Finance unit 2

• Risk


  Uncertainty because the future cannot be predicted
• Reward


  The benefit that comes from taking a financial decision
• Transparent


  It must be clear and not hide anything from the customer e.g. any penalties need to be obvious on early repayment or withdrawal
• Timely


  Information must be available when the customer needs it
• Someone who wants high rewards


  • Must accept a higher risk of loss
• Someone who wants to avoid risk

  • Must accept a lower return
• Sufficient


  The information should be enough so that the customer has a clear idea of what a product will do for them. But there is no need to give them too much technical information
• Financial plan


  Used to achieve set objectives
• Needs


  Essential, 'must have items'
• Interest rates


  The reward earned on savings
• Financial planning


  Arranging finances to fit expenditure to income, plan for the future, and achieve wants and aspirations in the medium and long term
• Key features of information and advice

  • Accurate
  • Up to date
  • Transparent
  • Timely
  • Sufficient
• Low interest rates are an incentive for some savers to choose riskier products to earn a higher return
• Financial budgets


  Forecasts, but the actual outcome can be very different from the forecast due to the impact of unforeseen influences
• Wants


  Optional, 'nice to have' items that are desirable but not essential. People cannot fulfil their wants until their needs have been met.
• Most people have an outline knowledge and understanding of financial products and how to prepare a financial plan, so they need help and advice
• Financial plans


  • Must have some built-in flexibility to deal with unforeseen events and changes in personal circumstances
• Flexibility in financial planning

  1. Life does not always work out as expected

  2. It is not possible to draw up a separate budget for every possible combination of events

  3. Some flexibility needs to be brought into every financial plan
• People need to be able to distinguish between good, sound advice and information that is biased and driven by the need for an organisation to sell its products
• Aspirations


  Hopes for the future. They are the items or experiences that people wish to have in the medium and long term future.
• Unfavourable events


  • Divorce
  • Redundancy
  • Illness
• Being flexible


  Being willing and able to change priorities
• Ways of allowing for flexibility

  • Savings
  • Anticipating events
• Reasons people need financial advice

  • Buying a financial product, to help make an informed choice
  • During the period they are using the product, as circumstances may change
• 'What if' calculation


  A function of a spreadsheet where the user can change one variable to see the effect on the final results
• Changes in interest rates

  Impact on borrowing repayments and savings goals
• Making a bad financial choice can have unfortunate consequences, especially for medium and longer term products like savings and mortgages
• Changes in interest rates can be a problem for anyone repaying a loan with a variable rate of interest
• If interest rates increase, mortgage repayments will increase
• Inflation


  The rate at which prices increase
• If people's incomes rise more slowly than prices, they will suffer a fall in their standard of living
• Inflation is a special problem for people on fixed incomes, such as retired people living off an annuity
• People should factor inflation into their financial plans, assuming an average rate of 2-3% and increasing income and expenditure by this amount each year
• Information sources


  Sources of information that influence financial choices
• Exchange rates


  The price of one currency in terms of another
• Changes in exchange rates will affect the cost of foreign holidays
• Types of benefits


  • Job Seekers Allowance (JSA)
  • Universal Credit
  • Personal Independence Payments (PIP)
• Purposes of financial planning

  • Achieve long term objectives
  • Finance life events
• Changes in government social security policy create great uncertainty for people who rely on benefits
• Types of debt


  • Equity withdrawal
  • Hire purchase
  • Unsecured loans
  • Credit cards
  • Overdrafts
  • Student debt