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E&E - Personal and business Finance > Personal and Business Finance > Flashcards

Personal and Business Finance Flashcards

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1
Q

What is unit of account (as a function of money)?

A

Money can be used to place a value on goods and services. You exchange money for an equivalent value in goods and services

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2
Q

What is means of exchange (as a function of money)?

A

Money is used to sell, buy or trade goods and services. Money makes it simple to do this, otherwise you would have to swap products or services in order to trade (bartering)

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3
Q

What is store of value (as a function of money)?

A

Money has a value. It can be stored, for example in a bank, and then used in the future to buy goods and services

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4
Q

What is legal tender (as a function of money)?

A

Money is the legal means in which you use to pay. National currency for a country and official form of payment

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5
Q

Identify the main functions of money

A

Unit of account
Means of Exchange
Store of value
Legal tender

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6
Q

Name six factors that influence your view of money

A

Personal attitudes, life stages, culture, life events, external influences, interest rates

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7
Q

Name 6 reasons why it is important to plan expenditure?

A

Control costs. Avoid legal action and/or repossession of goods or your home. Remain solvent. Maintain a good credit rating. Avoid bankruptcy. Manage money to fund purchases.

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8
Q

Name 5 more reasons why it is important to plan expenditure?

A

Generate income and savings. Set financial targets and goals. Provide insurance against loss or illness. Counter the effects of inflation. Avoid getting into debt.

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9
Q

Three benefits of planning expenditure?

A

Good credit rating allows you to borrow money to fund large purchase. Money saved earns interest = income. Savings fund purchases and unexpected expenses.

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10
Q

Five risks of not planning expenditure?

A

Getting into debt because you cannot pay bills. Having insufficent funds for loan repayments. Repossession (losing goods) or legal action (loans). Poor credit rating. Can’t save for the future.

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11
Q

Name as many payment methods as you can.

A

Cash, Debit card, Credit card, Cheque, Electronic transfer. Direct debit. Standing order. Prepaid card. Contactless card. Charge card. Store card. Mobile banking. BACS. Faster Payments. CHAPS.

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12
Q

Benefits and drawbacks of cash (notes)

A

Accepted in most places. Can be stolen or counterfeited. Cannot be used for online purchases.

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13
Q

Benefits and drawbacks of debit card (issued by banks)

A

Payment is taken directly from cardholders bank account. Secure method. Contactless cards can be used for small amounts. Small risk of cardholder overspending. Online purchases may encourage overspending. Risk of hacking.

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14
Q

Benefits and drawbacks of credit cards (issued by banks and financial companies)

A

Paid for directly by card issuer. Short interest free period, usually a month. Interest charged on outstanding after this period. Risk of overspending=debt. Risk of hacking. Some retailers may charge a fee for payment on credit card.

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15
Q

Benefits and drawbacks of cheque (issued to bank customers)

A

Written order to pay a sum of money from a bank account to payee. Secure method- only payee can cash cheque. Once cashed, it takes 3 days for money to enter bank account. Although still widely used, some retailers no longer accept cheques.

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16
Q

Benefits and drawbacks of electronic transfer (direct payment)

A

Payment is made directly between bank accounts. Easy to set up and use. Instant transfer. Bank details of third party must be correct, otherwise transfer will not take place.

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17
Q

Benefits and drawbacks of direct debit (an instruction to pay)

A

An instruction to a bank authorising payee collect varying amounts of money from payers. Simple way to pay regular bills - amount deducted automatically from payers bank account. Payee may vary amounts=difficult to plan. Must have sufficient funds

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18
Q

Benefits and drawbacks of standing order (an instruction to pay)

A

Regular set payments to payee. Payments do not change, allowing the payer to plan expenditure. Payments automatic and continue until cancelled by payer. Must have sufficent funds.

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19
Q

Benefits of prepaid cards (cash loaded onto a card which can be used to make purchases)

A

Widely accepted by retailers. Cannot spend more than the amount of cash=helps control expenditure. If lost or stolen=cash on card is lost. Some have set up and transaction fees.

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20
Q

Benefits and drawbacks of contactless cards - payment is made when card touches terminal

A

Fast, easy and secure. Usually for amounts less than £30. Cardholder can lose track of how much they are spending.

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21
Q

Benefits and drawbacks of charge cards - issued by financial companies

A

A short term, interest free loan. Cardholder can buy goods/services immediatley but balance must be paid in full at the end of month. Annual fee is payable, charge card companies require to have a certain level of annual income.

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22
Q

Benefits and drawbacks of store cards - issued by retailers.

A

Similar to credit card - only accepted by store that issues it. May benefit from dicounts and loyalty schemes. Interest payable on balance unless paid off in full every month. Risk of overspending=debt.

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23
Q

Benefits and drawbacks of mobile banking - online banking using an app

A

Account holder manages through smartphone/tablet. Check balances, make payments and transfers. Secure, can be used wherever the holder has access to internet. Service limited compared with internet banking. Full range of services restricted.

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24
Q

BACS and Faster Payment - electronic payment from one bank account to another.

A

BACS - takes three days to transfer payment from one account to the other. Faster Payments - transfer takes place within two hours. Usually no fee.

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25
Q

CHAPS - electronic payment from one bank account to another.

A

Guaranteed same day - transfer as long as bank instructed by a certain time. A fee is charged.

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26
Q

Who offer current accounts?

A

Banks and societies.

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27
Q

Give four types of current accounts.

A

Standard account. Packaged, premium account. Student account. Basic account.

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28
Q

Who is a standard current account aimed for?

A

Customers with a fair credit rating.

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29
Q

Benefits and drawbacks of standard current account.

A

No banking fees. Cheque book and bank card, often with contactless payment. Facility to set up direct debit/standing orders to pay bills. Salary can be paid directly into account. Overdraft facilities - may be high interest.

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30
Q

Who is a packaged premium account aimed for?

A

Customers who want features of a standard current account but want additional features for a fee.

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31
Q

Benefits and drawbacks of packaged premium account.

A

Packaged benefits such as travel insurance - customers have to pay for these. Interedt on credit balances. Cash back on household bills paid by direct debit. Special rates of interest on overdraft. Benefits may not be required or used.

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32
Q

Who is a student account aimed for?

A

Learners in higher education to help them manage their finances. Limited features.

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33
Q

Benefits and drawbacks of student account.

A

Limited features include interest fee overdraft up a certain limit - if you go over the limit, the interest can be very high.

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34
Q

Who is a basic account aimed for?

A

No frills account aimed at customers with a poor credit rating.

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35
Q

Benefits and drawbacks of basic account

A

Similar to standard account but no overdraft facilities. No banking fees. Debit card. Facility to set up direct debits to pay bills.

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36
Q

Name six types of borrowing.

A

Overdraft, Personal Loan, Hire purchase, Mortgage, Credit card, Payday loan.

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37
Q

What is an overdraft?

A

Short term loan which can be used to pay bills. Can arrange with bank to borrow up to a certain amount when the balance on your current account reaches zero.

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38
Q

Benefits and drawbacks of an overdraft.

A

Usually free to set up. You only pay interest on the money you borrow. Interest is high and you will be charged a fee to use your overdraft. If you go over the limit or have an arranged overdraft, there will be penalty charges.

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39
Q

What is a personal loan?

A

This can be used to buy expensive items, such as household goods or a car. You borrow a fixed amount and pay it back in set monthly instalments, usually over a period of one to five years, at a fixed rate of interest.

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40
Q

Benefits and drawbacks of a personal loan.

A

Monthly instalments allows you to plan your expenditure. There may be arrangement fees, which can add to the cost. If you fail to make payments on a secured loan, you may lose the asset it is secured against.

41
Q

What is a hire purchase?

A

This is usually used to buy a car. You put down a deposit and then pay monthly instalments over a period of one to five years. During the payment period, you hire the car, once the instalments are paid, you own the car.

42
Q

Benefits and drawbacks of a hire purchase.

A

Allows you to buy an expensive item at an amount you can afford. While you are paying, you cannot sell the car because you do not own it. If you fall behind with payments, then the lender may repossess the car.

43
Q

What is a mortgage?

A

This is a loan taken out to buy a property. It is usually for 25 years and you pay off the mortgage in monthly instalments.

44
Q

Benefits of a mortgage.

A

Allows you to buy home and spread the cost over a long period. Fixed or tracked mortgage rates can help make payments affordable.

45
Q

Drawbacks of a mortgage.

A

An increase in interest rates may affect your ability to pay back the mortgage. The property is used as security for the loan. If repayments are not made, the property can be repossessed.

46
Q

What is a credit card?

A

You can use this to buy goods/services in shops, online, by post and on the phone. You may spend up to the amount of the credit limit on your card. At the end of the month, you will receive a statement showing how much you owe.

47
Q

Benefits and drawbacks of a credit card.

A

If you pay the full amount each month, you will pay no interest. If you pay the minimum amount shown on the statement, you will be charged interest on the outstanding amount. Interest rates are higher than a personal loan.

48
Q

What is a payday loan?

A

This is a short term loan, usually for small amounts, often when people need cash to pay bills between paydays. A fee is charged.

49
Q

Benefits and drawbacks of a payday loan.

A

Can help with cash flow problems. A fee is charged. Very expensive way to borrow.

50
Q

Name six types of savings and investment.

A

Individual savings accounts (ISAs), deposits and savings account. Premium bonds. Bonds and gilts. Shares. Pensions.

51
Q

What is an individual savings account (ISA)?

A

Type of savings account where a holder is not charged income tax on the interest received.

52
Q

Name the two main types of ISAs

A

Cash ISA - savings account where interest is tax free. Stock and shares ISA - funds are invested in shares or bonds, and profit returns are tax free.

53
Q

What is innovative finance ISA?

A

Innovative finance ISA: interest is earned from lending money to other people or companies through peer to peer lending.

54
Q

What is help to buy ISA?

A

This was launched in 2015 for first time buyers to help them save to buy property.

55
Q

Benefits of individual savings account (ISAs)

A

Tax is not charged on interest. Interest rates are sometimes slightly higher than alternative savings accounts.

56
Q

Drawbacks of individual savings accounts (ISAs)

A

Notice is required to make withdrawals, there may be a limit set on the number of withdrawals. More withdrawals than in agreement=penalty may cancel out tax savings. Limited annual amount can be put into ISA.

57
Q

What are deposit and savings accounts?

A

These are accounts where interest is paid on the balance and normally the holder needs to give notice before withdrawing funds.

58
Q

Benefits of deposit and savings accounts.

A

Interest is earned on positive balances.. Accounts sometimes require regular deposits of a set amount forcing the saver to follow a savings plan.

59
Q

Drawbacks of deposit and savings account.

A

Interest earned is taxed. Interest on borrowing is higher than interest acquired, therefore the benefits of savings are lost if the customer borrows.

60
Q

What is a premium bond?

A

A government scheme 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.

61
Q

Benefits of premium bonds.

A

Chance of winning substantially more than could be earned in interest. Can be easily withdrawn with no loss or penalty.

62
Q

Drawbacks of premium bonds

A

No guaranteed return on investment. Maximum amount reviewed annually by the government. The amount invested, assuming zero or low inflation, loses value due to inflation.

63
Q

What are bonds and gilts?

A

What are bonds and gilts?
These are fixed term securities where the lender (the individual) lends money to companies and governments in return for interest payments. The money is invested for a specified period of time.

64
Q

Benefits of bonds and gilts.

A

Regular fixed returns. Spreads risk across a range of markets.

65
Q

Drawbacks of bonds and gilts.

A

Risk of losing some or all of the value of the investment if the value falls. Interest payments may not be received if the issuer is unable to make payments.

66
Q

What are shares?

A

Shares involve investment in a business in return for equity, i.e the shareholder becomes a part owner of the business. The shareholder will receive dividends from the company’s profits and will also want the value of shares to increase.

67
Q

Benefits of shares.

A

Share prices fluctuate = high reward. Returns include dividend payments and an increase in share value. Part owners = additional benefits including discounts and special offers. More than just saving, pastime and creates interest.

68
Q

Drawbacks of shares.

A

Share prices fluctuate offering a potential high risk. There is no guarantee of any reward or return as all of an investment can be lost.

69
Q

What are pensions?

A

These are long savings plans where individuals make regular contributions, called premium payments, throughout their working life. This is then repaid as either a lump sun, regular payments or a contribution of the two upon retirement.

70
Q

Benefits of pensions.

A

Encourages individuals to save throughout their working life for retirement. Depending upon the policy, an individuals savings may be boosted by an employers contributions. Regular payments are deducted, individual is tied to making regular payments

71
Q

Drawbacks of pensions.

A

Movement between jobs may mean that one policy stops and another starts, reducing cumulative value. Final outcome is difficult to predict. If compulsory payments are deducted, this may affect short term living standards.

72
Q

What is the definition of saving?

A

Placing money in a secure place so that it grows in value and can be used in the future.

73
Q

What is the definition of investment?

A

Speculative commitment to a business venture in the hope that it generates a financial reward in the future.

74
Q

Risks of saving.

A

Low or zero risk as money saved is guaranteed to be available to be there in the future. Inflation can reduce spending power.

75
Q

Rewards of savings.

A

Interest payments. Financial security/peace of mind.

76
Q

Risks of investment.

A

Investments can go wrong and all or some of the value may be lost. No guarantee of a return.

77
Q

Rewards of investment.

A

If successful there is potential for a high financial return (significantly higher than could be earned in interest). Can be exciting, in the hopes of high returns.

78
Q

What is the definition of insurance?

A

An agreement with a third party to provide compensation against financial loss in line with conditions laid out in the policy agreement.

79
Q

What is the definition of premiums?

A

Regular payments made by an individual or company to an insurance provider in return for protection.

80
Q

How does a premium payment vary?

A

Payment will vary depending upon the amount of cover provided and the amount of risk as assessed by the insurance provider.

81
Q

What is car insurance?

A

Legal requirement-covers theft as well as accidents. Degree of cover will vary - from third party to comprehensive. Protects drivers, passengers and other road users.

82
Q

Benefits of car insurance

A

Meets legal requirements. Three levels of cover (third party, …and theft, fully comprehensive, build no claims bonus, provides protection against liability claims from other drivers

83
Q

Drawbacks of car insurance

A

Premiums can be high depending upon assessed level of risk. Normally there is an excess that must be paid, add to cost in the event of a claim e.g first £500 of all damages is still the responsibility of the car owner.

84
Q

Benefits of home and contents insurance

A

Covers cost of repairs e.g. fire subsidence, flood, otherwise may be too £££ Contents- personal. Additional security precautions can reduce premiums. Possessions covered outside house.

85
Q

Drawbacks of home and contents insurance

A

Premiums are an additional expense to home ownership. Some items cannot be replaced due to a value beyond financial worth - painting/heirloom. Covers cost of rebuilding, not market value.

86
Q

What is life assurance and insurance?

A

Ongoing policy to pay a lump sum upon death (if you die within time period) Mortgage lenders insist for same period as mortgage if holder dies while money is owed.

87
Q

Benefit of life assurance and insurance

A

Peace of mind to family following the bereavement of a homeowner. Mixture of insurance and investment. Security/collateral. Payout may be larger than the total amount of premiums paid.

88
Q

Drawback of life assurance and insurance

A

If the policy holder does not die within the period of life insurance, no payment is made ( advantage ). Pre-exisitng medical conditions may not be covered. Life insurance payouts linked to performance of investments, rather than what family deserve.

89
Q

What is travel insurance?

A

Protects groups or individuals while abroad. Policies can be purchased to cover specific trip, multiple, or all in one year. Cover will generally include loss or theft, illness, cancellation and emergencies up to predetermined limits.

90
Q

Why do specific types of holidays or activities require additional cover?

A

For example skiing or extreme sports will require additional cover due to the high risk associated.

91
Q

Benefits of travel insurance.

A

Provides cover for delays, cancellations or curtailment of the trip. Provides cover for loss of personal possessions while on the trip. Cover for emergency medical expenses.

92
Q

Drawbacks of travel insurance.

A

Payouts may not cover full amount of financial loss. May have to pay upfront, claim later. Pre-existing medical conditions not covered. Additional cost while travelling. High risk=additional premium.

93
Q

What is pet insurance?

A

This protects the owners of pets against some or all the expenses associated with treating ill or injured pets, ie vet fees.

94
Q

Benefits of pet insurance

A

Veterinary bills can be expensive. Can opt for lifetime cover for serious illnesses for an additional premium. Cover provided for personal injury or damage caused by the animal.

95
Q

Drawbacks of pet insurance

A

Pre-existing medical conditions are not covered. Some policies will limit the amount of medical expenses covered. Vaccinations are not covered. Additional expense.

96
Q

What is health insurance?

A

Covers individuals, families or employees against medical expenses - assessments, treatments, loss of earnings. Choose over NHS = time is spent in hospital, receive private treatment. Include payment plans cover % routine visits - dentist, optician

97
Q

Benefits of health insurance

A

Covers some or all private medical costs with convenient treatment times. You can choose the types of illnesses and treatment you want to cover. Focus on recovery, no financial stress. Quicker treatment, better facilities.

98
Q

Drawbacks of health insurance

A

Pre-existing medical conditions are not covered. Medical conditions which arise during the initial period of the policy may not be covered. Can be ££ depending on degree of cover.

E&E - Personal and business Finance (3 decks)

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