Unit 3 - Functions and roles of money (A1) Flashcards
Memorise and understand terms and questions
what is the functions of money
-Unit of account
-means of exchange
-store of value
-legal tender
what is unit of account?
Where a monetary (related to money) value is placed on an item/service. The price of good/service can be seen to determine the quality and purpose of the item.
What is means of exchange
Exchanging products/services for money
What is store of value?
Money doesn’t lose its value it maintains its value the products increase in value.
What is a legal tender?
anything recognized by law as a means to settle a public or private debt or meet a financial obligation, including tax payments, contracts, and legal fines or damages.
Common principles of money
-avoid getting into debt
-control cost
-avoid legal action
-remain solvent
-maintain a good credit rating
-avoid bankruptcy
What factors affects and influences the role of money?
-personal attitudes towards risk and reward, borrowing and spending, and saving
-Life stages key features of each stage financial needs and implications at each stage
-culture including religion and beliefs
-life events
-external influences/trends
-interest rates
-cost of borrowing vs saving
Planning expenditure, common principles to be considered in planning personal finances:
-to avoid getting into debt
- to control costs
- avoid legal action and/or repossession
- remain solvent
- maintain a good credit rating
- avoid bankruptcy
- to manage money to fund purchases
-generate income and savings
-set financial targets and goals
-provide insurance against loss or illness
- counter the effects of inflation.
external influences that impact the role of money
-changing intrest rates
-inflation
-government action e.g. Brexit
-Taxation
Interest rates
Interest rates dictate how much money you pay back on products such as loans and how much money you are paid for saving money within a bank/building society.
(interest charged on a loan means that the business will pay back than they initially borrowed)
What happens when rates of interest increase?
-the cost of borrowing increases
-less disposable income
-bigger overheads
-customers would spend less money
What happens when you fall into debt or conduct any fraudulent activities?
Then you may face legal actions, which can range from paying fines, having seized by bailiffs, and serving a prison sentence.
Remaining solvent
being solvent refers to being able to pay your day to day outgoings.
e.g. saving a set amount each month inro a savings account
How do you remain solvent?
to remain solvent you should set financial goals/targets to plan ahead.
good credit rating
your credit rating gives you a score based on your past financial decisions.
This indicates how much of a risk you are to financial institutions such as banks.
what is bankrupt?
when you can’t find a way to pay off your debts.
Funding purchases
Generate income and savings
having a significant amount of savings will generate future income by paying interest from the account provider.
Financial targets/Goals
Some financial targets may include;
-save £10,000 over two years
-Be in a job role earning £30,0000 within 3 years
-Purchase your first home within 5 years
-Pay off debts within 2 years
Insurance for loss/illness
Savings provide a safety net for individuals/households.
Factors to consider include;
-serious illness
-losing your job
-having an accident
-being the victim of a crime
Countering inflation
Inflation is the average price across all countries within a country.
This means that money does not lose its value but your spending power falls due to increased prices across all your purchases.
