Personal Finance: A1-A4 Flashcards
A1- What are the Functions of money? (4)
• Unit of account
• Store of value
• Means of exchange
• Legal tender
What factors affect the role of money? (6)
- Personal attitudes (risk taker/risk averse)
- Life stages
- Culture
- Life event
- External influences and trends (high/low income)
- Interest rates (high: saving, low: spending)
Common principles of planning personal finance: (11)
• Avoid debt
• Avoid bankruptcy
• Avoid legal action/repossession
• Control costs
• Remain solvent
• Maintain a good credit rating
• Generate income/savings
• Manage money to fund purchases
• Provide insurance against loss/illness
• Counter the effects of inflation
• Set financial targets/goals
A2 - Cash
Advantages:
- Most widely accepted form of exchange
- Makes budgeting easier
- Consumers feel confident when using
Disadvantages:
- Can be lost/stolen
- Cannot be used online
- Only appropriate for small purchases
Debit card
Advantages:
- Secure method of payment = low risk of theft
- Widely accepted
- Suitable for online transactions
Disadvantages:
- May results in overspending
- Not accepted/ appropriate for small transactions
Credit card
Advantages:
- Most cards are widely accepted
- Suitable for online transactions
- Offers a degree of protection on purchases
Disadvantages:
- Can encourage a user to overspend and get into debt
- A limit will be set on the amount of credit allowed
- Interest is charged on balances not paid off within a month
Cheque
Advantages:
- Low risk form of payment as cheque can only be cashed by the named payee
- Widely accepted for face to face/ postal transactions = secure
- No need to provide change as it can be written for an exact amount.
Disadvantages:
- Viewed as old fashioned
- Time delay between writing cheque and being cashed out could cause consumer to be overdrawn.
Electronic transfer
Advantages:
- Provides a record of payment
- No additional costs incurred
- Easy to use use for one off/ frequent transactions
Disadvantages:
- Risk of loss if the transfer is incorrectly set up
- Not appropriate for face to face transactions
Direct Debit
Advantages:
- Easy way to make regular payments
- Quick and easy to set up
Disadvantages:
- The payer determines the amount paid each time, making it difficult for the payee to plan and budget
Standing order
Advantages:
- Easy to set up/ cancel
- Same amount is paid each time = easier for payee to plan/budget
Disadvantages:
- Payments will continue to be made unless cancelled
- Payments are taken regardless of customer’s balance- unplanned use of an overdraft facility
Pre-paid card
Advantages:
- Can set a budget in advance to avoid overspending
- If lost/ stolen, the loss is limited to the remaining balance
- Effective way of controlling the amount spent by children- lunch money
Disadvantages:
- No protection if lost
- Sometimes requires an initial fee to set up/ purchase e.g oyster travel cards
Contactless card
Advantages:
- Gaining in popularity
- Secure method of making payments
Disadvantages:
- Often a limit - small transactions
- Still not widely accepted as seen as ‘new technology’
Charge card
Advantages:
- Reduces risk of theft
- Avoids the need to carry cash
- Allows a short period of credit
Disadvantages:
- Must be paid in full each month
- Often an annual fixed fee is applied
Store card
Advantages:
- Often offer loyalty schemes, discounts and special promotions/ privileges
- Allows a short period of credit that is interest free
Disadvantages:
- Can encourage overspending and result in getting into debt
- Only accepted in issuing store/ linked associations
Mobile banking
Advantages:
- Convenient- can be used at any time/place
- Secure
Disadvantages:
- Features are still limited
- Does not offer all of the functionality of internet banking
Bankers automated clearing system (BACs) / Faster Payments
Advantages:
FP - allows almost instant transfers that are guaranteed within 2 hours
- Can be accessed in a number of ways; in a branch, over the telephone, online
Disadvantages:
- FP is not offered by all banks/ branches
- BACs can take 3 days to transfer payments
- A limit is set on the amount that can be transferred in any single transactions
Clearing house automated payment system (CHAPs)
Advantages:
- Transfers can be made the same day assuming instructions are received prior to a set time E.g 2pm at Barclays
- No limit on amount that can be transferred in a single transaction
Disadvantages:
- Normally, there is a fixed charge per transaction regardless of the amount transferred
A3 - Current accounts
Used to:
~ Wages paid into
~ Pay cheques into and out of
~ Pay bills/ other frequent expenses
~ Withdraw cash
Features:
~ Rate of interest paid in any positive balances
~ Rate of interest charged on any negative balances
~ Overdraft limit
~ Charges on unauthorised overdrafts
~ Additional incentives
Standard current account
Advantages:
~ widely available
~ overdraft facility
~ range of services
Disadvantages:
~ limited additional benefits
~ charges on overdrafts can be high
Packaged, premium current account
Advantages:
~ additional features to a standard account
~ range of services
Disadvantages:
~ fee/additional charge
~ generic rather than tailored to individual needs
Basic current account
Advantages:
~ allows those who might find it difficult to open a bank account to open one e.g those with a poor credit history
Disadvantages:
~ limited features
~ no overdraft
~ no interest on positive balances
~ May attach a stigma
Student current account
Advantages:
~ student loans can be paid in
~ overdraft can help/ be useful for students
Disadvantages:
~ might have interest charges in overdrafts
Banks are keen to attract learners- once a young person has joined a bank, they are likely to stay with that bank forever
A4 - Overdraft
Advantages:
- only pay for the money borrowed
- only borrowed when required, allowing flexibility
- quick/ easy to arrange
Disadvantages:
- only available for a current account
- bank can call it in at any time
- interest is charged
Personal loan
Advantages:
- Quick and easy to secure
- Improved cash flow
- Fixed interest rates allow individuals to budget
Disadvantages:
- Often expensive interest repayments
- Can be charged a penalty for early repayment
Hire purchase
Advantages:
- Immediate use of item
- Spreads the cost over a period of time
Disadvantages:
- May add interest
- Payments have to be made or item will be repossessed
Mortgage
Advantages:
- Spreads the cost
- Makes it possible to buy items such as a house, which would not be feasible otherwise
Disadvantages:
- Payments may be subject to change - interest rates
- Normally require a deposit- e.g 10% of house value
Credit cards/ balance transfers
Advantages:
- Good backup/ alternative to using cash
- Can claim insurance on goods/services
- Spreads the cost
Disadvantages:
- Interest is usually very high
- There is a fee for transferring balances
Payday loan
Advantages:
- Solves short term cash flow problems
- Quick access to funds
- Suitable for an emergency
Disadvantages:
- high rates of interest
- Needs to be repaid quickly
- can escalate out of control if not paid on time
Individual savings account (ISA)
Advantages:
- Bank will pay interest
- interest is not taxed - all interest is yours
Disadvantages:
- A set amount has to be paid in each month
- A limit is set on how much you can save each year
- A period of notice has to be given before savings can be withdrawn
Deposit and savings account
Advantages:
- Interest is paid on positive balances
- the value of savings will increase as a result of interest received, assuming withdrawals are not made
Disadvantages:
- Funds cannot be withdrawn immediately
- Interest is taxed, however government only tax up to a certain amount E.g £1000
Premium bonds
Advantages:
- Each month, bonds are entered into a prize draw
- opportunity to win up to £1million
Disadvantages:
- Interest is not paid on the saving
- unlikely to win any prizes
Bonds and gilts
Advantages:
- A fixed rate of interest is paid on the loan
Disadvantages:
- If a company gets into financial difficulty, they might not be able to pay you back
Shares
Advantages:
- Shareholders receive a share of the profits called dividends- if share prices increase they can sell them for more than they bought them for = profit
Disadvantages:
- Share prices can go in both directions - an investor can lose money and dividends are not guaranteed- RISKY
Pensions
Advantages:
- Pensions mean you will still have an income when you stop working
- some employers pay into your pension as well E.g teacher pension
Disadvantages:
- Paying into a pension means you get less wages each month
Risk and rewards of saving vs investment
Saving:
* low risk - money won’t lose value- money is in a secure place
* limited reward- limited to the current rate of interest
Investment:
* high risk- money could be lost
* rewards can vary- higher shares could mean rewards are high
Health insurance
Features:
- Annual health check
- Private consultations
- Accommodation and nursing care
Advantages:
- May be seen quicker than in the NHS
- May include drugs/ treatment not included in the NHS
Disadvantages:
- NHS provides comprehensive health cover for all
- Cost is high
Car insurance
Features:
- Damage or theft
- damage to a 3rd party
- hire car
Advantages:
- Legal requirement
- pays for repairs to own car + hire car
- reduced premiums for safer drivers = no claim’s discount
Disadvantages:
- Premiums can be high for groups deemed high risk (young and old)
- excesses often apply
Home and contents insurance
Features:
- New for old- items replaced if stolen
- repairs paid for if caused by accidents E.g storms/ floods
Advantages:
- Covers items when outside the home E.g laptops
- replacing stolen/ damaged items can be expensive
Disadvantages:
- Excesses often apply
- compulsory for some mortgages
Pet insurance
Features:
- Vets fees
- Operations
- Annual health check
Advantages:
- Vets fees/ operations can be expensive
- peace of mind
Disadvantages:
- Exclusions may apply
- excesses often apply
Travel insurance
Features:
- Medical expenses paid when abroad
- holiday cancellation costs
- lost baggage
Advantages:
- Repatriation costs (to bring you back home)
- millions of pounds of expenses can be covered
Disadvantages:
- Excesses often apply
- May need to meet replacement costs then claim these back
Life assurance
Features:
- small regular monthly payments made to the named beneficiary for their whole life when the policy holder dies
Advantages:
- compensates for the loss of a breadwinner when the policy holder dies - this insurance will act as their income for the rest of the family
Disadvantages:
- Some policies are not linked to inflation so may not be worth as much as when it was put in
Life insurance
Features:
- large lump sum paid to the beneficiary when the policy holder dies
Advantages:
- If the policy holder dies, their family/ named beneficiary will get a lump sum of money to pay off a mortgage/ remaining debts
Disadvantages:
- once money is spent, it’s gone- may need to be used to pay off a mortgage so no extra money left for family
