Level 3 Business - Learning Aim A (UNIT 3)

Functions of money

Unit of account, Means of exchange,

Store of value & Legal tender

Role of money

Personal attitudes

Life stages

Culture

Life events

External influences

Interest rates

Principles in planing personal finances

Avoid debt

Control costs

Avoid repossession by setting financial goals

Remain solvent by setting financial goals

Maintain a good credit rating

Manage money to fund purchases

Counter effects of inflation

Benefits of planning

Good credit rating

Generate an income

Fund unexpected purchases

Risks of not planning

Debt

Legal repossession

Poor credit rating

Unable to save for the future

Ways to pay

Cash - notes and coins

Advantages

- Accept form of exchange

- Physical

Disadvantages

- Can be stolen

- Cannot be used online

Debit card - issued by banks, paid by the cardholder

Advantages

- Secure method of payment

- Suitable for online transactions

Disadvantages

- Not accepted for small transactions

- Risk of card details being hacked

Credit card - issued by financial companies, paid by the card issuer

Advantages

- One month interest free credit

- Loyalty schemes offered

Disadvantages

- Encourage overspending

- Fee charged

Cheque - written order to a bank, payment to an account

Advantages

- Secure method

- As an exact amount

Disadvantages

- Old method

- Risk of cheque "bouncing"

Electronic transfer - direct payment

Advantages

- Easy to set up

- Instantaneous

Disadvantages

- Risk of loss if incorrectly set up

Direct debit - third part withdraws money from an account, agreed with the bank

Advantages

- Easy to make regular payments

- Quick to set up

Disadvantages

- Difficult to plan expenditure

- Must have sufficient funds

Standing order - transfer a fixed amount to a third party on a regular basis

Advantages

- Easy to plan expenditure

- Easy to set up and cancel

Disadvantages

- Must have sufficient funds

- Continual payments unless cancelled

Prepaid cards - cash uploaded onto a card, used to make purchases

Advantages

- Accepted by retailers

- Effective way to control costs spent by children on school lunches

Disadvantages

- Not protected if loss

- Set up fees

Contactless cards - payment made when card touches terminal

Advantages

- Popular

- Secure method

Disadvantages

- Accepted for small amount only

- Not widely accepted

Charge cards - issued by financial companies

Advantages

- Avoid carrying cash

- Short period of credit

Disadvantages

- Paid in full each month

- Annual fixed fee

Store cards - issued by retailers, similar to credit cards

Advantages

- Interest free for a short period

- Loyalty schemes

Disadvantages

- Only accepted in issuing store

- Interest charged on balances

Mobile banking - using an app

Advantages

- Convenient

- Secure

Disadvantages

- Limited features compared to internet

- Unable to access full range of services

BACS - electronic transfer

Advantages

- No fee

Disadvantages

- 3 days to transfer

Faster payments - electronic transfer

Advantages

- Takes 2 hours to transfer

Disadvantages

- Not offered by all banks

CHAPS - electronic transfer

Advantages

- Same day transfer

- No limit on amount transferred

Disadvantages

- Fee is charged

Current accounts

Account designed for frequent use e.g. deposits and withdrawals

Features of current accounts

Interest paid on positive balance

Interest charged on negative balance

Overdraft limit

Additional incentives

Types of current accounts

Standard - a fair credit rating

Advantages

- Convenient for receiving payments

- Includes a cheque book, debit card, overdraft facility

Disadvantages

- High charges on overdraft facilities

- No additional perks

Packaged, premium - offers additional features

Advantages

- Includes features such as car insurance, breakdown cover and credit card protection

Disadvantages

- Monthly fee charged

- Unable to meet needs

Basic - for customers with poor credit rating

Advantages

- No banking fees

- Access to depositing and withdrawals

Disadvantages

- No debit card

- No overdraft facility

Student - for learners in higher education

Advantages

- Easy to handle fees and loans

- Offers bonuses such as travel discount

Disadvantages

- Encourages overspending with overdraft facility

- High charges

Different types of borrowing

Overdraft - withdraw money for short-term needs e.g. to pay bills

Advantages

- Interest only charged on outstanding balance

- No penalties

Disadvantages

- High interest rates

- Expensive form of borrowingP

Personal loan - to fund expensive items, repaid in regular instalments

Advantages

- Easy to plan expenditure

- Useful to buy a car

Disadvantages

- Not suitable for short-term loans

- Secured against an asset

Hire purchase - buy an item immediately, paid in regular instalments

Advantages

- Cost spread over 1 to 5 years

- Afford something customers can't

Disadvantages

- Higher interest rates

- Risk of repossession

Mortgages - long-term loan to fund a house

Advantages

- Fixed interest rates

- Spread over a long period of time

Disadvantages

- Interest rates can vary eventually

- Loss of property if failure to meet repayments

Credit card - must be paid for when a statement is issued

Advantages

- Protection on purchases

- No interest if paid in full

Disadvantages

- Encourage overspending

- Higher interest rates

Payday loans - short-term loan for small amounts to pay bills

Advantages

- Solve cash flow problems

- Easy to secure

Disadvantages

- Expensive

- High interest rates

Different types of saving

Individual Savings Account

Advantages

- Tax is not charged on earnings

- Slightly higher interest rates than alternatives

Disadvantages

- Too many withdrawals = penalty

- Limit on amount placed

Deposit and Savings account - must give notice before withdrawing

Advantages

- Interest earned on positive balance

- Comes with a savings plan

Disadvantages

- Tax charged on interest earned

- Lower interest rates on savings, results in loss of savings if borrowing too

Premium bonds - doesn't pay interest, instead purchasing bonds comes with the chance of winning a tax-free prize

Advantages

- Chance to win more than earned in interest

- Easily withdrawn with no loss

Disadvantages

- Loss in value due to inflation

- Reviewed by the government

Bonds and gilts - money is lent to companies and government for interest payments

Advantages

- Regular fixed returns

- Risk is spread across many markets

Disadvantages

- Value can fall

- Interest payments are only received if the issuer makes payments

Shares - investment in a business for equity/dividends from profits

Advantages

- Additional benefits e.g. discounts, special offers

- Fluctuating share prices offer potential for high reward

Disadvantages

- Fluctuating share prices offer potential for high risk

- Risk of loss if under performs

Pensions - long-term savings plan, making regular contributions until retirement, paid as a lump sum

Advantages

- Savings boosted by employer contributions

- Provides financial security for retirement

Disadvantages

- Changing jobs reduces overall value

- Difficult to predict final value

Savings - placing money in a secure place, grows in value, to be used in the future

Risks

- Inflation reduces power of savings

Rewards

- Interest payments

- Financial security

Investment - into a business, hope of generating profit or financial reward in the future

Risks

- Can go wrong, loss in value

- No guaranteed return

Rewards

- Potential for high return if successful

- Exciting

Insurance

Protection against financial loss in return of a premium

Motor - legal requirement, covers theft/accident, third party, fully comprehensive, protects driver, passengers and road users

Advantages

- Meets legal requirements

- Provides protection against damage/theft

Disadvantages

- Expensive for young drives

Home & Contents - covers the building against fire and the items insider the house

Advantages

- Protection against damage, expensive to repair

- Protection inside and outside

Disadvantages

- Additional expense

- Certain items can't be replaced, e.g. paintings

Life assurance - ongoing policy to pay a lump sum upon death

Life insurance - in the event of death

Advantages

- Provides peace of mind to family

Disadvantages

- Payment is not made if the policyholder doesn't die, bad for the insurer

Travel - protection whilst abroad, covers loss, theft, illness, cancellation and emergency medical expenses

Advantages

- Provides protection for personal belongings away from home

- Covers medical costs

Disadvantages

- Additional cost

- Highly risky events require additional cover

Pet - protects against expenses with treating pets

Advantages

- Avoid expensive vet fees

- Avoid putting the pet down due to high fees

Disadvantages

- Additional expenses to protect against the unexpected

Health - covers individuals, families, employees against medical expenses

Advantages

- Funds private care with convenient treatment times

- Choose types of illnesses to cover

Disadvantage

- Does not cover existing medical conditions

- Expensive depending on degree of cover