Savings

Question 1

What are the different reasons for saving?

Answer 1

Transactions motive, precautionary motive, and speculative motive

Question 2

What is the transactions motive?

Answer 2

Saving for specific spending eg holiday or retirement

Question 3

What is the precautionary motive?

Answer 3

Savings for emergencies eg become ill, lose job

Question 4

What is the speculative motive?

Answer 4

Savings to allow good investment opportunities to be taken advantage of, when they arise eg start a business

Question 5

How much should you save?

Answer 5

Rule of thumb: 3 months income, or non-discretionary expenditure

Question 6

What are the risks of saving?

Answer 6

Information asymmetry, adverse selection, and moral hazard, loss of capital, inflation risk, interest rate risk, tax risk

Question 7

What is information asymmetry?

Answer 7

One party to a transaction has access to superior information than the other eg unaware banks at risk of failure

Question 8

What is adverse selection?

Answer 8

One party to a transaction has better access to information and the disadvantages party makes a poor decision eg banks knew they have issues so tried to attract money by offering high interest

Question 9

What is a moral hazard?

Answer 9

Risk that after a transaction has occurred, one of the parties to the deal does not act in good faith eg banks continued to accept savings even though they were heading for failure

Question 10

What is the Financial Services Compensation Scheme (FSCS)?

Answer 10

The UK’s compensation fund available to compensate customers of authorised financial services in the event of their failure

Question 11

What is the Retail Price Index (RPI)?

Answer 11

‘Average’ of prices of 100s of items we spend on money on including housing costs

Question 12

What is the Consumer Price Index (CPI)?

Answer 12

Now the ‘official’ measure, excludes housing costs and takes into account that when prices risk, folk will switch to lower-price alternatives

Question 13

What is compound interest?

Answer 13

Interest paid on the original deposit and also on accumulated interest from past periods

Question 14

What is annual equivalent rate (AER|)?

Answer 14

An interest rate that reflects what the interest rate would be if interest was paid and compounded once a year

Question 15

What are tax-efficient wrappers?

Answer 15

Tax-favoured environment in which securities can be placed where tax is legally avoided

Question 16

Give examples of tax-wrappers.

Answer 16

ISA’s and personal pension plans

Question 17

What are free income tax and CGT?

Answer 17

Cash ISAs and Stocks/Shares ISAs

Question 18

What are the different types of savings accounts?

Answer 18

Bank and building society accounts, instant access accounts, regular savings accounts, fixed rate bonds and fixed term accounts

Question 19

What does someone saving depend on?

Answer 19

Time horizon, desire for flexibility, view on likelihood and direction of changes to interest rates, and tax status

Question 20

What is the systematic approach to saving?

Answer 20

Set objectives, measure you financial position, research suitable accounts, act, review regularly, and take control

Question 21

What are some other options for savings?

Answer 21

National savings and investments, credit unions, and peer-to-peer lending

Question 22

What are credit unions?

Answer 22

Savings for some members used to lend to other lenders - ‘co-operative’ idea

Question 23

What is peer-to-peer lending?

Answer 23

Savers lend money to individuals or businesses