A-Level Finance immediate and short term

Money can be defined as ‘anything that is widely accepted as a means of making payments’.

Before money, there was a system of barter: a system for the exchange of goods or services. This works only if there is a double coincidence of wants. This means that what I have to exchange is what you want and what you have to exchange is what I want.

Money performs the following functions.

• A means of exchange

It is a way of paying so that we can buy and sell goods and services.

• A store of value

It is a way of saving so that we can pay for items in the future.

• A standard for deferred payments

It measures what we owe if we do not pay immediately, eg if we borrow money.

• A unit of account

It is a standard measure of what things are worth, which means that we can keep accounting records.

For money to perform all of these functions, it must have the following features:    

• Acceptable - People, shops, organisations, etc, will take it as payment for goods and services. (See ‘Legal tender’ below.)

• Recognisable - People become familiar with the look and feel of coins and notes. (See ‘Homogeneous’, below.)

• Stable - It needs to hold its value. Inflation must be low.

• Divisible - It must be available in different amounts so that people can use it to pay different prices and to make change.

• Durable - It must be hardwearing, so that it lasts a long time.

• Portable - People need to be able to carry it.

• Scarce - It must be sufficiently rare that it has a value. But there must be enough of it for people to make transactions.

• Homogeneous - All coins or notes of the same value must look and feel the same.

The type or amount of money that cannot be refused in payment of a debt. For example, 20p pieces are legal tender up to a total of £10 in a single transaction.

Money is worth what you can buy with it. This is known as its ‘purchasing power’.

Money tends to buy less in the future than it will today. This is called the ‘time value of money’ and is caused by inflation.

Another country may use money that has a different name, look and purchasing power from our own. A country’s form of money is called its ‘currency’.

Money comprises coins, notes and bank balances.

Most of the world’s money supply is held as bank balances – that is, electronic computer records.

Payment mechanisms that are used to transfer money from one bank account (the buyer’s) to another (the seller’s):

• cheques and travellers’ cheques;

• payment cards, such as Oyster cards (a prepaid card), debit, credit, charge and store cards;

• payment services offered on current accounts, such as standing orders and direct debits.

Savings accounts are offered by banks, building societies, credit unions, and National Savings and Investments (NS&I).

They keep money safe and pay interest.

Savings are ‘delayed spending’. The saver will spend the money in the future.

Quoted as an annual equivalent rate (AER).

Can be fixed for the term of the saving, eg a six-month bond. But most savings accounts offer variable interest rates. This means that the rate goes up and down over time.

Inflation means that prices are rising. This means that money put into savings will be losing purchasing power; it will buy less in the future because prices are higher. Ideally, savers want to put their money into savings accounts with interest rates that have a higher percentage than the percentage of inflation.

These are accounts from which savers can withdraw money at any time and keep all of the interest that the money has earned so far.

These accounts require the saver to warn the provider when they will withdraw money. This warning must be given a set amount of time before withdrawing any money, eg 60 days. This warning is called ‘giving notice’.

Notice accounts usually pay a higher rate of interest than instant-access accounts. However, if the saver does not give the required notice of withdrawal, a penalty will be charged. This is usually part of the interest that the money has earned so far.

Interest rates are quoted as gross (before income tax is deducted) and net (after income tax is deducted). The AER is a gross interest rate.

Providers deduct income tax at the basic rate (at the time of writing, 20 per cent) from interest before paying interest to the saver. This is known as deducting the tax ‘at source’.

Savers who do not pay income tax can claim this income tax back.

Savers who pay income tax at higher rates must pay the difference to Her Majesty’s Revenue and Customs (HMRC) via their annual tax return.

These savings accounts earn a return that is free of income tax. So providers do not deduct income tax at source.

The government introduced ISAs to encourage people to save. There are two types to choose from: cash ISAs, and stocks and shares ISAs.

There are limits to the amounts of money that can be saved in an ISA. During the tax year 2015–16, savers can deposit a maximum of £15,240 into either a cash or a stocks and shares ISA, or they can divide their savings between cash and stocks and shares in any proportion up to the limit of £15,240.

Savings accounts are usually covered by the Financial Services Compensation Scheme (FSCS). This means that if a provider were to be unable to return the money held in savings accounts, the FSCS would do so, up to a maximum of

£85,000 per person per provider. There are rules, such as that the provider must be authorised by the Financial Conduct Authority (FCA).

People’s choices and aspirations are influenced by their values, beliefs and attitudes, even if they are not aware of it.

Personal values, such as ethics and attitudes to risk, affect financial choices. For example, they affect how you choose to deal with your money and what you are prepared to invest it in

These are generalised feelings about desirable behaviour or goals. They involve the concepts of ‘good’ and ‘bad’, and how things ought to be.

There are different types of value that have varying importance for different individuals and cultural groups. These values are social, economic, moral, religious and cultural, and personal.

These are the ways that we think things are. They are more specific and detailed than values. They are absolute (eg ‘It is acceptable to do X, but not Y’), or causal (eg ‘If I do X, then Y may happen’).

Our attitudes are how we are disposed towards things. They are general feelings or evaluations. Attitudes may be changed by circumstance, events, experience or advice. Attitudes towards something can be positive, negative or neutral.

This refers to the phenomenon that what we expect to happen often does happen because our attitudes affect how we behave and how we behave affects what happens. Our expectations are often self-fulfilling.

Perceptions are the way in which things appear to us. They are the way in which we interpret what we observe and sense, consciously or unconsciously. Each person’s perceptions are shaped by the values, beliefs, etc, that they have as an individual.

People make decisions based on objective analysis (looking at the facts only) or subjective analysis (using their perceptions, values, attitudes, etc).

Objective analysis tends to be influenced by subjective factors even if we are unaware of it. This is because of selective attention (that is, tuning out some information) and selective distortion (that is, interpreting information according to our values, etc, such as when we stereotype people or situations).

This means assuming that certain groups of people automatically share the same characteristics because they belong to that group.

The strongest influences are from our culture, the society in which we live (including the media) and our peers (people like us).

The messages that we receive can be direct, also known as ‘overt’ or ‘explicit’; alternatively, they can be indirect, also known as ‘covert’ or ‘implicit’.

How we want other people to perceive us also influences our behaviour and decisions, for example through imitating, identifying with and complying with others.

These are standards of personal conduct that guide our decisions and behaviour. They are based on core values and refer to what we think is ‘right’ or ‘wrong’.

Organisations express their values through their marketing, their corporate responsibility strategies and their approaches to ethics, such as offering ethical investment products.

Providers will ‘sell’ you money that you can use to buy and enjoy things now when you cannot afford to buy them with cash. This is also called ‘taking credit’.

When you borrow money, you sign a legal contract. Only people aged 18 and over are responsible for the contracts that they sign under UK law. So only people aged 18 and over can borrow money

Quoted as an annual percentage rate (APR).

These rates include some fees and charges, as well as the price for borrowing the money.

Providers must calculate APRs using a standard formula. This means that borrowers can use the APR to compare the cost of borrowing on a ‘like for like’ basis.

Except overdrafts, which are quoted as an equivalent annual rate (EAR).

A flexible way of borrowing, overdrafts allow you to take more money from your current account than you have paid in. Overdrafts are intended for short-term borrowing such as for a few days before your pay arrives. You are charged only for the money that you borrow and for the length of time that you borrow it.

Interest rates are variable. There can be a big difference in the interest rate charged for authorised overdrafts (that is, the provider has agreed to lend you the money) and unauthorised overdrafts (those to which the provider has not agreed). In addition to interest rates, providers may make penalty charges.

Usually for terms of between three and five years. The interest rate is usually fixed, so that borrowers know how much they must repay every month over the term of the loan. It is usually a lower APR than an overdraft.

People use personal loans for buying items such as cars and for making home improvements.

These loans are cheaper than long-term credit card borrowing. So borrowers who have owed a lot of money for a long time on their credit cards may be better off getting a personal loan. They might be able to repay the card debt in full and have smaller monthly repayments on their loan.

Loans that help borrowers to buy property, such as a house or a flat. Mortgages are secured on the property. This means that if the borrower does not repay the mortgage (if they default), the provider can sell the property to get back its money.

Interest rates on mortgages can be fixed or variable. There are many different types of mortgage.

Credit cards are a flexible way of borrowing money in the short term, up to a credit limit set by the provider. The borrower uses the credit card to pay the retailer. The credit card provider pays the retailer and sends the cardholder a statement. It is up to the cardholder to decide whether to repay only the minimum amount or more of the bill. Interest rates on credit cards are variable and tend to be high, so delaying repayment means that the debt grows quickly.

There are other types of payment card that involve taking credit. Charge cards let the cardholder borrow until the next statement. But the amount borrowed must be repaid in full at that time.

Store cards are credit cards that you can use only in that shop. These tend to be very expensive.

Used by stores to offer ‘in-store credit’ to buy, for example, a freezer, camera or furniture. The money is lent by a finance company.

The instalments on hire purchase tend to be fixed for the term of the credit, often three years. Borrowers do not own the goods that they buy through hire purchase until they have paid the last instalment.

If they miss payments, the finance company can ‘repossess’ the goods, subject to certain rules.

Protection against the financial consequences of risks that might occur, for example fire, theft, accident

All insurance, except motor insurance, is voluntary. People will buy it only if they think that the risk of something happening makes it worthwhile paying the cost of the protection. They are buying ‘peace of mind’.

The price of the insurance policy. The more likely a risk is to occur, and the larger the amount of money needed to protect against it, the higher the premium.

The insurance company puts all of the premiums that are paid for a certain type of policy into a pool. Policyholders who suffer the risk, such as theft, are paid from the pool. Policyholders who do not suffer the risk receive nothing.

Covers the cost of repairing or rebuilding a property if it is damaged or destroyed, for example in a fire or if a tree falls on it. Policyholders may be able to add accidental damage for an extra premium

Covers someone’s home contents, such as carpets, furniture, equipment and personal belongings kept at home. The risks covered are usually loss or damage from such things as fire, flood or theft. Policyholders can pay extra and receive cover for accidental damage or loss.

Some policies cover personal belongings when they are taken out of the home for short periods of time.

Life insurance policies with a large element of savings. They pay out at the end of the term of the policy or if the insured person dies within the term. Policyholders may withdraw the investment part of the policy before the end of the term.

• Permanent health insurance (PHI)

Pays an income if the insured person is unable to work because of illness. These policies will pay out only after a certain number of weeks of the illness. They usually pay between 60 and 75 per cent of the person’s usual earnings.

• Critical illness cover (CIC)

Pays a lump sum (a one-off payment) when the insured person is diagnosed with a certain type of illness such as cancer, stroke or heart attack. The payment is made whether someone is able to work or not.

• Private medical insurance (PMI)

Covers certain private medical bills for the insured person

• Accident, sickness and unemployment (ASU)

Cover that pays a set amount of income if someone has an accident or illness that prevents them from working. These policies also provide a stated income if the insured person loses their job.

• Family income benefit policies (FIBs)

Term insurance that pays regular amounts, usually monthly, to the family of the insured person who has died.

• Mortgage payment protection insurance

Pays the insured person’s monthly mortgage repayments if they cannot due to accident, illness or redundancy.

Covers someone’s life. When the insured person dies, the insurance policy amount (the sum assured) is paid to their dependants. Some life cover is for ‘whole-of-life’. This means that, as long as the policyholder keeps paying the premiums, the policy will cover them for the rest of their life.

This is called life assurance because the person who is covered will definitely die at some point. Term insurance is life cover that lasts for a specific length of time (the term) The person covered may not die within this term, so this protection is called insurance.

Term insurance is often taken out by people who borrow money on a mortgage. The term of the insurance matches the term of the mortgage so that the debt is repaid if they die

A certain level of motor insurance is compulsory under UK law for people who drive. They must be covered so they can pay other people if they hurt them or damage their car or other property. This is called ‘third-party’ cover. The basic policy is called ‘third-party, fire and theft’. Drivers who want a higher level of cover can buy ‘comprehensive’ policies instead. Comprehensive cover costs more.

Covers the cost of vet bills in case a pet needs treatment.

Insurance that covers businesses against the costs that they might incur if someone visiting their offices were to be injured or their property to be damaged.

Covers the costs of medical treatment when on holiday and the cost of replacing luggage or belongings that are lost or stolen or damaged. These policies often cover the costs of having a delay in your journey too, eg having to stay in a hotel for extra nights.

Pensions are a way of saving money for retirement

Individuals pay into a pension scheme while they are working. This builds a ‘pension pot’ of money. The money is invested by the pension scheme’s managers with the aim that it grows in value.

The government encourages people to save in a pension scheme by providing tax relief on the contributions.

Individual pensions are stand-alone schemes that belong to one person. They are ‘money-purchase schemes’ (see below).

Occupational pension schemes are offered by employers to their employees. The employer and the employee both contribute payments to the pension scheme. The employer deducts the employee’s contributions from their salary.

Some occupational pensions are final-salary, also known as ‘defined-benefit schemes’. This means that the employee will know how much their pension will be per year before they retire. These schemes can be expensive for employers, so they are becoming less common.

Most occupational pensions are money-purchase schemes.

Standing for the National Employment Savings Trust, this is a workplace pension scheme run by the NEST Corporation. It is targeted at UK employers who have not offered a pension scheme to their employees before.

When the pension owners retire (which may be before or after the state retirement age), the pension pot is used to buy an ‘annuity’. An annuity is a product that pays an annual income for a set number of years or until the pensioner dies.

Annuities can pay the income per year or per month. This money may be a set amount or the amount could increase over the years to offset inflation. The amount of money that the pensioner receives depends on the size of the pension pot and the annuity rate when the annuity is purchased. Annuity rates are variable, just like interest rates. Private pensioners or managers of occupational schemes often shop around to buy the annuity with the best rate available.

Annuities are provided by life insurance companies

Pensioners may be able to withdraw some of the money from the pension scheme as a lump sum at retirement.

The government pays State Pension to people who reach state retirement age. The amount of the pension depends on for how many years the individual has paid National Insurance contributions (NICs).

People who reach State Pension age before 6 April 2016 receive the Basic State Pension and may be eligible for Pension Credit if their income is below a certain amount. People who reach State Pension age on or after 6 April 2016 receive the New State Pension. This is paid at a flat rate depending on how many years of National Insurance contributions the pensioner has paid.

The State Pension age is being increased. By November 2018, State Pension age for both men and women will be 65. From December 2018, the age will increase until it reaches 66 in 2020. The government now proposes to increase State Pension age gradually from 66 to 67 by 2028.

The personal life cycle is a typical sequence of stages and events that happen to people during their lifetimes.

• Birth and infanthood (0–2 years)

• Childhood – preschool (2–5 years)

• Childhood – school (5–12 years)

• Teenager (13–19 years)

• Young adult (18–25 years)

• Mature adult (16–40 years)

• Middle age (41–60 years)

• Late middle age (55–65 years)

• Old age (65+)

• Death (at any point in the cycle, but more likely here)

• Starts school                                                                           • Starts a part-time job

• Learns to drive                                                                        • Leaves home

• Goes to university                                                                    • Starts a full-time job

• Gets married / enters into civil partnership                                  • Gets promoted

• Buys a car                                                                               • Has children

• Buys a property                                                                       • Changes career

• Children leave home                                                                • Retires

Individuals and families use the personal life cycle to make financial plans for the events that they think may happen to them.

Providers use the personal life cycle to develop financial products to help with the financial needs or problems that people experience at each stage. They then market these products so that people understand that the products will solve their problems and decide to buy them.

In each lifecycle stage, people may have different financial needs and attitudes. These are used as lifecycle indicators to build profiles of consumers, including:

• levels and patterns of spending;

• debt held and attitudes to debt;

• level of income;

• family size and structure;

• level of education;

• attitudes to risk and the future.

Marketing companies classify people into different groups according to different characteristics. This is to help businesses, such as financial services providers, to understand their customers. ACORN (standing for ‘A Classification Of Residential Neighbourhoods’) is an example.

What events happen, the timing of the events and the length of the personal life cycle are all changing because of:

• demographic changes – changes in the size and structure of a population through longer life expectancy, births, retirement age, deaths and migration;

• socioeconomic trends and changes – better education, gender equality, family changes, welfare state and economic events.

An interest rate is a measure for the price of money.

The provider pays the customer for money put into savings accounts.

The customer pays for money borrowed from the provider.

Quoted as an annual equivalent rate (AER).

A larger percentage means that the saver’s money is earning more of a return than a lower percentage.

Example

If you were to deposit £100 in a savings account for one year, at an AER of 2 per cent, you would have £102 in the account at the end of the year.

If the AER were to be 5 per cent, you would have £105 in the account at the end of the year

Inflation means that prices are rising. This means that money put into savings will be losing purchasing power; it will buy less in the future because prices are higher. Ideally, savers want to put their money into savings accounts with interest rates that have a higher percentage than the percentage of inflation.

Quoted as an annual percentage rate (APR).

Except for an overdraft, when it is quoted as an equivalent annual rate (EAR). These rates include some fees and charges, as well as the price for borrowing the money.

A larger percentage means that the credit is more expensive for the borrower than a lower percentage.

Example

If you were to borrow £100 for one year at an APR of 9 per cent, you would have to pay back £109 at the end of the year.

If the APR were to be 19 per cent, you would have to pay back £119 at the end of the year.

Providers must calculate the AER, APR and EAR interest rates using a standard formula. This means that savings rates (AER), borrowing rates (APR) and overdraft rates (EAR) can be compared across products on a like-for-like basis.

Adverts for borrowing products sometimes quote a headline interest rate that is lower than the APR. The headline interest rate does not include fees and charges, and so does not give a true idea of the cost of the borrowing.

Providers must provide a representative APR when advertising borrowing products. This means that it is the rate that 51 per cent of the people who apply for the loan will get. The other 49 per cent of applicants will pay a different, probably higher, interest rate.

Some interest rates are fixed for the term of the saving or borrowing. For example, fixed-rate bonds pay savers a set amount of interest. Personal loan interest rates are usually fixed. This means that the borrower knows the exact amount that they must repay from the beginning.

Other interest rates are variable, which means that they can increase or decrease. Most savings accounts have variable interest rates. Credit card and overdraft borrowing is often on a variable basis

Providers use the rate set by the Bank of England, known as Bank rate, as a base from which to work out how much their savings and borrowing interest rates will be.

Investing can offer higher returns on your money than saving. However, the risks are much greater. Investors may not get their original investment back or make any money. In general, the higher the potential return, the higher the risk.

People invest money for the medium to long term.

Investors can make money through capital growth – that is, the value of their investment grows, so they can sell it at a higher price than they paid for it.

They can also make money if the investment pays a regular amount of money that the investor uses as income.

Some investments offer both capital growth and income.

Individual shares in the ownership of a company. Shares are bought and sold through the stock market. The investor’s aim is to buy at a low price and sell at a high one. The difference in value is the return that the investor makes. If the share value decreases, investors may make a loss.

Shares can pay dividends – that is, a share of the profits – to shareholders. Dividends are usually paid twice a year. If a company does not make a profit, it will not pay any dividends.

Buying shares in an individual company is high risk.

These are a way of reducing the risk of investing.

A large number of investors put their money into a pool. This large sum of money is used to invest in a wide range of shares and other investments. This is known as ‘risk-spreading diversification’. Each investor owns part of the collective investment, such as a number of units in the unit trust.

Investors may be paid dividends, usually twice a year.

In the past, property, such as houses, has increased in value. The aim is to buy at a low price and sell at a higher price, making a profit. However, this can be a risky investment in the short term because property prices can fall, as they have recently.

These are a way in which companies, governments and other organisations raise money. The investor lends the organisation money for a fixed length of time and at a fixed interest rate. The interest is often paid twice a year throughout the life of the bond.

Investors who own bonds do not own a part in the company.

These are a type of bond issued by the government. These investments are very safe.

This is a range of government-backed investments that are very low risk. Potential returns are lower than for other types of investment.

Some NS&I products offer an income, such as income bonds.

This is a range of government-backed investments that are very low risk. Potential returns are lower than for other types of investment.

Some NS&I products offer an income, such as income bonds.

This is a range of government-backed investments that are very low risk. Potential returns are lower than for other types of investment.

Some NS&I products offer an income, such as income bonds.

Some specialist investments are very high risk, for example derivatives.

Current accounts are products that meet the needs to:

• keep money safely; and

• make and receive payments (known as ‘transaction needs’).

The Financial Services Compensation Scheme (FSCS) guarantees up to

£85,000 held in one person’s accounts with one provider.

Banks; building societies

Note that a particular account may have only some of the following features.

Paying money in or out:

• Cash card - To get cash from an ATM or over the counter in a branch

• Debit card - To get cash from an ATM or branch, and to make payments in shops in person, online and by mail or telephone order

• Chequebook - To instruct the provider to pay a specific amount of money from the account to a person or organisation

• Standing orders - Automated payment of the same amount of money from the account to a specific person or organisation on a regular basis, eg paying a club subscription once a month

• Direct debits - Permission for an organisation to take money from the account by automated payment on a regular basis. The amount can vary, eg paying a mobile phone bill.

• Online payments - To move money between your own accounts or to pay other people/organisations using the Internet

Via an ATM, in branch, on the telephone, via a mobile phone or the Internet

Basic – Customer cannot go into debt, so this account does not offer a debit card, an overdraft or a chequebook.

Standard – Offers all of the features listed above.

Packaged – Offers extra benefits, such as mobile phone and travel insurance for a fee.

Joint – An account that is held by two or more people.

Premier – An account type for wealthy customers.

On overdrafts, the interest charged, quoted as an EAR (equivalent annual rate). Authorised overdrafts (that is, those that were agreed with the provider before the money was borrowed) have lower interest charges than unauthorised overdrafts.

The provider may also charge fees for overdrafts such as a daily fee and fees for cheques that have to be returned. These fees are often higher for unauthorised overdrafts.

Some accounts pay interest on the money held in an account, quoted as an AER (annual equivalent rate). Some accounts pay a set amount of money to the customer every month rather than an interest rate.

'Credit’ is money paid into an account.

‘Debit’ is money paid out of an account.

‘Balance’ is the total amount of money held in an account at a particular time. A balance will be negative if it is overdrawn.

‘Withdrawal’ is taking money out of the account.

‘Making a deposit’ is putting money into the account.

thats everything