK, 1.4 in Germany and Japan which is below the replacement rate of 2.7, which is necessary for maintaining population).
• This gives rise to a ageing population which needs a higher support ratio, however it is decreasing cause more elderly people and less people born. Youngsters have to finance an ageing population
• Huge strain on healthcare system

Question 13

Diminishing role of Government in retirement

provision as a push factor in wealth creation

Answer 13

Ageing population has exerted enormous burden on financial resources of countries. Resultantly,
governments in many countries are now taking steps to diminish their resource allocation towards financial resources towards elderly.

– Resultantly, retirement age is now gradually increased
in the UK to compensate longer life expectancy

– It is expected that those in their early 20’s now will
have to wait till 70 years before they become entitled to get their state pension.

Question 14

Diminishing role of employer as a push factor in creating wealth

Answer 14

• Shifted from defined benefit (promise and income in retirement) to defined contribution (Dependant on individual as to how much they save)
• Leaves many people under-saving and running out of money due to longevity risk.
• Increasing life expectancy and reduction in birth rates have also strained employers’ abilities to finance employees after retirement.

Question 15

Diminishing role of the family as a push factor in wealth creation

Answer 15

• Number of single household is on the rise
• Without an extended family to look after them and the state roll decreasing, individuals will needs resources to pay for services when the ability to look after themselves decreases.

Question 16

Relationship between health and wealth as a pull factor in creating wealth

Answer 16

• Work more, including taking on more hours as there income is not enough to pay the bills, with stress can affect health
• Stress over saving or retirement can led to stress related illnesses including: anxiety and depression
• insomnia always thinking about finance can affect how they eat, sleep and function
• Lead to little access to healthcare, quality foods and housing
• Live in deprived areas with unsafe streets and infrastructure=unhealthier lifestyle leading to obesity and smoking.

Question 17

Relationship between wealth and longevity as a pull factor in wealth creation

Answer 17

• Wealth affords better health so these people live longer
• Wealth allows people better access to education, and they are more educated in their life decision and are more focussed on the future therefore make healthier choices.
• Good health means that you can work more and earn more income to generate wealth
• Parental wealth impacts children’s educational attainment, as they are able to access better quality education=leaving a legacy increasing longevity.

Question 18

3 ways to create wealth

Answer 18

• Guiding principles
• Financial literacy
• Planning

Question 19

Guiding principles as a way of creating wealth

Answer 19

• Start saving: Savings are necessary as they give an emergency fund as well as the capital to invest (10% of income)
• Control expenditures: Expenditure less than income to avoid debt and have surplus money for investment
• Make the gold multiply: Increase savings and investments so inflation don’t erode the value away
• Guard investments from loss: Protect investments or wealth from losses by taking unnecessary risks
• Make home an investment: sub-let rooms or update to increase value
• Create sources for future income: Future income stream due to ill-health
• Increase ability to earn: Inflation increases prices, therefore, ensure earnings higher than prices.

Question 20

What is financial literacy?

Answer 20

-the ability to process economic information and make informed decisions about financial planning, wealth accumulation debt and pensions

Question 21

Financial literacy as a way of creating wealth

Answer 21

-Those who are financially literate are more likely to
invest in the stock market (because they understand
that this is one of the engines of wealth accumulation),
avoid debt (because they understand the costs of it!)
and plan for their retirement.

• High financial knowledge lowers costs of gathering information and reducing barriers to investing in high risk equities i.e. stock market/Allowing individuals to take advantage f equity premium
• More likely to setup a retirement plan as they have more confidence and financial knowledge to plan.

Question 22

Financial planning as a way of creating wealth

Answer 22

Research has found a positive link between
financial planning and wealth.

• Households that give little thought to retirement
had far lower wealth than the ones who
considered it carefully.,

• Retirement planning is a good indication of
wealth of an individual.

• People with high propensity to plan might be wealthier because they can better control their
spending and can have ,more surplus income to
invest.