A1 - Functions of Money

Money flows in two directions, into your ownership and out. It comes from various sources including wages, gifts and savings. Money goes out to pay for necessities and wants. The same can be said for a business – money comes in from sources, including sales and bank loans, and goes out to pay day-to-day expenses and fund expansion. Therefore, the ability to handle money received, and to control money paid, is a requirement for personal and business success.

Functions of Money

The functions of money are the jobs that it performs.

  • Unit of account:

    • It allows us to place a monetary value on goods and services.

    • The price of goods and services show the unit of account, e.g. a chocolate bar is 60p.

  • Means of exchange:

    • It allows us to trade.

    • Businesses and customers can buy and sell goods and services using money.

  • Store of value:

    • It allows us to use it in the future as it keeps its value.

    • You might have money saved in a bank account which you can then use to buy goods and services in the future.

  • Legal tender:

    • It is a legally recognised form of payment.

    • Money is widely recognised and used for all sorts of transactions from buying an ice cream or getting a haircut to paying a deposit on a house and receiving your wages.

Role of Money
Life Stage, Financial Needs, and Implications

  • Childhood

    • Financial needs:

      • Limited needs

      • Mainly reliant on parents

      • May want to buy sweets or toys

    • Implications:

      • Money received from presents may be spent as attitude will be that this is to buy things you want

      • May be encouraged to save to save or parents or grandparents may set up a savings account for you into which they make regular payments

      • May rely on pocket money

  • Adolescence

    • Financial needs:

      • Want to be more independent

      • Slightly less reliant on parents as want to socialise away from family

    • Implications:

      • May look for a part-time job

      • Still partially reliant on pocket money

      • More likely to receive cash as gifts and may be willing to save up smaller amounts in order to make bigger purchases

  • Young adult (This is a very big stage which can encompass a wide range of different scenarios depending upon life choices)

    • Financial needs:

      • University or starting a career

      • Looking to be more independent

      • Buying a car and buying or renting a flat or house

      • Looking to settle down and maybe get married or start a family

    • Implications:

      • May take a student loan if going to university

      • Borrow money to pay for a car or purchase one on a finance deal

      • May be looking at taking out a mortgage

      • Need to earn money to support self and others

      • Eligible for credit and debit cards

  • Middle age

    • Financial needs:

      • Support family

      • Start saving for children's futures, e.g. university, weddings, etc.

      • Look to improve own lifestyle, e.g. new car or move house

      • Enjoy having access to additional money to spend on luxuries such as foreign holidays

    • Implications:

      • Savings accounts for specific purposes

      • Paying a mortgage

      • Planning for own future through pensions and retirement plans

      • Likely to be the stage of life when income peaks but matched with high expenditure

  • Old age

    • Financial needs:

      • Fewer dependents

      • May downsize, e.g. move from family home to a smaller retirement home

      • Fewer financial needs for assets but may be higher for services such as health care

    • Implications:

      • Mortgage payments stop or become lower

      • Less income as reliant on a pension rather than a salary

Different people will have different attitudes to money

People's attitude to money can change based on the situation they are in.

  • Personal attitudes: People's attitudes vary in relation to risk and reward and saving and borrowing. You can be a risk averse, to avoid the risk or you could be willing to take the more risks, perhaps enjoying the risk taking, meaning you are incentivised by the potential rewards available. Equally, you may be more or less likely than other to save your money, rather than spending it. This can be dependent on your family's attitude to money, which will also influence your attitude to borrowing as well. You could live within the restraints of only buying what you need and not what you want, or you good buy goods/services on credit or borrow the money to get it quicker.

  • Life stages: As you grow up from a child to an adult, your financial needs change. Each stage of your life has different implications that will affect your needs and attitudes to money.

  • Culture different: Cultures, religion and ethical beliefs, will have different attitudes to money. The older generation of Chinese people, have a culture of saving. However, as the country becomes wealthier young people are more willing to spend and even buy on credit.

Factors influencing attitude to money

  • Life events: Events throughout your life will impact your attitude to money. These events may be within your control, going to university or travelling abroad or may be outside your control, illness, financial gains or losses.

  • External influences: Factors outside your control, like the state of the economy, will have an impact. Impacting your wages, jobs and prices of goods/services. It will also affect the amount of tax paid. Affecting the ability to spend/save.

  • Interest rates: When interest rates are low you may be more willing to borrow money or spend on credit. When interest rates are high there is more of an incentive to save.