Unit 3 Topic 1 Flashcards
What does sustainability mean?
Sustainability means achieving and maintaining a balance between personal income and expenditure for the short, medium and long term so that individuals can satisfy their needs and achieve as many of their wants and aspirations as they can afford within their budget.
What is the main reason for the financial crisis of 2007 - 2008?
Bankers encouraged people to take on mortgage loans and other debts that they could not afford to repay.
Economists believe that the consumers who took advantage of the mortgages and loans to pay for unsustainable levels of spending must also share the blame.
What did the financial crisis follow?
A period of unprecedented growth in personal debt. Total personal debt in the UK had doubled between 1994 and 2002, from £400 billion to £800 billion. It hit a peak of £1,400 billion in 2008.
What is the credit crunch?
The credit crunch resulted from the financial crisis and is the tightening of the conditions required to obtain loans that were formerly freely available. This stopped the increasing of personal debt.
When is personal debt manageable?
When the economy is growing and unemployment is relatively low.
What did the recession following the financial crisis do to unemployment figures?
Unemployment figures rose on a steep upward path. In Jan 2008 there were 1.62m unemployed UK workers but this had increased to 2.12m just one year later. Unemployment continued to rise until Nov 2011 where is peaked at 2.7m.
What are some of the consequences of growing debt without being able to keep up with payments?
Legal action from lenders seeking to recover bad debts, e.g. CCJs, bankruptcy and homes being repossessed.
The number of insolvent people grew from 35,604 in 2003 to 107,288 in 2006 and then to 135,045 in 2010. This is considered to be related to households taking on higher levels of debt from the early 2000s.
The number of repossessions rose from just over 8,000 in 2004 to nearly 49,000 in 2009.
Government agencies (Money Advice Service) and Non-government agencies (citizens advice, StepChange Debt Charity, national debt line service, etc) reported increased demand for help and advice.
Citizens Advice saw a 100% increase in the number of debt enquiries over the last 10 years.
How have debt problems changed in the last few years?
Traditional credit problems have been overtaken by arrears on household bills (behind on household bills) and mainstream credit has fallen as a proportion of debt issues. There has also been a rise in the proportion of problems relating to high cost, short term payday loans.
What has been added to the National Curriculum?
Financial capability, aiming to give students a basic level of financial literacy before they leave school.
How do you achieve sustainable personal finance over the long term?
Through active management of all aspects of an individual’s financial plans.
This includes:
Being aware of how much money you are spending and what it is being spent on.
Using weekly or monthly budgets and cash flow forecasts to plan spending.
Knowing the financial implications of future events and aspirations.
Having a savings plan to build up the capital sums they expect to need in the future.
Carefully planning borrowing and only borrowing amounts you can pay back.
Having an adequate emergency fund to fall back on when there is an unexpected reduction in income.
Paying into a pension scheme to ensure income in retirement.
Looking for ways to increase income.
Making use of insurance products to protect income.
Regularly monitoring, reviewing and amending financial plans.
Having clear, realistic contingency plans to deal with unexpected events that can disrupt carefully made plans.
What is a budget?
The short-term, medium-term and long-term plans detailing expected income and expenditure.
What budget does the government publish?
An annual budget which is an estimate of the income from taxation expected in the coming year and what it expects to spend over the same time period.
What do budgets and cash-flow forecasts, or financial plans allow?
They allow individuals to think about all the things they want and how much these will cost. They can estimate their income and work out whether that income is going to be enough to cover the expenditure.
What is financial planning?
Planning for future expenditure and deciding how this will be financed. This depends on future income, their attitudes to saving, borrowing and other financial products like insurance.
What can people use to check expenditure?
Monthly current account statements.
Give examples of regular bills that don’t fall due every month that people should still plan for.
Motor vehicle road tax - can be paid either annually, six-monthly or monthly.
Council tax - can be paid either annually, quarterly or monthly (over ten months).
Should also plan for expected car servicing bills, costs of household maintenance, replacing broken or worn items and other occasional bills.
Give examples of long term financial planning ?
Additional funds to do with raising a family, holidays and retirement (pensions and care home fees).
Calculations of these fees can work out the level of regular saving and investment likely to be required to make sure the funds are available when needed.
What is the key principle to flexible financial planning?
Expect the unexpected.
Flexible financial planning means developing a mix of savings and insurance that allows an individual to cover the costs of unexpected events and changed circumstances. It also allows for future plans to be revised accordingly.
What is a flexible financial plan sometimes also known as?
A dynamic financial plan
List the features of a flexible financial plan.
Balanced between different time periods
Informed (based on accurate information)
Able to adapt to changing products and services
Fluid (must reflect any monthly, termly or seasonal variations in the personal circumstances of the person making it)
Realistic
How do you draw up a financial plan?
Make a list of all the goods and services someone is likely to spend money on over a given period of time and record how much these cost. (For medium and long term plans this will be general headings and estimates).
The list can then be grouped into categories based on whether they are needs, wants or aspirations.
What are the three categories of expenditure?
Mandatory expenditure
Essential expenditure
Discretionary expenditure
What is mandatory expenditure?
Costs you have a legal obligation to pay.
E.g. income tax, National insurance contributions, council tax, Tv licence and third-party car insurance, road tax and MOT certifications.
What is essential expenditure?
Costs that have to be paid to meet basic needs.
E.g. food and drink, rent or mortgage payments, bills, clothing, travel to and from work or school, mobile phone contracts, credit card payments, payments on a loan.
What is discretionary expenditure?
Spending on items that are not mandatory or essential but fulfil a want or aspiration.
E.g. snacks, clubs, cable TV, takeaway food, mobile phone contract payments, clothes for a special occasion, entertainment, restaurant food, holidays,
How should spending priorities be followed?
- Pay all mandatory bills
- Meet basic needs
- Pay essential bills
- Divide any surplus between spending and saving
What are the different types of savings?
Mandatory savings
Discretionary (optional) spending
What is mandatory saving?
Under the pension auto-enrolment rules, employees are required to make regular pension contributions (unless they opt out). These are therefore mandatory.
What is discretionary saving?
People may choose to pay money into a savings account whenever there is some money left over at the end of the month. This is said to be discretionary saving.
What affects the amount of money people save?
Give an example.
Income and attitudes to saving and borrowing.
Post-war economic growth in the 1950s and 1960s and easier access to borrowing led to a change in attitudes during the latter half of the 20th century. Previously people saved up to pay for items they wanted and avoided borrowing unless there was no other choice. People are now more willing to borrow to pay for their growing consumption of consumer goods.
How can cash-flow modelling help someone plan?
Cash-flow modelling software programs are available to allow individuals to predict the medium-term and long-term effects that different decisions and events may have on their income, expenditure and savings plans. They can then produce what if scenarios to judge the financial implications of a range of different decisions. By comparing these predictions of potential outcomes a person can change their spending, saving, investment and insurance plans to ensure they are financially stable.
What are the obstacles that prevent someone achieving sustainable personal finances over the long term?
Failing to:
Make short term, medium term or long term plans that are flexible.
Compare actual weekly or monthly income and expenditure with the amounts predicted in forecasts.
Amend plans when circumstances change or when monitoring reveals a difference between predicted and actual outcomes.
Take appropriate steps to avoid predicted cash shortfalls.
Make adequate contingency plans to deal with unexpected changes in income or expenditure.
Do sustainable personal financial plans need to evolve as circumstances change?
Yes, sustainable personal financial plans needs to evolve as individual’s circumstances change.
What is contingency planning?
Contingency planning is attempting to plan for unexpected events, or at least take them into account when making financial plans. These can be planning for undesirable or unfortunate events or pleasant surprises too.
Give examples of favourable unexpected events.
Getting a job Salary increase or promotion at work Winning money on the lottery An increase in the value of an asset Paying off a personal loan
Give examples of unfavourable unexpected events.
Losing a job Receiving a pay cut Increase in the rate of income tax Becoming ill or having to stop work for a period of time Major car repair costs
How did the financial crisis cause contingencies in many financial plans?
The financial crisis and the economic recession that followed were major contingencies that results in financial plans going wrong.
People lost money when investments fell in value and others lost their jobs. People also were affected by prices rising faster than wages.
Investors and people paying into money-purchase pension schemes were affected by falling share prices. The FTSE 100 fell from 6730 in June 2007 to 3512 in March 2009 (nearly 50%).
In the 5 years following the crisis the real value of wages was squeezed by price inflation which rose to 5% in the second half of 2011, while the growth in wages was below 2% a year.
What is the FTSE 100?
An index of the share prices of the top 100 companies traded on the London Stock Exchange.
What is the credit crunch?
Banks tightening their lending policies.
What are austerity measures?
The government making large cuts in public spending to try cut government debt by reducing the deficit between government income and expenditure.
What are the financial products and services available from providers to help maintain sustainable personal finances?
Current accounts Savings accounts Borrowing products Insurance Pensions Investments
What are current accounts?
Banks and building societies are the main providers of current accounts. They allows for the safe storage of money and can be used to make payments to, and receive payments from other people. Current accounts can be used to: Deposit money Withdraw money Current accounts can make payments using: Cheques Direct debits Telephone banking Mobile banking Standing orders Debit cards Internet banking
How do current accounts help sustainable personal finances?
The availability of online banking has made it easier for customers to monitor their accounts and access current account statements to show receipts, payments and balances. Customers can then compare their actual income and expenditure to what they predicted. They can also spot differences from their short term plans and if a problem arises can transfer money from another account, cancel a standing order or arrange a short term overdraft. This can all be done online.
What is a savings account and how are they used?
Customers deposit money into a savings account and are ‘lending’ this money to that provider to use to fund loans, overdrafts and credit cards to other customers. In return the provider pays the customer interest on their savings.
What type of savings products are available?
Savings accounts (variable rate interest)
Tax-free ISAs (individual savings accounts) (variable rate interest)
Regular (monthly) savings accounts
Notice savings accounts
Fixed term, fixed-interest savings bonds or deposit accounts
Credit union savings accounts
Christmas or other festival saving clubs
National Savings and Investments (NS&I) products
List the types of NS&I products available.
Direct Saver account (variable interest online savings account) Income bonds (variable interest paid monthly) Investment account (variable interest paid annually) Premium bonds (no interest but entered into a monthly prize draw) Direct ISA (variable-interest, tax-free cash savings account) Bonds (fixed interest rate for a fixed term of one or three years)
What type of saving accounts help sustainable personal finances and can be used for emergency funds?
Instant or easy-access savings accounts as they are ideal to use for an emergency fund.
How long does a financial adviser recommend for an emergency or contingency fund?
Financial advisers usually recommend saving an emergency fund or contingency fund roughly equal to three months’ net salary so that if someone is made redundant or has to stop working they will have enough money to continue paying their bills for three months.
A three month emergency fund also means that if someone takes out income protection insurance policies they can choose a three month waiting period before the policy starts to pay out benefits, this usually makes the policy’s monthly premiums cheaper.
What type of saving accounts are NOT suitable for emergency funds and why?
Notice accounts or fixed term, fixed interest accounts and savings bonds are not suitable for emergency funds because the savers pay a penalty (or lose interest) if they withdraw money in an emergency without giving the required notice or before the ‘maturity date’ of the fixed term savings product.
When are notice accounts or fixed term, fixed interest accounts or savings bonds useful?
For medium-term or long-term saving if someone can afford to save more than they need to as an emergency. They are ideal when planning to save over a period of years.
How can borrowing lead to problems that might damage the sustainability if individual finances?
If the borrowing is unplanned and the borrower fails to consider whether they can afford to pay the regular monthly repayments, and there is no contingency plan in place then borrowing can lead to problems.
