business

• Unit of account

  • As a unit of account, money serves as the common base of comparison that people use to present prices and record debts
  • Money also provides a measure by which we can value different goods and services
• Means of exchange

  • In today’s economy, we use notes and coins as money, rather than barter as a medium of exchange
  • Money enables goods and services to be exchanged, transactions to be settled and debt to be paid
  • Money avoids the problems of barter, principally the double coincidence of wants, which is inefficient and would stifle specialisation and division of labour
• Store of value 

  • Money acts as a store of value over time
  • It enables individuals to transfer spending to future time periods secure in the knowledge that it will have a future value
• Legal tender

  • Accepted to buy goods and services
  • Money allows individuals to pay for goods and services later, despite their consumption taking place now
  • Because money is an accepted medium of exchange, it enables credit to be offered so payment can take place at a future date
• factors affecting the role of money

  • Personal attitudes towards risk and reward, borrowing, spending and saving
  • Risk averse or risk taker
  • some people are willing to take more risk e.g. to gamble or spend all of their money
  • others will be more cautious and want to save money to ensure security in the future
• factors affecting the role of money

  • Rewards can be immediate e.g. buying a new pair of shoes or long term e.g. earning interest on savings or saving for a big commitment such as buying a house or car
  • Borrowing can allow for immediate rewards but will incur a cost as money borrowed will be paid back with interest, whereas saving will see the value of money grow
• life stages: childhood

  • Zero or low income e.g. pocket money, gifts Savings maybe set up by relatives, Piggy bank!
  • financial needs: Most needs are met by parents e.g. food, clothes, toys
  • implications: Likely to spend money received. Planned savings by parents
• factors affecting the role of money: adolescence

  • Want greater independence, May start to earn e.g. a part time job, Looking to future e.g. saving for driving lessons or university
  • financial needs: Higher expenditure patterns e.g. buying more expensive items or going out with friends
  • implications: Conflict between wanting to spend now and save for the future, Still heavily reliant on parents
• factors affecting the role of money: young adults

  • preparing for university, getting a job, hanging out with friends
  • financial needs: getting jobs means they're less financially tied to parents, may start paying rent if still living at home
  • implications: can cause burnout as they're going to school and work, tends to spend more money they may need
• factors affecting the role of money: middle age

  • features: Settling down, may be buying a house, having a family, Hopefully earning a good wage, Self sufficient with dependents
  • financial needs: Support self and family. Maybe buying a house or moving up the property ladder. Regular incomes and expenditure
  • implications: Need to earn. Difficult to save for the future but concerned over security at retirement. Likely to spend the majority of income on short to medium term items e.g. food, clothing, home, family holiday
• factors affecting the role of money: middle age

  • implications: factors affecting the role of money: middle age ,features: Settling down, may be buying a house, having a family, Hopefully earning a good wage, Self sufficient with dependents, financial needs: Support self and family. Maybe buying a house or moving up the property ladder. Regular incomes and expenditure
• factors affecting the role of money: old age

  • features: Loss of income. Reliant on pension. No longer have dependents
  • financial needs: Day to day expenditure. Comfortable life style e.g. enjoy leisure time
  • implications: spending savings. More careful with expenditure e.g. may downsize house or shop around for groceries
• Culture, including religious and ethical beliefs

  • Culture can influence our attitudes to money
  • Different societies will have different opinions on what is right and wrong
  • Some societies will talk openly about money, earnings and wealth whilst others are more reserved or secretive
• • Consider the following questions and how the response might be influenced by religion, culture or ethics
  • Is it OK to show off your wealth with flash cars and expensive jewellery?
  • Should the rich give back to society, either through higher taxes or voluntary donations?
  • Do you talk about money with your family? Do you know how much your parents earn or how much is owed on the mortgage or other debts?
  • Is money a good gift? If you gave money as a wedding gift would you tell others how much you gave?
  • Is it OK to keep spending on credit cards?
  • Should all children have a savings account?
• • Life events mean that the personal life cycle varies from person to person
  • Consider how each of the following life events would impact on borrowing, saving and spending:
  • Start or end of a long term relationship
  • Having a baby
  • Going to university
  • Getting a promotion at work
  • Taking a year off to travel
  • Being made redundant
  • Illness of a loved one
  • Starting up a business
• • External influences/trends
  • External influences are outside of the control of the individual i.e. you can not determine them
  • When the economy is in decline the spending power of individuals tends to fall, maybe as a result of job losses
  • People are less willing or able to spend
  • Uncertainty about the future encourages savings
  • Banks may be less willing to lend
• • Interest rates
  • Low interest rates encourage borrowing and therefore spending
  • Low interest rates may encourage more people to buy on credit
  • The reward for saving is low therefore making it less attractive
• Expenditure is the spending of money i.e. an outward flow. 

  These are the common principles, or guidelines, to consider when planning personal finance:

  • To avoid getting into debt
  • Debt is when you are spending more than you have i.e. expenditure is greater than income
  • This may be spending on credit cards, hire purchase, using an overdraft or borrowing from the bank
  • Debt will increase your costs i.e. it will have to be repaid with interest
• • To control costs
  • By setting budgets you can control your expenditure to ensure it doesn’t spiral out of control – assuming you stick to it!
  • Shop around for the best deals, this has been made significantly easier as a result of the internet e.g. price comparison websites
  • Planning in advance can often save money e.g. buying tickets early rather than at the last minute
• • Avoid legal action and/or repossession
  • If you fail to make agreed payments the creditor can take legal action, this will be expensive and can damage your reputation
  • Loans taken out against an asset e.g. a house. If payments are missed the bank can repossess the asset i.e. take the house from you
• • Remain solvent
  • To be solvent means to be able to meet your debts i.e. to have enough assets, things you own, to cover your liabilities, things you owe
  • If a creditor calls in their debt at short notice and a person is not solvent they would have to sell their assets e.g. home or car to meet their debt repayment
• • Maintain a good credit rating
  • Whenever you apply for  credit, whether it be a bank loan or to buy a car on hire purchase, the creditor will review your credit rating
  • This assesses the degree of risk i.e. how likely is it you will be able to repay the debt
  • Based on history, earnings, other debt etc.
• • Avoid bankruptcy
  • Bankruptcy is when an individual legally declares themselves as unable to repay their debts
  • Effects ability to achieve future credit
  • Loss of all assets
  • Damage to reputation
  • Restrictions such as the ability to become a director of a company
• • To manage money to fund purchases
  • There will nearly always be a time gap between income and expenditure e.g. we don’t get paid on a daily basis
  • Expenditure needs to be planned so that purchases such as food can still be afforded at the end of the month, quarterly bills such as electricity can be paid every three months and there is some money put aside for birthday gifts or holidays
• • Generate income and savings
  • Interest is paid on savings and therefore generates income, the size of savings therefore increases. However, interest rates are currently very low!
  • Money can be invested to generate income e.g. buying shares. However, this is not guaranteed
  • Income may be invested in assets that will appreciate e.g. we expect a house to increase in value over time. This affects wealth
• • Set financial targets and goals
  • A target or a goal is something you want to achieve at a set point in the future
  • These can help encourage regular savings and good spending practices as you have something to work towards
  • Examples include to save a set amount each month, or to achieve a consistent bank balance over a set time period
• • Provide insurance against loss or illness
  • Money can be kept as insurance e.g. saving so that you can maintain your current life style even if for some reason your income falls
  • Being able to replace lost items
  • This may involve paying into an insurance policy now to protect you against future loss or illness 
• • Counter the effects of inflation
  • Inflation is a general rise in prices or a fall in the value of money. In other words, the fact that for every £1 we have now, we can buy less over time
  • Money invested that is index linked will go up in line with inflation so the spending power of our money stays the same
  • Money left under the mattress will fall in value!
• different ways to pay:

  • There are many different ways to pay for goods and services
  • Each method has advantages and disadvantages but a lot is down to personal preference
  • What is your preferred method of payment?
  • How many different methods do you use on a regular basis?
  • How might the answers to the previous 2 questions differ for an elder generation?
  • How have methods changed over time?
• • Cash: notes and coins
  • advantages: Confidence, widely accepted, small denominations, easy to control expenditure
  • disadvantages: Risk of loss or theft, physical transactions only, inappropriate for large items of expenditure
• Debit card: allows you to make purchases by card with the money being taken directly from a current account, used to withdraw cash

  • Advantages: Secure, widely accepted, can withdraw cash from various places
  • Disadvantages: Need to monitor spending and bank balance, if overspend can be costly
• Credit card: make purchases on credit i.e. buy now and pay later, repayments are made following the issue of a statement with a minimum amount

  • Advantages: Allows you to defer and spread payment, widely accepted, used online or in store
  • Disadvantages: interest is charged on the outstanding balance, can encourage over spending
• Cheque: A paper transaction giving a bank permission to transfer payment from your account to another account. Now largely seen as old fashioned!

  • Advantages: Secure method of payment, widely accepted, appropriate for postal transactions
  • Disadvantages: Maybe charged for each cheque processed, costly if cheque is not honoured due to insufficient funds
• Electronic transfer: Online transfer of money from one account to another

  • Advantages: Quick method of payment, transfer is almost instant, can be done remotely e.g. by mobile app
  • Disadvantages: Need to be carefully set up to ensure the transfer goes to the right place
• Direct debit: Permission given to the bank to make regular payments to a third party upon request

  • Advantages: Ensures regular payments are not missed
  • Disadvantages: Amount taken will vary making budgeting difficult, need to be re set up if bank details change, taken automatically
• Standing order: Permission given to the bank to make regular payments, of a set amount, to a third party upon request

  • Advantages: Secure method of payment, ensures regular payments are not missed
  • Disadvantages: Money taken regardless of balance, must be reset or cancelled if anything changes
• Pre-paid cards: A cash balance is held on a card which then reduces each time a transaction takes place e.g. Oyster travel card or school lunch card

  • Advantages: Can only spend up to the amount uploaded, secure method of payment, can only be used for specific purpose
  • Disadvantages: Can be difficult to monitor balance, can be used by others without permission, may involve a fee to purchase the card in the first instance
• what is the difference between a direct debit and a standing order?

  A standing order is a regular payment that you can set up to pay other people, organisations or transfer to your other bank accounts. You can amend or cancel the standing order as and when you like. A Direct Debit can only be set up by the organisation to which you're making the payment.
• contactless cards: Contactless payment” refers to a no-touch form of payment using a credit, debit or gift card on a point-of-sale system equipped with the adequate technology.

  • Advantages: easy to use, fast and efficient payment. convenience as customers can use their smartphone in lieu of their payment card. less likelihood of long queues during busy times. Covid-safe and hygienic.
  • Disadvantages: Because contactless payments require neither PIN nor signature authorisation, lost or stolen contactless cards can be used to make fraudulent transactions.
• Charge card: Allows for purchases to be paid on a credit card but the total amount is automatically paid direct from a bank account upon receipt of a statement each month

  • Advantages: Secure method of payment, avoids long term debt
  • Disadvantages: May incur annual or monthly fees, has to be paid in full regardless of funds