Topic 6 - Financial Planning + Informed Choices Flashcards
How long my a ST plan run for?
- just over 1 yr
When can MT plans be achieved?
- after a few yrs
What do ppl use MT plans for?
- diff. wants at diff. stages of their life cycle
What are 2 examples of long term plans?
- buying a home + paying back a mortgage
- saving for retirement
What should a person look carefully at in order to make an informed choice ab choosing the right products?
- their wants + aspirations
- their position on risk/reward spectrum
- risk/reward spectrum of product
What does the products chosen by an individual partly depend on?
- their risk profile which partly depends on their personality, financial situation + age
What is closely linked to how much a person is prepared to risk in their financial plan?
- how much they’re prepared to lose
What are the factors depending where an individual stands on the risk/reward spectrum?
- their personality
- amount of money they have at their disposal
- stage of life cycle
What is a form of self-insurance?
- when ppl save some money to fall back on in case the risk event happens
What are the factors that depend the extent ppl practice self insurance?
- whether there’s a legal/operational obligation to insure risk
- cost of insurance when balanced w risk
- perception of degree of risk
- ability to access insurance
What are the 2 main decisions, concerning the product group + product band, that a prospective customer needs to make?
- risk associated w a particular type of product
- risk profile of a specific brand
How does saving reduce future risk?
- ensures they have a lump sum they can use in an emergency + that they’ll have a sufficient income in retirement
What are the risks associated w saving?
- based on fact that a saver hands money to a provider to look after
- provider may fail + saver may lose uninsured deposits - nominal sum of money saved eroded by inflation over yrs
Why is borrowing always risky?
- borrower must commit to repaying out of future income but may not have enough over repayment term to settle debt in full
What does the risk associated w a particular loan product vary according to?
- amount of interest charged
- possibility of interest rate rising during loan period
- number of yrs for repaying loan
- terms + conditions
What is the risk w insurance?
- insurance company might fail + not be able to pay compensation
What factors does a customer need to know when considering a provider’s risk profile?
- how safe + stable provider is
- reputation it has for good + reliable service
- how it’s regulated
- how it can be accessed
What is the 1st step when making an informed choice of the product + provider?
- consider strength or want + aspiration
- thank ab benefit they will get from fulfilling it
What is the 2nd step of making an informed choice of the product + provider?
- look at own risk profile according to financial circumstances
- consider risk profile of product
- consider risk profile of provider selling product
What is the 3rd step of making an informed choice of the product + provider?
- find out charges + any penalties, flexibility, terms + conditions
What is the 4th step of making an informed choice of the product + provider?
- consider extent to which it fits in w own values
What is the most important factor when someone is choosing a financial product?
- to match product to its intended purpose + characteristics of person buying it
What should a product be suitable in term of?
- intended purpose
- timescale
- affordability
- attitude to risk + risk profile of product + brand
- how product fits into overall product mix
What are the various product groups relating to MT + LT financial requirements?
- saving + investment
- borrowing
- insurance
What are financial products examples of?
- derived demand
Why do ppl save + invest in the M + LT?
- bc they’re aiming to eventually spend money on an item/life event
- bc they want to provide for own or children’s future
What does the amount someone saves depend on?
- their income
- amount of current consumption in their ST plan
- necessity of saving
- ppl’s attitude to saving
What factors does the amount someone borrows depend on?
- income
- other expenditure, especially mandatory + necessary items
- time period of loan
- necessity of borrowing
- ppl’s attitudes to borrowing
What does joint demand mean?
- that 2 products are bought together bc they’re complementary
What are examples of product pairs?
- personal loan to buy a car + motor insurance
- fixed-term savings bond + instant access savings account
- interest-only mortgage + investment product to cover capital payment
- mortgage to buy a home + personal loan to buy furniture to put in home
What is competitive demand?
- a situation where 2 or more products fulfil the same need or want + so are in competition w each other for customer’s money
- opposite to joint demand
What are some examples of product competition?
- savings product + borrowing products
- diff. types of product under same product heading
- diff. product brands under same product heading being offered for sale by diff. providers
- diff. product brands under same product heading being offered by same provider
Why is savings products v borrowing products an example of product competition?
- have a neg. relationship between them
What are the differences between savings products?
- some savings + some investments
- products have diff. maturity dates, interest rates + terms + conditions
- providers inc. comp. between products by product differentiation
What are ‘add ons’ on financial products?
- additional features making a product look more attractive
What is the brand?
- name of a provider + is v. powerful as it inspires loyalty from customers
What does a market segment contain?
- ppl similar in terms of income, age, attitude to risk, + lifestyle
What are internal factors?
- factors that originate in a person themselves
- e.g. personal priorities, health, state of mind
- affect only that person + their family
What are external factors?
- factors that originate from outside a person + come from external envi.
- beyond their control + affect many ppl
What do external factors affect?
- ppl’s wants + aspirations, plans + ability to succeed in those plans
What are examples of external eco. factors that can affect a financial plan?
- inflation
- interest rates
- unemployment
- house prices
What is inflation?
- the gradual inc. in the general lvl of prices in an economy over a period of time + dec. purchasing power of money
How does inflation affect savers + borrowers?
- saver’s money loses value as prices rise unless interest rate they receive is > rate of inflation
- borrowers gain as money borrowed loses value but pay interest which is > rate of inflation
What is the interest rate change according to?
- eco. + financial condition of country
What does the Bank of England make changes in its bank rate according to?
- whether it wants to slow down or speed up economy
What does saving + borrowing decisions depend on?
- current level of interest rates + how ppl expect interest rates to change in future
What does under employment stem from?
- lvl of eco. activity in country slowing down or country becoming less competitive in export markets: less demand for goods to be produced
Why is unemployment a particular problem for anyone already owing money?
- bc they won’t have income to meet loan repayments
What is a key indicator of the state of an economy?
- house prices
When my house prices rise + fall?
- rise: in growing economy + demand inc
- fall: if economy slows + there’s more uncertainty ab future
What is the advantage + disadvantage on 1st time buyers for a house if economy slows down?
- advantage: may make easier to buy house as cheaper
- disadvantage: greater risk of losing job + mortgage higher to obtain
What is the disadvantage of falling house prices on ppl who alr. bought their own home?
- value of house falls + may become < amount owed on mortgage (negative equity)
- problem if wanting to move as proceeds of sale won’t cover debt still outstanding
What will a person in negative equity have to do if they want to move house?
- buy cheaper property + ask bank to finance any difference
- wait until market improves
What does a fall in the stock market mean?
- you get less for your shares if selling them
- if companies not doing well, you receive lower dividends
