Unit 1 - Personal Economics

Question 1

What will individuals first spend their money on?

Answer 1

Ensuring their basic needs are met

Question 2

After ensuring their basic needs are met, what do individuals then spend their money on?

Answer 2

All individuals have different unlimited wants, they will each spend their income based on what best satisfies them. How much they have available to spend will all depend on their income,e, the taxes they pay, the essential bills they must pay and how much they want to save.

Question 3

What might individuals spend on?

Answer 3

-Food + drink, clothing, heating, leisure activities, transport.

Question 4

What is disposable income?

Answer 4

Income left after taxes have been deducted.

Question 5

What is discretionary income?

Answer 5

Income left over after taxes and essential bills have been deducted.

Question 6

What sources may individuals receive income from? (6)

Answer 6

-Wages, a fixed regular payment earned from work or services, typically paid on a daily or weekly basis.

-Salaries, a fixed regular payment, typically paid on a monthly basis but often expressed as an annual sum made by an employer to an employee.

-State benefits, sums of money paids by the government to people in certain circumstances to meet their day to day living expenses.

-Tax credits, child tax credit is available to people responsible for a child, who have an income below a certain amount. Working tax credit is a payment to top up earnings of people working on low incomes.

-Pensions-a tax-free pot of cash you, your employer pays into, as a way of saving up for retirement.

-Investments- an asset or item that is purchased with the hope that it will generate income or appreciate in the future.

Question 7

Why do individuals save?

Answer 7

-for a rainy day, emergency funds
-For a treat
-Financial protection from uncertainty
-Future spending
-Retirement

Question 8

Where may individuals save? (5)

Answer 8

-Cash ISAs
-Instant access savings account
-Regular savings account
-Treasury bonds
-Premium bonds

Question 9

Why would someone choose to borrow?

Answer 9

To buy assets – house or car
To consolidate existing debt. If a person has multiple credit cards and pay-day loans.
To cover unexpected house repairs e.g. a new roof
To cover day-to-day expenses

Question 10

Where might individuals borrow from? (6)

Answer 10

Mortgage,
Credit card
Hire purchase
Bank loan
Overdraft
Payday Loans

Question 11

What is a mortgage?

Answer 11

A loan to help you buy property on the condition that the bank or mortgage company giving you the loan has certain rights, including the right to sell the property if you don’t pay back the loan.

Question 12

What is an advantage and a disadvantage of a mortgage?

Answer 12

An advantage is that you pay the loan back in equal monthly instalments, however,
A disadvantage is that you repay back more than you borrow as interest is added monthly to your instalment amount. Used to buy a property an individual would unlikely be able to buy outright.

Question 13

What is a credit card?

Answer 13

allows you to pay for items on your card straight away and repay the credit card provider e.g. Visa, at a later date.

Question 14

What is an advantage and a disadvantage of a credit card?

Answer 14

An advantage is that you can repay your credit card off by either paying the minimum instalment or more than that. You can take as long as you wish to pay off your credit card as there is no agreed repayment period like a bank loan;
A disadvantage of this is that interest is added each month so you repay more. Credit cards can have APRs (Annual Percentage Rate) at anything from 0% upwards to high rates. It is also easy to overspend on a credit card without realising pushing some people into debt.

Question 15

What is a hire purchase?

Answer 15

A way of paying for goods over time if you don’t have all the money up front.
An initial deposit is usually paid, followed by a series of regular payments to cover the balance and any interest.

However, an individual does not own the asset until the last payment is made and
it is likely to cost more in the long term than buying the item outright in the first place.

Question 16

What is an advantage and a disadvantage of a hire purchase?

Answer 16

An advantage is the initial deposit is usually paid, followed by a series of regular payments to cover the balance and any interest.
However, a disadvantage is that an individual does not own the asset until the last payment is made and it is likely to cost more in the long term than buying the item outright in the first place.

Question 17

What is a bank loan?

Answer 17

either ‘secured’ or ‘unsecured’. a sum of money borrowed by a customer or business from a bank, often for a specific purpose

Question 18

What is an advantage and a disadvantage of a secured bank loan?

Answer 18

-Secured loans require you to provide some sort of collateral as security.
- Secured loans are cheaper than unsecured loans.

Question 19

What is an advantage and a disadvantage of a bank loan?

Answer 19

-Bank loans usually carry a lower rate of interest compared to credit cards. Once the loan has been arranged the money is received instantly therefore you can now buy the item that you couldn’t afford to buy with cash.
-You will pay back more than you borrowed due to interest being added monthly.
Another disadvantage of a bank loan is that it can be difficult for a bank loan to be approved.

Question 20

What is an overdraft?

Answer 20

An overdraft is the amount of money you can still access when you have no money in your account. So if you have a £1,000 overdraft limit you can keep spending up to that limit.

Question 21

What is an advantage and a disadvantage of an overdraft?

Answer 21

-Allows an individual to buy something if they need extra cash in an emergency e.g. to pay a locksmith if they lock themselves out of their house.
-You are charged interest on the amount and length of time overdrawn.

Question 22

What is a payday loan?

Answer 22

Small value loans with extremely high interest rates. Targeted at individuals who have a poor credit rating as payday loan companies will lend to those people that high street banks will not. Can create a spiral of debt as when a payday loan is not repaid on time, huge interest is added to the amount owed and often individuals will take out a second payday loan to pay off the first.

Question 23

What is a disadvantage of a payday loan?

Answer 23

-Can create a spiral of debt as when a payday loan is not repaid on time, huge interest is added to the amount owed and often individuals will take out a second payday loan to pay off the first.

Question 24

What is it important to consider before borrowing? (7)

Answer 24

-Do not borrow more than you can repay and make sure you can keep up with repayments .
-Compare rates of interest before borrowing.
-Do not borrow for non-essential items.
-Do not borrow if your job is insecure as you may not be able to make repayment should you lose your job.
-Check if there are penalties for late payment.
-Complete a personal income and expenditure statement/cash budget to calculate affordability.
-The term of loan should not be longer than the life of the asset.

Question 25

Define the term interest rate.

Answer 25

the cost/price of borrowing

Question 26

What is budgeting?

Answer 26

a forward financial plan of likely income and expenses for a given period. It’s an invaluable tool to help you prioritize your spending and manage your money

Question 27

What does budgeting help individuals to do?

Answer 27

It helps individuals determine the spending of their income (after tax is deducted) as well as potential savings and the need for borrowing

Question 28

What does borrowing allow individuals to do?

Answer 28

to reduce uncertainty and make sure they can research and make good decisions about the best methods to save and borrow.

Question 29

What can borrowing lead to?

Answer 29

quick but expensive choices e.g. payday loans

Question 30

What changes can happen that cause uncertainty to individuals?

Answer 30

-A change in prices/the rate of inflation
-A change in taxation
-A change in interest rates
-Redundancy
-Unemployment

Question 31

If prices increase rapidly what will happen and what will this impact?

Answer 31

an individual will have to spend a larger proportion of their income on the same items that they had bought previously. They may have to reduce the number of products they buy. They may have to reduce the amount they save. They may have to borrow money to pay for essentials.

Question 32

If income tax rates increase rapidly what will happen and what will this impact?

Answer 32

an individual will have less disposable income. They may not be able to buy the same quantity of products as they previously did. They may have to reduce the amount they save or dip into savings to pay for goods and services. This can impact the standard of living and purchasing power of individuals in a negative way.

Question 33

If interest rates increase rapidly what will happen and what will this impact?

Answer 33

-individuals on a variable mortgage or those who renew their mortgage will have higher repayments.
-Overall demand in the economy may fall resulting in lower economic growth.
They may have to reduce the amount they save in order to repay the higher interest rates on their mortgage or other borrowing.

Question 34

What will happen to individuals facing redundancy?

Answer 34

those facing redundancy may have to reduce the number of products they buy. They may have to reduce the amount they save. They may have to borrow money to pay for essentials.

Question 35

What will happen to individuals facing unemployment?

Answer 35

those who are unemployed are unlikely to be able to save and may not be able to afford to buy products to meet all their needs. They are not likely to buy luxuries and may have to borrow to pay for essentials.

Question 36

What is a Cash ISA and what is the benefit of it?

Answer 36

an account that pays interest tax free. The benefit is that you earn interest tax-free to a certain point,

Question 37

What is an instant access savings account and what is the benefit of it?

Answer 37

a savings account that a customer can make withdrawals from at any time, without any notice and without incurring any type of penalty.

Question 38

What is a regular access savings account and what are the advantages and disadvantages of it?

Answer 38

require you to put money away each month. Higher interest rates tend to impose rigid Ts+Cs. The benefit of this account is that because of the penalties imposed if you do not follow the rules good savings habits can be formed.

Question 39

What is a treasury account and what is the benefit of it?

Answer 39

a bond issued by a national government, generally with a promise to pay periodic interest payments and to repay the face value on the maturity date. This is a secure, low risk method of saving.

Question 40

What is a premium bond and what is the benefit of it?

Answer 40

a government security that offers no interest or capital gain but is entered in regular draws for cash prizes. Often used as savings for children with the extra excitement!

Question 41

Suggest ways in which households can plan for financial uncertainty.

Answer 41

Saving more
Spending less
Not borrowing
Avoiding use of credit card
Keeping to a budget