Understand the Importance of managing personal finance Flashcards
learning aim A
What are the 4 functions of money?
Unit of account, Means of exchange, Store of value, Legal tender
Explain how money is a unit of account
Allows us to place monetary value on goods and services. The price of the good or service will show the unit of account
Explain how money is a means of exchange
Money is a means of exchange because it allows us to trade and buy and sell goods or services
Explain how money is a store of value
Money can be stored in a savings account or a piggy bank for later use, as it never loses its value
Explain how money is a legal tender
Money is a legally recognised form of payment and therefore is used for many types of transactions
What are the 6 things which impact the role of money?
Personal attitudes, Life stages, Culture, Life events, External influences, and Interest rates
Explain how personal attitudes impact the role of money
Individuals vary their attitudes towards risk and reward and saving and borrowing. Some people may be willing to take risks whilst others may avoid risk. Some people are less likely to spend than save and vice versa. Some people have different attitudes to borrowing (some will only buy what they can afford, but some will borrow money to get what they want sooner)
What are the different life stages that impact the role of money?
Childhood, Adolescence, Young adult, Middle age, Old age
What are children’s financial needs and implications?
Reliant on parents but have limited needs. Implications include may be reliant on pocket money, money received from gifts may be spent on toys or saved by parents
What are adolescence financial needs and implications?
Want to be more independent. Implications include part time jobs, reliant on pocket money, willing to save up small amounts for bigger purchases
What are young adults financial needs and implications?
University or starting a career, buying a car, renting a flat or house, start to settle down (marriage and family). Implications include taking out a student loan for uni, paying for a car, taking out a mortgage, support self and others
What are middle aged financial needs and implications?
Support family, improve own lifestyle, access to additional money to spend on luxuries (holidays). Implications include paying a mortgage, saving for specific purposes, and planning for pensions
What are old aged financial needs and implications?
Fewer dependents, may downsize houses. Implications may include reliant on pensions, and mortgage may become lower or stop
Explain how culture impacts the role of money?
Different cultures will have different attitudes to money
Explain how life events impacts the role of money?
Life events within your control (uni, travelling) and life events outside of your control (illness, financial gains or losses) will impact your attitude to money
Explain how external influences impact the role of money
Factors outside of your control(economy) may impact wages, prices of goods and services, availability of jobs, amount of tax paid, interest earnt will affect ability to save and spend
Explain how interest rates impact the role of money?
Low interest rates means people are more willing to borrow or spend. High interest rates means people are incentive to save
What are the common principles to planning expenditure
Control costs - Avoid debt - Maintain a good credit rating - Avoid bankruptcy - Remain solvent - Set financial targets - Manage money to fund purchases
Describe cash as a method of payment
Payments in notes and coins
Advantages of cash as a method of payment
Confidence, easy to control expenditure, widely accepted
Disadvantages of cash as a method of payment
Risk of loss and theft, physical transactions only, inappropriate for large items of expenditure
Describe debit card as a method of payment
Allows you to make purchases by card with money taken from a current account
Advantages of debit card as a method of payment
Secure, widely accepted, can withdraw cash
Disadvantages of debit card as a method of payment
Monitors spending and bank balance, overspending can be costly
Describe credit card as a method of payment
Can make purchases on credit (buy now but pay later), repayment are made following the issue of the statement with a minimum amount
Advantages of credit card as a method of payment
Allows you to defer and spread payment, widely accepted, used online and in store
Disadvantages of credit card as a method of payment
Interest is charged on the outstanding balance, can encourage overspending
Describe cheque as a method of payment
A paper transaction giving a bank permission to transfer payment from your account to another account
Advantages of cheque as a form of payment
Secure method of payment, widely accepted, appropriate for postal transactions
Disadvantages of cheque as a method of payment
May be charged for each cheque processed, costly if the cheque is not honoured due to insufficient funds
Describe electronic transfer as a method of payment
Online transfer of money
Advantages of electronic transfer as a method of payment
Quick method, transfer is almost instant
Disadvantages of electronic transfer as a method of payment
Risk of loss if incorrectly set up, not appropriate for face-to-face transactions
Describe standing order as a method of payment
Permission given to the bank to make regular payments, of a set amount, to a third party upon request
Advantages of standing order as a method of payment
Same amount is paid each time, don’t need to remember to make regular payments
Disadvantages of standing order as a method of payment
Payments are continuously made unless cancelled, payments are taken regardless of balance so may lead to overdraft
Describe direct debit as a method of payment
Agreement made with a bank allowing a third party to withdraw money from an account on a set day to pay for goods and services
Advantages of direct debit as a method of payment
Easy way to make regular payments, amount paid may vary, quick and easy to set up
Disadvantages of direct debit as a method of payment
The payer determines the amount paid making it difficult for payee to plan and budget, if the payer makes a mistake the responsibility to claim back the money is with the payee
Describe pre-paid card as a method of payment
Money is uploaded onto a card with transactions then being withdrawn to reduce the balance
Advantages of pre-paid card as a form of payment
Can set a budget in advance to avoid overspending, effective to control children’s spending and where it is spent, if stolen or lost the loss is limited to the remaining balance
Disadvantages of pre-paid card as a form of payment
No protection if lost, sometimes requires initial fee to purchase or set up the card
Describe contactless card as a method of payment
Cards containing antennae allow money to be transferred when the card touches a contactless terminal
Advantages of contactless card as a method of payment
Gaining in population, quick and easy, secure method
Disadvantages of contactless card as a method of payment
Often only accepted for small transactions, still not widely accepted as it is new technology
Describe a change card as a method of payment
Issued by financial institutions allowing customers to delay payments for goods and services for a short period
Advantages of change card as a method of payment
Reduces risk of running up debt, allows a short period of credit, avoids need to carry cash
Disadvantages of a change card as a method of payment
Must be paid in full each month, often a fee applied
Describe store card as a form of payment
Issued by a retail outlet so that customers can delay payments for goods and services
Advantages of a store card as a method of payment
Allows a period of credit, often offer loyalty schemes, discounts, and special promotions or priviledges
Disadvantages of a store card as a method of payment
Only accepted in issuing store associations, interest is paid on outstanding balances, encourages overspending
Describe mobile banking as a method of payment
Ability to carry out financial transactions using mobile devices
Advantages of mobile banking as a method of payment
Convenient as can be used at anytime and place, secure method of payment
Disadvantages of mobile banking as a method of payment
Features are limited, does not offer all functionality that internet banking does
Describe Banker’s Automated Clearing Service (BACS) as a method of payment
System that allows the transfer of payments directly between accounts
Advantages of BACS as a method of payment
Faster payment allows almost instant transfers, no additional costs (interest)
Disadvantages of BACS as a method of payment
Faster payment is not offered by all banks and branches, a limit is set on the amount that can be transferred in a single transaction
Describe Clearing House Automated Payment Systems (CHAPS) as a method of payment
A system that allows the transfer of payments directly from one account to another
Advantages of CHAPS as a method of payment
Transfers made same day, no limit on the amount that can be transferred in a single transaction
Disadvantages of CHAPS as a method of payment
Fixed charge per transaction regardless of the amount transferred#
Define current account
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
What are the features of a current account?
Rate of interest paid on a positive balance, Rate of interest paid on a negative balance, Overdraft limit, Charges on unauthorised overdrafts, Additional incentives
What are the different types of current account?
Standard, Packed Premium, Basic, and Student
What is a standard current account?
Normal account offered to customers with a reasonable credit rating, includes standard features (ability to pay and withdraw money and interest payments on positive balances)
What is a packed premium current account?
This account offers additional features to a standard account (house insurance, cash back on certain transactions, credit card protection), may have additional charges due to this
What is a basic current account?
Offers only limited features designed for those who find it hard to open a bank account due to having a poor credit rating, this account will not offer overdraft or interest on positive balances
What is a student current account?
Accounts designed specifically to meet the needs of learners, features include an agreed overdraft limit, and incentives to join the bank, they tend to stay with the bank for life once joined
What are the advantages of a standard current account?
Convenient for receiving regular payments (wages), no charges on credit balances, and a wide range of facilities (cheque book, debit/cash card, overdraft facility)
What are the disadvantages of a standard current account?
Standard facilities only, no additional perks, potentially high charges on the overdraft facility
What are the advantages of a packaged premium current account?
Offers additional perks at a packaged price (car/house insurance, break down cover, credit card protection), convenient for receiving regular payments
What are the disadvantages of a packed premium current account?
Might not offer value for money, additional monthly charges for access to additional perks
What are the advantages of a basic current account?
Available to customers with a poor credit rating, easy first step for individuals to gain access to basic banking facilities (pay in and withdraw money)
What are the disadvantages of a basic current account?
Limited facilities (no overdraft facilities)
What are the advantages of a student current account?
Course fees and student loans can be easily handled, Bonuses offered are designed to meet the needs of learners
What are the disadvantages of a student current account?
Overdraft facilities could encourage overspending, which has a high charge, and there are limited facilities
What are the types of borrowing?
Overdraft, Hire purchase, mortgage, credit card and pay day loans
Explain overdraft as a type of borrowing?
Allows withdrawal of money that you do not have from a current account, suitable to meet short-term needs
What are the advantages of overdraft as a form of borrowing?
interest is only charged on amount outstanding, overdraft limit can be pre-arranged
What are the disadvantages of overdraft as a type of borrowing?
interest charges are high, it is not the cheapest form of borrowing, could encourage overspending
Explain hire purchase as a form of borrowing?
Spreading the cost of a purchase over a pre-agreed period of time
What are the advantages of hire purchase as a form of borrowing?
spreads cost of an expensive item over time, credit is secured against an asset
What are the disadvantages of hire purchase as a form of borrowing?
interest charges may be higher than other types of borrowing, ownership of the asset stays with the seller until instalments are fully paid
Explain mortgage as a type of borrowing?
long term loans, paid back over a long time (25 years), secured against an asset
What are the advantages of mortgage as a type of borrowing?
spreads costs over a long period of time, interest rates can be pre-agreed
What are the disadvantages of mortgage as a type of borrowing?
interest rates may fluctuate if not pre-agreed, failure to meet payments means loss of an asset
Explain credit card as a form of borrowing?
goods are paid for by card, then paid for at the end of a month, used for convenience as an alternative for cash
What are the advantages of credit card as a form of borrowing?
can be used for items of multiple sizes and value, provides protection on purchases
What are the disadvantages of credit card as a type of borrowing?
encourages overspending, high interest rates, must be paid back every month
Explain pay day loans as a form of borrowing?
used to bridge the gap between how and the next pay day
What are the advantages of pay day loans as a form of borrowing?
helps save immediate short term cash flow problems, relatively easy to secure
What are the disadvantages of pay day loans as a form of borrowing?
high interest rates, cumulative amount to be repaid can spiral out of control
What are the types of saving and investment
ISA’s, Deposit and savings account, pensions, premium bonds, shares, bonds and gilts
explain ISA’s as a type of savings account?
the holder is not charged income tax on the interest received
What are the advantages of an ISA as a type of savings account?
Tax is not charged on interest earned, allowing the saver to keep all of the rewards for savings, interest rates are sometimes high
What are the disadvantages of ISA’s as a form of savings account?
notice is required to make withdrawals, limit set on the annual amount that can be placed on ISA’s
Explain how deposit and savings accounts are a form of savings and investment
accounts where interest is paid on the balance
What are the advantages of a deposit and savings account as a form of saving and investment
interest is earned on positive balances, requires a set amount of deposit forcing saver to have a savings plan
What are the disadvantages of a deposit and savings as a form of saving or investment
interest earned is taxed, a percentage rate of interest paid is likely to be lower than interest paid for borrowing
explain premium bonds as a type of savings and investment
government scheme that allows individuals to save up a set amount by buying bonds
what are the advantages of premium bonds as a form of saving and investments
chance of winning more than could be earned in interest, can be easily withdrawn with no loss or penalty, no risk of financial loss, tax free winnings
what are the disadvantage of premium bonds as a form of saving and investments
no guaranteed return on investment, the amount invested loses value due to inflation
explain bonds and gilts as a form of saving and investment
fixed term securities where the individual lends money to companies and governments in return for interest payments or to raise funds
what are the advantages of bonds and gilts as a form of saving and investment
regular fixed returns, spreads risk across a range of markets
what are the disadvantages of bonds and gilts as a form of saving and investment
risk of losing some or all of the value of investment if the bond or gilt value falls, interest payments may not be received if unable to make payments
explain shares as a form of saving and investment
investment into a business in return for equity, the shareholder will receive dividends from the company’s profits
what are the advantages of shares as a form of saving and investment
share prices fluctuate, potential high award, additional benefits (discounts)
what are the disadvantages of shares as a form of saving and investment
sharing prices fluctuate, no guarantee of a reward or return, money invested may be lost
explain pensions as a form of saving and investments
long-term saving plans where individuals make regular contributions throughout their working life
what are the advantages of pensions as a form of saving an investments
encourages individuals to save throughout their working life for retirement, regular payments are deducted (individuals tied into making regular contributions)
what are the disadvantages of pensions as a form of saving and investment
movement between jobs means one policy may stop and another may start, if compulsory payments are deducted this may affect short-term living standards
Define saving
placing extra money in a secure place where it will hopefully grow as it gainst interest
Define investment
making a commitment to a project in the hope that it is successful and a healthy return is made on the investment
What are the risks of saving
low or zero risk as money saved is guaranteed to be available in the future, inflation can reduce the spending power of money saved
what are the rewards for saving
interest payments, financial security/peace of mind
what are the risks of investment
investments can go wrong and all or some of the value may be lost, no guarantee of a return
what are the rewards for an investment
if successful, there is potential for a high financial return, can be exciting in hopes for returns
what are the different types of insurance
car, home and contents, life assurance and insurance, travel, pet, and health
Explain car insurance
legal requirement to insure any car on the road, covers theft and accidents, protects the driver, passengers, and other road users
what are the disadvantages of car insurance
premiums can be high depending upon assessed level of risk (expensive for young drivers), normally excess that must be paid
what are the advantages of car insurance
meets legal requirements, protects self against theft or damage, protects against damage caused to a third party
explain home and contents insurance
home insurance covers the physical building, contents insurance covers the physical items in the house (furniture, personal items)
advantages of home and contents insurance
protects against damage which may otherwise be too expensive to repair resulting in loss, contents are protected both when inside and outside the house
disadvantages of home and contents insurance
premiums are an added expense to home ownership, some items cannot be replaced due to value beyond financial worth (inherited items of worth)
explain life assurance and insurance
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 that period
advantages of life assurance and insurance
provides peace of mind to family following the bereavement of a homeowner
disadvantages of life assurance and insurance
if the policy holder does not die within the period of life insurance, no payment is made
explain travel insurance
protects individuals or groups while abroad, includes loss or theft of property, illness, cancellation, emergencies,
advantages of travel insurance
protection of personal belongings when away from home, covers medical costs when abroad, protects against cancellation and delays
disadvantages of travel insurance
the person suffering loss is likely to have to pay upfront to replace items or cover medical costs, then reclaim later, an additional cost when travelling abroad
explain pet insurance
this protects the owners pets against some or all of the expenses associated with treating ill or injured pets
advantages of pet insurance
avoids expensive pet fees, avoids need for pet to be put down if vet fees are too high
disadvantages of pet insurance
an additional monthly expense to protect against the unexpected
explain health insurance
covers individuals, families, or employees against medical expenses, include payment plans to cover routine visits to appointments
advantages of health insurance
some compensation is provided when ill which can reduce financial burden and stress, patient can then concentrate on recovery, private care means quicker treatment and better facilities
disadvantages of health insurance
paying for something that you hope you will not use, premiums can be expensive, will not cover pre-known conditions
