Section A (PERSONAL FINANCE) Flashcards
To understand the importance of managing personal finance
4 Functions of money
- Unit of account
- Means of exchange
- Store of value
- Legal tender
Examples of role of money
- Personal Attitudes = Brought up in an environment to spend or save
- Life Stages = Changes in spending from childhood to adulthood
- Culture = Asians tend to save more money
- Life Events = In control (marriage, uni) OR out of control (illness)
- External Influences = Economy effecting wages OR tax changes
- Interest Rates = High interest rates may be incentive to save more
Life Line - Examples of what people will do with money at different stages of life
- Child = Limited needs, Completely reliant on parents, May want to buy sweets or toys
- Adolescence = Want to be more independent, Slightly less reliant on parents as they want to socialise away from families
- Young Adult = Uni or starting career, Looking to be more independent, Buying a car or house, Maybe looking to start a family
- Middle Age = Support family, Start saving for kids futures e.g. uni / weddings, Look to improve own lifestyle e.g. car / house, Enjoy having access to additional money to spend e.g. holidays
- Old Age = Fewer dependents, May downsize, Less financial needs for assets
Common Principals for planning personal finance
- Avoid getting into debt
- Avoid legal action & repossession
- Maintain good credit rating
- Manage money to fund purchases
- Set financial targets & goals
- Counter the effects of inflation
- Control costs
- Remain solvent
- Avoid bankruptcy
- Generate income & savings
- Provide insurance against loss or illness
What are the 4 types of current accounts
- Standard
- Packaged, Premium
- Basic
- Student
Advantages & Disadvantages of a Standard Current Account?
ADVANTAGES:
No charges on credit balances.
Offers the holder a wide range of facilities, including a cheque book, debit / cash card and possibly an overdraft.
Convenient for receiving regular payments e.g. wages and making regular withdrawals.
DISADVANTAGES:
Potentially high charges on the use of an overdraft.
Standard features only, i.e. no additional perks.
Advantages & Disadvantages of a Packaged, Premium Current Account?
ADVANTAGES:
No charges on credit balance.
Offers the holder a wide range of facilities, including a cheque book, debit / cash card and possibly an overdraft.
convenient for receiving regular payments.
Offers the holder additional perks at a packaged price [cheaper than getting them individually (standard add. feat. include holidays / travel insurance, break down cover and phone protection)]
DISADVANTAGES:
Additional monthly charge is frequently applied.
The package offered may not offer value of money or meet the needs of the individual account holder.
Advantages & Disadvantages of a Basic Current Account?
ADVANTAGES:
Available to customers with a low credit rating.
Offers and easy first step for individuals to gain access to basic banking facilities i.e. the ability to pay in and withdraw cash.
DISADVANTAGES:
Limited facilities e.g. no debit card or overdraft.
Advantages & Disadvantages of a Student Current Account?
ADVANTAGES:
Course fees & student loans can be easily handled.
Bonuses offered are designed to meet the needs of a learner e.g. discounts on travel or small lump sum cash payment.
DISADVANTAGES:
Overdraft facilities could encourage overspending and charges for this are high.
Limited facilities.
What is ‘DEBT’?
Money owed
What is a ‘CREDIT RATING’?
A score given to an individual on how likely they are to repay debts based upon their previous actions
What is ‘BANKRUPT’?
When an individual or organisation legally states their inability to repay debts
What is ‘SOLVENT’?
The ability to meet day to day expenditure and repay debts
14 Methods of Payment
- Cash
- Debit Card
- Credit Card
- Cheque
- Electronic Transfer
- Direct Debit
- Standing Order
- Pre-paid Card
- Contactless Card
- Charge Card
- Store Card
- Mobile Banking
- Banker’s Automated Clearing Service (BACS) Faster Payment
- Clearing House Automated Payment System (CHAPS)
Explanation / Features of CASH
Notes and coins in a wide range of denominations
Advantages of CASH
- Most widely accepted form of exchange
- Physical not virtual
- Consumers feel confident when using
- Makes budgeting easier
Disadvantages of CASH
- Can be stolen or lost
- Threat of counterfeit
- Only really appropriate on purchases up to a certain amount
- Cannot be used online
Explanation / Features of DEBIT CARD
Issued by banks with payments for goods and services being deducted directly from a current account
Advantages of DEBIT CARD
- No need to carry cash
- Secure method of payment with low risk of theft
- Widely accepted
- Offers a degree of protection on purchases
- Suitable for online transactions
Disadvantages of DEBIT CARD
- Short time lapse between making the transaction and the money being withdrawn from the customer’s account may result in overspending
- Not accepted or appropriate for small transactions
Explanation / Features of CREDIT CARD
Issued by financial institutions allowing customers to delay payments for goods and services
Advantages of CREDIT CARD
- Allows a period of credit that is interest free, e.g. one month
- Most cards are widely accepted
- Loyalty schemes are often offered, e.g. collect points or cash back
- Offers a degree of protection on purchases
- Suitable for online transactions
Disadvantages of CREDIT CARD
- Interest is charged on balances not paid off within a month
- Can encourage a customer to overspend and get into debt
- Interest is charged on cash withdrawals
- A limit will be set on the amount of credit allowed
Explanation / Features of CHEQUE
A written order to a bank to make a payment for a specific amount of money from one person’s account to another account
Advantages of CHEQUE
- Low risk form of payment as the cheque can only be cashed by the named payees
- Widely accepted for face-to-face and postal transactions
- No need to provide change as can be written for an exact amount
Disadvantages of CHEQUE
- Expensive for the consumer if the bank refuses to clear the cheque, i.e. it ‘bounces’
- The time delay between writing the cheque and it being cashed could cause a consumer to go overdrawn
- Viewed as old fashioned
- Easy for the consumer to make errors when writing the cheque which will create problems for both the consumer and the recipient
Explanation / Features of ELECTRONIC TRANSFER
Payment is transferred directly from one bank account to another
Advantages of ELECTRONIC TRANSFER
- Almost instantaneous
- Provides a record of payment
- No additional costs incurred
- Easy to use for one-off and more frequent transactions
Disadvantages of ELECTRONIC TRANSFER
- Risk of loss if the transfer is incorrectly set up
- Not appropriate for face-to-face transactions
Explanation / Features of DIRECT DEBIT
An agreement made with a bank allowing a third party to withdraw money from an account on a set day to pay for goods or services received, e.g. pay a gas bill
Advantages of DIRECT DEBIT
- An easy way to make regular payments, e.g. utility bills
- Amount paid can vary to ensure the payment matches the amount required by the vendor
- Quick and easy to set up
Disadvantages of DIRECT DEBIT
- If the payer makes a mistake and takes too much it is the payee’s responsibility to claim back their money
- The payer determines the amount paid each time making it difficult for the payee to plan and budget
Explanation / Features of STANDING ORDER
An agreement made with a bank to transfer a fixed sum of money to a third party account on a set date on a regular basis, e.g. pay £30 for a phone contract each month
Advantages of STANDING ORDER
- The same amount is paid each time making it easier for the payee to plan and budget
- Easy both to set up and to cancel
- No need to remember to make regular, standard payments
Disadvantages of STANDING ORDER
- Payments are taken regardless of the customer’s balance which could lead to the unplanned use of an overdraft facility
- Payments will continue to be made unless cancelled
Explanation / Features of PRE-PAID CARD
Money is uploaded onto a card with transactions then being withdrawn to reduce the balance
Advantages of PRE-PAID CARD
- Can set a budget in advance to avoid overspending
- If lost or stolen, the loss is limited to the remaining balance
- An effective way of controlling the amount spent by children and where money is spent, e.g. upload money for school lunches or transport
Disadvantages of PRE-PAID CARD
- No protection if lost
- Sometimes requires an initial fee to purchase or set up the card, e.g. Oyster Travelcards
Explanation / Features of CONTACTLESS CARD
Cards containing antennae allow money to be transferred when the card touches a contactless terminal
Advantages of CONTACTLESS CARD
- Gaining in popularity
- Secure method of making payments
Disadvantages of CONTACTLESS CARD
- Often only accepted for relatively small transactions
- Still not widely accepted as seen as new technology
Explanation / Features of CHARGE CARD
Issued by financial institutions allowing customers to delay payments for goods and services for a short period of time; the balance must be paid off in full when a statement is issued
Advantages of CHARGE CARD
- Reduces risk of running up debts
- Allows a short period of credit
- Avoids the need to carry cash
- Often offers additional perks
Disadvantages of CHARGE CARD
- Must be paid in full each month
- Often an annual fixed fee is applied
Explanation / Features of STORE CARD
Issued by a retail outlet so that customers can delay payments for goods and services (similar to a credit card but only accepted by stores specified)
Advantages of STORE CARD
- Allows a short period of credit that is interest free, e.g. one month
- Often offer loyalty schemes, discounts and special promotions or privileges
Disadvantages of STORE CARD
- Only accepted in issuing store or linked associations
- Interest is paid on outstanding balances
- Can encourage overspending and result in a consumer getting into debt - particularly if they hold multiple cards
Explanation / Features of MOBILE BANKING
The ability to carry out financial transactions using mobile devices such as phones or tablets
Advantages of MOBILE BANKING
- Convenient as can be used at any time and place
- Secure
Disadvantages of MOBILE BANKING
- Features are still limited and hence mobile banking does not offer all of the functionality of Internet Banking
Explanation / Features of BANKER’S AUTOMATED CLEARING SERVICE (BACS) FASTER PAYMENT
A system that allows the transfer of payments directly from one bank account to another
Advantages of BACS FASTER PAYMENT
- Faster payment allows almost instant transfers that are guaranteed within 2 hours
- Can be accessed in a number of ways including in a branch, over the telephone and online
- No additional costs
Disadvantages of BACS FASTER PAYMENT
- Faster payment is not offered by all banks or branches and the customer may therefore have to default to BACS which can take three days to transfer payments
- A limit is set on the amount that can be transferred in any single transaction
Explanation / Features of CLEARING HOUSE AUTOMATED PAYMENT SYSTEM (CHAPS)
A system that allows the transfer of payments directly from one bank account to another
Advantages of CHAPS
- Transfers can be made the same day assuming instructions are received prior to a set time, e.g. 2pm at Barclays
- There is no limit on the amount that can be transferred in a single transaction
Disadvantages of CHAPS
- Normally, there is a fixed charge per transaction regardless of the amount transferred
6 Types of Borrowing
- Overdraft
- Personal Loan
- Hire Purchase
- Mortgage
- Credit Card
-Payday Loan
Explanation / Features of OVERDRAFT
This allows yo to withdraw money that you don’t have from a current account.
It may be suitable to meet short-term needs, e.g. a shortage of cash just before payday.
Advantages of OVERDRAFT
- Interest is charged only on the amount outstanding
- Can be paid off without penalties
- An overdraft facility can be prearranged and only used if needed
- Provides a short-term solution to cash flow problems
Disadvantages of OVERDRAFT
- When used, interest charges are often high
- Additional penalty charges for going over a pre-arranged limit are often very high
- Not the cheapest form of borrowing
- The ease with which these can be obtained could encourage overspending
Explanation / Features of PERSONAL LOAN
This gives you the ability to borrow a set amount of money, normally for a specific purpose, to be repaid in regular instalments with interest.
It may be suitable to find the purchase of a high price item such as a car or to make home improvements.
Advantages of PERSONAL LOAN
- Regular, pre-agreed payments make planning and budgeting easy
- As a general rule these would only be issued to individuals who can prove their ability to make the repayments
- Useful when looking to purchase a specific item of medium to high value, e.g. a car or home improvement
Disadvantage of PERSONAL LOAN
- May have to be secured against an asset which means if payments are missed, the asset may be taken to cover the outstanding debt
- Not really suitable for short-term loans
Explanation / Features of HIRE PURCHASE
This allows you to have use of an item immediately but pay for it in regular instalments. The item remains the property of the seller until all instalments have been made.
It may be suitable for one-off or infrequent purchases, e.g. a TV or fridge-freezer.
Advantage of HIRE PURCHASE
- Spreads the cost of an expensive item over a period of time
- Credit is secured against a specific item
- Often allows a customer to afford something now that they could not otherwise afford, e.g. 4 years interest free on furniture
Disadvantage of HIRE PURCHASE
- Interest charges may be higher than other traditional loans
- Ownership of the asset may legally be kept by the seller until the final payment is made
- Agreements can be manipulated to make a purchase seem deceptively appealing
Explanation / Features of MORTGAGES
This is a long-term loan to fund the purchase of assets, normally paid back over a long time, e.g. 25 years. It is secured against an item, e.g. a house.
It is suitable for assets that will maintain value for a long time and cannot normally be paid for outright.
Advantages of MORTGAGES
- Allows the customer to spread the cost of expensive items over a long period old time, e.g. the purchase of a house is often spread over 25 years
- Interest rates, depending upon the mortgage deal, can sometimes be fixed or tracked against a standard rate of interest reducing the risk of fluctuations
Disadvantages of MORTGAGES
- Interest payments, although sometimes fixed for a short period of time, can vary - this seriously affects the borrower’s ability to repay or meet other expenses
- Failure to meet repayments may lead to a loss of a home and seriously affect an individual’s future credit rating
- Penalties may be applied to early repayment
Explanation / Features of CREDIT CARDS
Goods are paid for by card and can be paid for either at the end of a set period, normally a month, when a statement is issued or overtime with the card provider stating a minimum payment each month. The minimum payment will be a percentage of the balance on the credit card.
It may be suitable when buying high price goods or services, e.g. a holiday, or at times when expenses are higher than usual, e.g. Christmas, to spread the costs of spending.
It may also just be used for convenience and safety as an alternative to using cash.
Advantages of CREDIT CARDS
- The credit card holder can pay above the minimum rate if they wish and hence speed up the rate of repayment and reduce interest incurred
- Can be used for items of multiple sizes and value, to a limit, without the need to secure against an asset
- Provides some protection on purchases
Disadvantages of CREDIT CARDS
- Can encourage overspending, sometimes on unnecessary purchases, and can lead to debt problems
- Interest rates are often higher than that on a personal loan
Explanation / Features of PAYDAY LOANS
This is a short-term source of finance used to bridge the gap between now and next receiving a wage. It will only normally be available for relatively small amounts at very high rates.
It may be suitable in an emergency to meet cash shortages.
Advantages of PAYDAY LOANS
- Help solve immediate short-term cash flow problems
- Relatively easy to secure
Disadvantages of PAYDAY LOANS
- Interest rates are very high and the cumulative amount to be repaid can quickly spiral out of control
6 Different types of Saving & Investment
These options are open to you when you are earning or receiving MORE money than you need to cover your EXPENDITURE:
- Individual Savings Account (ISA)
- Deposit and Savings Account
- Premium Bonds
- Bonds & Gilts
- Shares
- Pensions
Explanation, Advantages & Disadvantages of ISA’s
WHAT?
This is a type of savings account where the holder is not charged income tax on the interest received.
ADVANTAGES:
- Tax is not charged on interest earned allowing the saver to keep all of the rewards for saving
- Interest rates are sometimes slightly higher than an alternative savings account
DISADVANTAGES:
- Notice is often required to make withdrawals and according to the agreement there may be a limit set on the number of withdrawals made
- If the saver makes more withdrawals than set out in the agreement then the penalty may cancel out the tax savings
- There is a limit set on the annual amount that can be placed in an ISA
Explanation, Advantages & Disadvantages of DEPOSIT & SAVINGS ACCOUNT’s
WHAT?
These are accounts where interest is paid on the balance and normally the holder needs to give notice before withdrawing funds.
ADVANTAGES:
- Interest is earned on positive balances
- Accounts sometimes require deposits of a set amount forcing the saver to follow a savings plan
DISADVANTAGES:
- Interest earned is taxed
- The percentage rate of interest paid on savings is likely to be lower than interest to be paid on borrowing, therefore the benefits of savings are lost if the customer is borrowing at the same time
Explanation, Advantages & Disadvantages of PREMIUM BONDS
WHAT?
A government scheme that allows individuals to save unto 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.
ADVANTAGES:
- Chance of winning substantially more than could be earned in interest
- Can be easily withdrawn with no loss or penalty
DISADVANTAGES:
- No guaranteed return on investment
- Maximum amount reviewed annually by the government
- The amount invested, assuming zero or low returns, loses value due to inflation
Explanation, Advantages & Disadvantages of BONDS & GILTS
WHAT?
These are fixed term securities where the leader (the individual) lends money to companies and governments in return for interest payments. The money is invested for a specified period of time.
ADVANTAGES:
- Regular fixed returns
- Spreads risk across a range of markets
DISADVANTAGES:
- Risk of losing some or all of the value of the investment if the bond or gilt value falls
- Interest payments may not be received if the issuer is unable to make payments
Explanation, Advantages & Disadvantages of SHARES
WHAT?
Share 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 the shares to increase.
ADVANTAGES:
- Share prices fluctuate offering a potential high reward
- Shareholders’ returns can include payments and an increase in share value
- As part owners in a business there may be additional benefits including discounts and special offers
- For some investors, share ownership is more than just a way off saving - it is an pastime and creates interest
DISADVANTAGES:
- 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
Explanation, Advantages & Disadvantages of PENSIONS
WHAT?
These are long-term saving plans where individuals make regular contributions, called premium payments, throughout their working life. This is then repaid as either a lump sum or regular payments or a combination of the two upon retirement. Pensions can be state, company or private.
ADVANTAGES:
- Encourages individuals to save throughout their working life for retirement
- Depending on the policy, an individual’s savings may be boosted by an employer’s contributions increasing the final value of the saving
- Regular payments are deducted, sometimes at source, meaning the individual is tied into making the regular contributions
DISADVANTAGES:
- Movement between jobs may mean that one policy stops and another starts, therefore reducing the overall cumulative value of the savings
- Final outcome is difficult to predict
- If compulsory payments are deducted, this may effect short-term living standards
Saving VS Investment
SAVING:
Saving is placing money in a secure place so that it grows in value and can be used in the future
Risks =
- Low or zero risk as money saved is guaranteed to be available in the future
-Inflation can reduce the spending power of money saved
Rewards =
- Interest payments
- Financial security / peace of mind
INVESTMENTS:
Speculative commitment to a business venture in the hope that it generates a financial reward in the future
Risks =
- Investments can go wrong and all or some of the value may be lost
- No guarantee of a return
Rewards =
- If successful, there is a potential for a high financial return (significantly higher than could be earned in interest in savings)
- Can be exciting! Some people will invest in shares, antiques, art or foreign currencies etc. in the hope of high returns
What is insurance and what are the 6 main types of Insurance?
Insurance is a form of protection. Insurance policies cover the cost of loss, damage or illness upto prearranged levels in return for regular payments called premiums.
6 Types of Insurance:
- Car
- Home & Contents
- Life Assurance & Insurance
- Travel
- Pet
- Health
Explanation, Advantages & Disadvantages of CAR INSURANCE
WHAT?
It is a legal requirement to insure any car that is on the road - this covers theft as well as accidents.
The degree of cover will vary depending on whether the policy is third party or fully comprehensive.
It protects the driver, passenger and other road users.
ADVANTAGES:
- Meets legal requirements
- Protects self against theft or damage
- Protects against damage caused to a third party
DISADVANTAGES:
- Premiums can be high depending on assessed level of risk, e.g. expensive for young drivers
- Normally there is an excess that must be paid, e.g. first £500 of all damages is still the responsibility of the car owner
Explanation, Advantages & Disadvantages of HOME & CONTENTS INSURANCE
WHAT?
Home Insurance covers the physical building, e.g. against fire.
Contents Insurance covers the physical items in the house including electrical equipments, furniture and personal items. If there are individual items of high value, e.g. a diamond ring, then they may need to be specified on the policy.
Items can be insured when a person is using them away from home as well as when inside the house.
ADVANTAGES:
- Protects against damage which may otherwise be too expensive to repair resulting in the loss of a home
- Contents are protected both when inside and outside of the house
DISADVANTAGES:
- Premiums are an additional expense to home ownership
- Some items cannot be replaced due to a value beyond the financial worth, e.g. painting or inherited piece of jewellery
Explanation, Advantages & Disadvantages of LIFE ASSURANCE & INSURANCE
WHAT?
Life Assurance is an ongoing policy to pay a lump sum upon death.
Life Insurance is a policy for a set period of time to pay a lump sum if you die within the time period.
Mortgage lenders will often insist upon life insurance for the same period of time as the mortgage to secure repayment of the mortgage if the holder dies while monies are still owed.
ADVANTAGES:
- Provides peace of mind to family following the bereavement of a homeowner
DISADVANTAGES:
- If the policy holder does not die within the period of life insurance, no payment is made (could be seen as an advantage)
Explanation, Advantages & Disadvantages of TRAVEL INSURANCE
WHAT?
This protects individuals or groups while abroad. Policies can be purchased to cover a specific trip, multiple trips or for al trips within a year.
Cover will generally include loss or theft of property, illness, cancellation and emergencies upto predetermined amounts / limits.
Specific types of holiday or activities, e.g. skiing or extreme sports, will require additional cover due to the high level of risk associated.
ADVANTAGES:
- Provides protection for personal belongings when away from home
- Covers medical costs when on holiday
- Protects against cancellation and sometimes delays
DISADVANTAGES:
- The person suffering the loss is likely to have to pay upfront to replace items or cover medical costs and then reclaim later
- An additional cost when travelling abroad
Explanation, Advantages & Disadvantages of PET INSURANCE
WHAT?
This protects the owner of pets against some or all of the expenses associated with treating ill or injured pets.
ADVANTAGES:
- Avoids expensive pet fees
- If vet fees are too high, there may be no alternative to having pet put down - insurance can avoid this
DISADVANTAGES:
- An additional monthly expense to protect against the unexpected
Explanation, Advantages & Disadvantages of HEALTH INSURANCE
WHAT?
This covers individuals, families or employees against medical expenses, including assessments, treatments and loss of earnings.
In the UK, the National Health Service (NHS) provides free medical care but individuals may wish to take out insurance to receive payments if, for example, time is spent in hospital, or to receive private treatment.
Health insurance can include a payment plan to cover routine visits such as to the dentist or optician with a percentage of expenses paid.
ADVANTAGES:
- Some compensation is provided when ill which can reduce the financial burden and stress allowing the patient to concentrate on recovery rather than financial worries
- If used to fund private care, this often results in quicker treatment and better facilites
DISADVANTAGES:
- Paying for something that you hope you will not use
- Premiums can be expensive depending on the degree of cover required
- Will not cover pre-known conditions
