Topic 9- Budgets And Forcasts Flashcards
What are the main tools people use to manage their finances?
Budgets
Cash flow forecasts
Records of actual income and expenditure
What is a budget?
A plan of expenditure and income for a period of time.
Why do people draw up a budget? (4)
- to see how much they have to spend
- so they can take control over their finances
- so they can prioritise on what they want to spend
- they can also form a a plan if they are spending more than they are receiving
What is income?
Means money received
- included money coming in from all sources both earned and unearned
What’s the difference between the income of self employed and those who are employed?
- Self employed income is often less predictable
- Employed income is usually the same/very similar each month or week
What is earned income?
From work on either employed or a self employed bases.
What are examples of unearned income? (2 examples)
- benefits
- pensions
-interest on savings - dividends from shares
- allowances paid by family members
- gifts, birthday money
- windfalls ( one off payments), winning the lottery
What is expenditure?
Outgoings, including money used to make payments to repay borrowing +/ to save.
What are the three broad categories of expenditure?
Mandatory
Essential
Discretionary
What is mandatory expenditure?
Mandatory expense payment required by law.
- don’t apply to everyone but if they do apply, must be paid.
What are 4 examples of mandatory expenditure?
- income tax and national insurance (NI) contributions
- council tax
- tv licence
- motor insurance, road tax and an MOT
What is council tax?
Payment to the local authority towards the cost of local services.
Each council sets its own charges for each valuation band.
- this is based in two or more adults living in a houshold
- those who live alone get a discount
What is a TV licence?
One TV licence covers all the devices in a home.
- if they watch live TV or record to as it is being broadcast must use a TV licence
What is motor insurance, road tax and an MOT?
Legal requirements for everyone who drives on public roads.
- third party insurance is the minimum level required
What does MOT stand for?
Ministry of transport
What is essential expenditure?
Spending on items that people need to live.
What are examples of essential expenditure?
- rent or mortgage repayments on a home
- food and drink
- water supplier
- gas and electricity suppliers
- basic clothing
- travel that enables people to earn their income
- loan repayments to maintain creditworthiness
What is discretionary expenditure?
Voluntary spending on products and services that people want now, and saving towards items that they aspire to buy in the future.
What is the equation for budget balance?
Total income - total expenditure = persons net financial situation = budget balance
What does it mean if the balance is 0?
The budget is balances
- all income is assigned to be used on making payments, repaying borrowing or saving
What does it mean if the balance is positive?
The budget is in surplus and there is money available to increase spending, make larger debt repayments, if applicable or to save.
It is called living within your means if your balance is in surplus
What does it mean if a balance is negative?
The budget is in deficit.
If people calculate their budget and discover that outgoings are greater than incomings. They can choose to increase income, decrease spending or borrow.
People with budget deficit are described as living beyond their means.
How would you deal with a budget deficit?
- May need to borrow money in the short term.
- May cut back on expenditure
- Use cash for spending that is withdrawn at the start of the weakest don’t use any other money (discretionary spending.
- Earn more income, by doing overtime
What must individuals do once designing their budget?
Adjust it by monitoring their actual spending and income against the budget.
How can individuals track expenditure?
View statements online for current account or credit card
Keep receipts
What is cash flow forecasting?
Prediction of cash flow in and out over a series of time periods.
What does cash flow forecasting identify? (4)
- when regular income will be received, such as earnings from self employment
- when unusually large payments must be made
- options for how to finance short term deficit
- when surplus may occur they can use it to save or make larger repayments on debts if applicable
What must be considered when people budget and forecast their cash flow?
The cost of living in the uk today
What is meant by inflation?
Inflation is sustained increase in the general price level.
How is inflation measured?
CPI or RPI
What does CPI stand for?
Consumer prices index
What does RPI stand for?
Retail price index
What are the main housing costs? And what’s happened to them recently?
- the costs of housing are rents and mortgages
- both of which have risen since the credit crunch
What were the 2017 government figures about rents?
Rents in England are rising by an average of £150 per year with some local authority rents rising between £570 and £1700 per year between 2011 and 2016.
Why did rents in the UK rise?
People find it difficult to move from renting a home to buying because:
- wages are static or falling in real terms;
- essential expenses are rising
- saving interest rates are very low
- prospective home buyers need large deposits before they can borrow money on a mortgage and providers are lending less money than they used to
What does an increase of rent effect?
There is an increase demand for properties to rent, in turn pushing up rents making it even more difficult for people to save the deposit they need to buy a home.
What effect does the value of the pound have on the cost of living?
The value of the pound falls import prices become more expensive so this increases the cost of living
What are fuel prices made up of?
Fuel duty
VAT
Why have fuel prices increased?
The cost of oil has been magnified due to;
- weakening of the pounds value
- cost of crude oil rising
Where is the VAT and fuel duty set?
In the annual budget by the chancellor
What are the three main essential goods that effect the cost of living?
Food costs
Household costs
Fuel costs
How much have food costs risen in the 5years to 2012?
32% increase
