Section A Understand The Importance Of Managing Personal Finance Flashcards
What is interest rate?
The proportion of an amount that is charged as interest to the borrowers
What is credit rating?
A score given to individuals on how likely they are to repay debts based upon their previous actions
What is solvent?
The ability to meet day-to-day expenditure and repay debts
What is debt
Money owed
What does it mean to be bankrupt?
When an individual or organisation legally states its inability to repay debts
What are the 4 functions of money; explained.
Functions of money:
Legal tender -
• It is a legally recognised form of payment
•Money is widely recognised and used for transactions such as buying goods/services, paying a deposit for a house, receiving wages
Unit of account -
• It allows us to place a monetary value on goods and services
• The price of goods and services show the unit of account
Means of exchange -
• it allows us to trade
•businesses and customers can buy and sell goods and services using money eg pay for lunch
Store of value -
• it allows us to use it in the future as it keeps its value
•you can have money in a bank account or at home which can be used to buy goods and services in the future
How does personal attitude influence the view of money?
Individuals will vary their attitudes towards money/spending. Examples:
Risk averse - avoid taking risks
Likely to take risks - enjoy potential rewards
Focus on saving - influenced by family attitudes
How do life stages influence the view of money?
Young people are less concerned about money whereas when you grow older, with debts etc., your attitudes change.
How does interest rates, costs of borrowing versus reward of saving, influence the view of money?
Interest rates are the proportion of an amount that is charged as interest to the borrower .
When interest rates are low = more likely to borrow money or spend on credit
When rates are high = more of an incentive to share
What are the financial needs in childhood and where would the money come from?
Financial needs:
Food/drinks
Clothes
Toiletries
Nappy’s
Toys
Source of finance:
From parents/carers
Pocket money
Gifts
What are the financial needs in adolescence and where would the money come from?
Financial needs:
Food/drinks
Clothes
Toiletries
Electronics
Source of finance:
From parents/carers
Pocket money
Gifts
Part time job in late adolescence
What are the financial needs in young adulthood and where would the money come from?
Financial needs:
Food/drinks
Clothes
Toiletries
Electronics
Taxes
Rent
Education
Insurance
Pension
Transport
Source of finance:
Jobs
Gifts
Help from parents
What are the financial needs in middle age and where would the money come from?
Financial needs:
Food/drinks
Clothes
Toiletries
Electronics
Taxes
Rent or mortgage
Insurance
Pension
Transport
Dependence from children
Source of finance:
Jobs
Inheritance
What are the financial needs in old age and where would the money come from?
Financial needs:
Food/drinks
Clothes
Toiletries
Electronics
Mortgages or rent
Insurance
Dependence from kids
Transport
Source of finance:
Pension inheritance
How can planning your spending help you avoid getting into debt?
Allows you to save money to pay for bills and taxes and many more
How can planning your spending help you to control costs?
-Allows you to save money for the future
-Helps with organisation
-Helps you know what you have to pay
How can planning your spending help you avoid legal action and /or repossession (take something away)
-makes you look good with money to banks and businesses so you can earn their trust to lend money
- means you always have money in your banks count
How can planning your spending help you remain solvent (have enough money to spend)
-saves money
- having multiple savings
- allows you to be able to pay for bills
-manage debts
How can planning your spending help you maintain a good rating?
-save money
-pay money back on time, loans and bills and more
How can planning your spending help you avoid bankruptcy
-allows you to have enough money to keep you alive
-save money
How can planning your spending help you manage money to fund purchases
-saves money and helps organisation so you know what to pay
How can planning your spending help you generate income and savings
Helps save your money and not spend it all at once. Allowing more income in your savings
How can planning your spending help you set financial targets and goals
Helps allow you to plan the future and organise what money you will need ahead of time for your goals
How can planning your spending help you provide insurance against loss or illness
-if you spend less and plan what you spend insurance companies will see you more liable
-if something breaks insurance will help cover the costs financially
How can planning your spending help you counter the effects of inflation
-save money for inflation
-spend carefully
-find cheaper dupes
What is a current account? Include types.
A current account is an account with a bank or building society that is designed for frequent use. Money can be paid in and withdrawn on a daily basis without the need to give notice.
Types:
Standard
Packaged, premium
Basic
Student
Give pros and cons to a STANDARD current account
pros:
- No charges on credit balances
- Offers the holder a wide range of facilities.
- Convenient for receiving regular payments
cons
- potentially high charges on the use of an overdraft facility
- standard features only
Give pros and cons to a PACKAGED PREMIUM current account
pros
- no charges on credit balances
- offers wide range of facilities
- convenient for receiving regular payments
- offers the holder additional perks at a packaged price cheaper than acquiring them individually
cons
- additional monthly charge is frequently applied
- package offered may not offer value for money or meet the needs of the individual account holder
Give pros and cons to a BASIC current account
pros
- available to customers with a low credit rating
- offers an easy first step for individuals to gain access to basic banking facilities
cons
- limited facilities
Give pros and cons to a STUDENT current account
pros
- course fees and student loans can be easily handled
- bonuses offered are designed to meet the needs of learners
cons
- overdraft facilities could encourage overspending
- charges for overspending are high
- limited facilities
Give advantages and disadvantages of using cash
Advantages:
- Most widely accepted form of exchange
- Makes budgeting easier
Disadvantages:
- Can be lost or stolen
- cannot be used online
What is a debit card
A payment card that deducts money straight away from your account when you make a payment
Give advantages and disadvantages of Using a debit card
Advantages:
- Accepted almost everywhere
- Good to keep track of money
Disadvantages:
- Can only spend what is in your bank account
What is a credit card
A payment card that is used for purchases but can be paid for later
Give advantages and disadvantages of using a credit card
Advantages:
- Accepted everywhere
- Can pay later if you have an insufficient amount
Disadvantages:
- Must pay interest
- Could lead to debt
Give advantages and disadvantages of using a cheque
Advantages:
- It is secure because nobody else can cash it off but the recipient
- No change has to be given
Disadvantages:
- Can be lost or stolen
- It’s a long process
What is an electronic transfer
the processing of money online into another account
Give advantages and disadvantages of using an electronic transfer
Advantages:
- Can pay someone instantly
- easy and quick
Disadvantages:
- Potential scammers and fraud
- If details are wrong money may go to a different person
What is direct debit
An arrangement made with a bank that allows a third party to take money at an agreed date
Give advantages and disadvantages of using direct debit
Advantages:
- Can be a varying amount
- Done automatically
Disadvantages:
- Wrong money may come out
- There is no warning because it is automatic so you are unaware
What is a standing order
It is like direct debit but it is set up by you and it is a set amount every month
Give advantages and disadvantages of using a standing order
Advantages:
- You have more control
- Set up personally by the payer
Disadvantages:
- It will keep going until you cancel it even if you don’t have sufficient amount of money
What is a prepaid card
Pre-paid cards, sometimes called everyday spending cards, are debit cards that operate on a pay-as-you-go basis. You can simply top it up with money whenever you want to use it and spend as you would normally.
Give advantages and disadvantages of using a prepaid card
Advantages:
- Can set a budget in advance to avoid overspending
- If lost or stolen the loss is limited to the remaining balance
Disadvantages:
- Sometimes requires an initial fee to purchase the card
Give advantages and disadvantages of using a contactless card
Advantages:
- Don’t have to remember the pin
- quick and easy process
Disadvantages:
- Can be stolen and used to pay
What is a charge card
It is similar to a credit card, you buy things, pay back later with high interest
Give advantages and disadvantages of using a charge card
Advantages:
- Can pay later
Disadvantages:
- can lead to debt
- Must pay interest
What is a store card
It is like a credit card but for a particular store
Give advantages and disadvantages of using a store card
Advantages:
- No spending limit
Disadvantages:
- Must pay back a monthly charge, if not you pay high interest
Give advantages and disadvantages of using mobile banking
Advantages:
- Easy and quick
- Can be accessed no matter where you are
Disadvantages:
- Cannot do everything on the app
- hard to access customer service
What is banker’s automated clearing service (BACS) faster payment
It is a system that allows the transfer of payments directly from one bank account to another
Give advantages and disadvantages of using a banker’s automated clearing service
Advantages:
- Money will be in account within two hours
- Can be accessed online or in a bank branch
Disadvantages:
- You can only transfer a certain amount
What is a clearing house automated payment system (CHAPS)
It is a system that allows the transfer of payments directly from one bank account to another
Give advantages and disadvantages of using a clearing house automated payment system
Advantages:
- No limit to transfer
- Can be accessed online or in a bank branch
Disadvantages:
- Time limit to transfer money; for example, you must transfer by two PM or will be transferred next day
What is insurance premium
What you must pay for your insurer to insure you
What is insurance excess
Insurance excess is the amount you have to pay towards the overall cost of an insurance claim. It’s usually a pre-agreed amount. Your insurer will then contribute the rest
What affects how much your insurance will cost
Risk affects how much your insurance will cost, and how many times you claim
What are the two types of car insurance and what are they
- Comprehensive
If you crash it covers both cars involved. It covers theft, fires etc. - Third party
Only covers The other car involved in the crash
An overdraft is a type of borrowing. Give pros and cons
Pros
- It is flexible and simple to arrange
Cons
- Limits to how much you can borrow
- Usually high interest
- The bank decides when you must pay back by
A personal loan is a type of borrowing. Give pros and cons
Pros
- Higher borrow limit
- Builds a credit score
Cons
- Still interest added
- Potential credit score damage
A hire purchase is a type of borrowing. Give pros and cons
Pros
- Pay in small amounts
- Payment flexibility
- No taxes charged
Cons
- Higher cost of financing
- Loss of any returned goods
A mortgage is a type of borrowing. Give pros and cons
Pros
- Different types of mortgages available
- Gradual payments
Cons
- Takes awhile to process before it can start
- Puts you into a lot of debt
A credit card is a type of borrowing. Give pros and cons
Pros
- Fraud protection
- Paying for purchases over time
Cons
- Pay interest
- Credit can be damaged
- Could overspend and get into debt
A payday loan is a type of borrowing. Define what it is
It is a short time loan for small amounts of money
A payday loan is a type of borrowing. Give pros and cons
Pros
- Flexibility
- Small amounts paid easily
Cons
- High interest
- Not for long term
Premium bonds are a type of saving/investment. Define what it is
An investment product where you can win money in monthly draws
Bonds and gilts are a type of saving/investment. Define what it is
Investing into the business or if a gilt - the government, to help with public spending – in return you receive interest.
Individual savings accounts are a type of saving/investment. Give pros and cons
Pros
-greater flexibility
-easy to transfer
-easy to open and access
-inheritance benefits
-potential to earn interest
Cons
-income tax implications
-no quick investments
-not easy to withdraw funds
Deposit and savings accounts are a type of saving/investment. Give pros and cons
Pros
-steady interest
-keeps money safe
-enables instant pay services
-automated bills payment
Cons
-Variable interest rates may change
-transaction limits may apply
-fees may be charged depending on the bank
-interest rates typically lower
Pensions are a type of saving/investment. Give pros and cons
Pros
-lower overall charges
-tax relief on contributions
-easier management of pension savings with just one scheme.
Cons
-lack of access until you are of age
-risk of poor returns
-not all pensions are transferable
-risk of company bankruptcy
Premium bonds are a type of saving/investment. Give pros and cons
Pros
-have a prize draw and can win a large amount of money
-backed by government
-tax free
-easy access
-easy withdraw led anytime
-no risk of losing money
Cons
-don’t earn any interest
-risk of overpayments
-no regular income
Bonds and gilts are a type of saving/investment. Give pros and cons
Pros
-investment returns are fixed
-offers regular interest payments
-safe investment
Cons
-exposed to inflation
-low risk
-if the business doesn’t do well, you can lose your money
Shares are a type of saving/investment. Give pros and cons
Pros
-limited liability for the debts of the company
-ability to invest in different sectors
-ownership stake of a business
-claims on assets and dividends of a company
Cons
-risk of losing money
-privacy issues
-taxes on dividends
