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Four functions of money
1. Unit of account
2. Means of exchange
3. Store of value
4. Legal tender
Role of money by SIX factors
1. Personal attitudes
2. Life stage
3. Culture
4. External influences (economy)
5. Life events (house move)
6. Interest rates
Why should someone bother to plan their spending
* Avoid getting into debt
* Control costs
* Avoid legal actions and losing possessions
* Keep a good credit rating
* Allows you to save for the future
* Gives you a safety barrier if you fall ill
What is a credit rating?
A score given to individuals on how likely they are to repay debts based on their previous actions.
How can you improve your credit rating?
1. Pay bills in your name
2. Pay bills and loans on time
3. Live with people who have good credit scores
4. Never default on a loan (not pay it back)
5. Avoid using credit cards to take out cash
Cash
The physical form of money, such as banknotes and coins.
+ Cash provides immediate liquidity and convenience
+ It helps with budgeting by limiting overspending
- Can easily be lost or stolen
- It does not earn interest or provide transaction records
Credit cards
A payment card, usually issued by a bank, allows its users to purchase goods or services, or withdraw cash, on credit.
+ Offer protection against fraud
+ Allow convenient and secure purchases
- High interest rates apply if the balance isn't paid off
- Overspending can result in debt accumulation
Electronic transfers
The transfer of money from one bank to another.
+ Provides fast and efficient transactions
+ Enable easy access to funds globally
- Pose a risk of fraud and cyberattacks
- Errors or system failures can result in delays
Standing orders
Instructions are given to the bank to pay a set amount of money at regular intervals to another bank account.
+ Able to send a regular amount that you control
+ Help with budgeting and planning payments
- Not very flexible if amounts of dates need changing
- Insufficient funds can result in missed payments of fees
Direct debits
Allow the organisation access to your bank account and let them withdraw money from your account.
+ No need to remember payment dates
+ Fewer admin costs for businesses
- Errors in set-up are hard to sort out after
- Takes time to set up
Cheques
A document that orders a bank to pay a specific amount of money from an account to the person's name the cheque is issued.
+ Secure way to make large payments without cash
+ Offer a paper trail for record keeping and proof of payment
- No guarantee it will be paid if the cheque is returned in large amounts
- Can't be used for online payments
Debit cards
A payment card that deducts money directly from a consumer's checking account to pay for a purchase.
+ Instant electronic payment using a plastic card
+ Can be used online
- Worries over security if cloned
- Shops have to pay a small fee
Prepaid cards
A card has to have money credited to it before the cardholder can use it to pay for goods.
+ Secure as you can only lose money put onto the card
+ Great for travelling or if you have a poor credit rating
- Money is tied up in a card and can't be used elsewhere
- It takes time to top up card and remember to do it
Store cards
A type of credit card issued by that retailer and to only be used in one store or chain.
+ Allows you to pay for items in a specific store with discounts
+ You pay the bill off when it arrives of the minimum payment
- Only for that store so limited
- Very high charges if not paid off in full every month
Charge cards
A credit card that enables the cardholder to make purchases which are paid for by the card issuer. But, you then must pay off the money when the bill arrives.
+ Often has no limit to spending
+ Benefits such as access to a concierge
- Retailers have to give a large commission to the charge card
- Annual fees from consumer and high spending on quality
Mobile banking apps
Allows customers to conduct financial transactions remotely using mobile devices.
+ Help you pay and manage your money at your fingertips
+ Instant payment system
- Concerns over security as apps are linked to your account
- Mistakes in paying the wrong person are hard to solve
Contactless cards
Cards that allow money to be transferred when the card touches a card reader.
+ Quick and easy payment for up to £100
+ Reduce need to carry cash
- Worries over security issues
- Not for larger purchases
BACS payments
A bank transfer system that allows payments between banks (often to pay employees) to be made.
+ Great for regular payments and easy to manage once set up
+ No fees involved
- BACS transfers take longer to process, up to three working days
- Payments cannot be reversed once processed
CHAPS payments
This is for a high-value payment system normally for buying things like houses in the UK.
+ Money is sent on the same day with no limits for maximum size
+ Is a reputable system in banking
- Fees are quite high and can be £35 per payment
- Same day transfers need to be informed by 2pm
What is an overdraft?
It is an arrangement with your bank to spend more money than is currently in your account. It was designed to be a temporary source of money.
Standard current account
A standard current account is a bank account that allows day-to-day financial transactions such as deposits, withdrawals, and payments.
+ It provides easy access to funds with features like debit cards and online banking.
+ Often include an overdraft for short-term borrowing
- Pay high interest on the overdraft
- Usually earn no or low interest on money in current account
Premium current account
A premium current account is a type of bank account that offers additional benefits and exclusive services, such as insurance and higher withdrawal limits, usually in exchange for a monthly fee.
+ Provides perks such as travel insurance and discounts on goods and services
+ Higher withdrawal limits and interest-free overdrafts
- Monthly fees may outweigh the benefits
- Some perks may not be useful for some users
Student current account
A student current account is a bank account designed specifically for students, offering features such as interest-free overdrafts and budgeting tools to help manage finances during studies.
+ Often includes an interest-free overdraft
+ Discounts / freebies cater to student's lifestyles, travel card
- Overdraft must be paid back after graduation typically leading to debt.
- Eligibility is strictly limited to students - must show proof
Basic current account
A basic current account is a simplified bank account designed for individuals with poor credit history or low income, offering essential banking services without overdraft facilities.
+ Provide basic banking services to those who would have nothing
+ No overdraft so you avoid going into debt
- Very limited features
- Some accounts charge fees on some transactions
Personal loans
A type of loan where you borrow a sum of money and have to pay it back in instalments.
+ One lump sum
+ Fast funding times
- No payment flexibility
- Increased debt load
Hire purchases
This is when a person buys something and instead of paying for it upfront pays for it in instalments.
+ Spread the cost
+ Gives you access to a newer, better car you couldn't afford
- You don't own the asset until the final payment is done
- Total cost will be more than buying the car cash
Mortgages
A loan used to purchase real estate, secured by the property itself.
+ Makes owning a home possible
+ Variety of mortgages: fixed, tracker, landlord...
- Risk of repossessions
- Pay back more than you borrow
Payday loans
A short-term, high-interest loan that usually must be repaid on the borrower's next payday.
+ Easy to access
+ Often get approved with bad credit
- Expensive
- Easy to get trapped in the cycle of debt
Individual savings account (ISA)
A savings account on which interest is paid tax-free and about which there are rules, including limits on how much money you can save.
+ No risk of losing your money
+ Tax-free
- Only £20,000 per annum is allowed to be withdrawn
- Withdrawn money cannot be put back in
Stocks and shares ISAs
Tax efficient investment account.
+ Any gains from the S&S ISA will be tax free
+ Grows faster than interest
- Can lose capital in a random turn of events
- Management fees can be high and eat your profits
Deposit and savings accounts
Easy access accounts with a variable rate of interest
+ Some pay a notice period and pay a higher fixed rate
+ You can put money into these accounts easily
+ If bank goes bankrupt first £85,000 is guaranteed
- Interest is potentially taxable
- Rates are usually very low and lower than ISAs
Premium bonds
Savers are given the chance to win a tax-free cash prize every month and are given a unique number when they invest £50 minimum and £50,000 maximum.
+ Top prize is £1,000,000 every month
+ Investment is backed by the government scheme
- No interest is paid on the savings amount
- So no regular income for savers and hard to plan
Bonds and gilts
These are investments or IOUs that pay you back a fixed rate of interest over a fixed time period.
+ Interest rates are usually higher than a savings account
+ Gilts are very safe
- Inflation risk
- Credit risk (UK bonds safe, Argentina’s risky)
Shares
When you buy a share in a company you become part owner.
+ Recieve dividends
+ The value of your share will increase so when you sell the share you can gain too
- Shares can drop meaning you can take a partial or total loss
- Dividends are not guaranteed and gains are taxable
Pension
Long-term saving schemes are designed to help you save for retirement by investing in things like the stock market.
+ Money paid into a pension by an employee gets tax relief
+ The lump sum can be tax-free when you take it.
- Often linked to the stock market (so could plummet)
- Money is tied to the pension scheme and is hard to access before retirement.
What is insurance?
It is a financial service that protects someone against a loss.
You pay a monthly premium and the insurance company will give you compensation if you suffer loss.
The higher the potential loss the higher the premium.
Motor insurance
Legal you must have motor insurance to drive on public roads.
1. Third-party
2. Third-party fire and theft
3. Fully comprehensive
+ If you don't claim over time you get access to a no-claims discount
+ If someone sues you the policy can provide protection to pay legal fees
- New and young drivers pay high premiums
- You may have to pay excess
Life insurance and assurance
In the event of a death, money is paid out to the family. Life assurance is a mix of life insurance and investment.
+ Can be cheap for younger people who are non-smokers and have no record of ill health in their families.
+ It can be used to cover loans such as mortgages which will be paid off in the event of a death.
- Pre-existing medical conditions may be excluded by the policy.
- You pay higher premiums if you are high-risk (office worker vs free mountain climber)
Pet insurance
+ A good way to cover expensive vet bills for your pet by taking out insurance.
+ Can also cover damage your pet may cause.
- Some policies limit the amount of vet bills and do not cover existing illnesses
- Vaccination costs are not covered
Home and contents insurance
+ Home insurance covers the cost of rebuilding or repairing your house
+ If you have good security you pay smaller premiums
- Some areas will pay higher insurance premiums due to the risk of crimes or the risk of floods.
- May need to purchase separate cover for expensive items.
Travel insurance
+ Provides cover for delays, cancellations or having to leave holiday early
+ Personal possessions on the trip can also be covered and luggage
- Some holidays like skiing require higher premiums
- Pre-existing health conditions aren't covered
Health insurance
+ Covers private medical costs if you don't want to wait on NHS
+ Allows for private rooms in the hospital
- Pre-existing health conditions aren't covered
- Can be expensive if not through a work scheme
