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  • Created by: Shehneel
  • Created on: 10-04-12 15:57

1.1 The Personal Life Cycle

Income – total money received from a person’s wages/salary, interest and dividends

Borrowing – getting money from a lender that must be repaid in the future

(e.g. a mortgage)

Savings – putting money aside for later use

Childhood (0-12) -> adolescence (teenagers) -> young adult -> middle adult (or middle age) -> late adult (or old age)

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1.1 Needs and Wants

Wants and needs – needs are essential to our lives but wants are things we could survive without

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1.1 Changes in Income

Like when a person leaves university and starts saving money to buy a house, so the person would stop spending money on parties and save up for a house

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1.1 Key Milestones in the Personal Life Cycle

Leaving school, college/university – when a person ceases to be in full-time education and looks for employment

Gaining employment – being offered and accepting a paid job

Promotion – a new higher-paid job role involving greater responsibility and skill

Debt – the amount still owing from funds borrowed

Unemployment – when an individual without a job is seeking paid employment or is able to work

Retirement – when we cease to do paid employment

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1.1 How the Government Affects Stages of the Perso

Benefits – regular payments from a government to support people in need

  • For those aged 16-19, the government pays an Education Maintenance Allowance of £10-£30 per week to encourage those from poorer families to get an education
  • Money can be provided for those under 20 who have children and want to continue their studies
  • For those going to university ‘student loans’ have a low interest compared to a bank loan
  • Tax credit – a state benefit paid to employees through the tax system, which acts like a negative tax… so they are better off working than claiming unemployment benefits. The tax credit reduces the amount of income tax you have to pay
  • Jobseekers Plus offices provided benefits and services to help people to find work (jobseeker’s allowance), start up their own businesses, help individuals manage in low-paid jobs or help work-related accidents or illness
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1.1 How the Government Affects Stages of the Perso

  • Pensions – a benefit paid as of right to those of retirement age who have paid the minimum National Insurance contributions
  • Taxes – a fee levied by a government on a product, income or activity
  • Tax allowances – sums deducted from total income before income tax is calculated
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1.2 Decision Making and Opportunity Costs

Scarcity and the basic economic problem

Scarcity – resources are limited compared with our needs and wants

Choice – deciding between different options because our resources are limited

Basic economic problem – resources are limited but needs and wants are infinite

Resources – the land, labor, capital and enterprise used to produce goods and services

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1.2 Decision Making and Opportunity Costs

Costs and benefits

Opportunity cost – something given up when we make choice

Benefits – the advantages of a particular choice

Costs – the expenses and drawbacks of a particular choice

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1.2 How Demand Changes Over the Personal Life Cycl

Demand – the quantity of a good or service that consumers are willing and able to purchase at a particular price

Depending on their savings, people may have to reduce their demand for non-essential goods and services

*when answering questions on the needs of pensioners, do not assume that everyone over 65 lives in an old persons’ care home

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1.3 Markets and how they Work

Factors affecting demand – things that cause suppliers to buy more or less of a product at a given price:

  • (Price)
  • Income level – the most important
  • Advertising and branding influence desire and loyalty for a product
  • Prices of substitutes (similar goods) and complements (for example fuel is a complement of cars)
  • Fashion

Supply – the quantity of a good or service that businesses will offer for sale at a particular price

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1.3 Markets and how they Work

Factors affecting supply – things that cause suppliers to offer more or less of a good or service at a particular price:

  • Cost of raw materials
  • Wage rates – overtime may need to be paid for higher output
  • Productivity of the workers

Markets and why market prices change

Markets – a market exists whenever buyers and sellers come together

Market price – the price that buyers and sellers agree on for a particular good or service

The market price is determined by the amount buyers are willing to pay and the price that the business needs to be paid to cover their costs. If a good does not sell, suppliers will have to lower their price. Eventually, the price will settle at a point where supply equals demand, known as the market price

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1.3 Markets and how they Work

Competition – the process of trying to beat others (e.g. trying to gain more consumers)

Businesses have to fight to win consumers from other businesses by:

  • Advertising and branding
  • Improving quality
  • Changing the design and features (e.g. frequent updates of mobile phones)
  • Lowering the price by improving production methods (e.g. by being more energy efficient)

Consumers can benefit greatly from competition through:

  • Lower prices (e.g. price wars – supermarkets compete to provide better value)
  • Greater variety (e.g. supermarkets stock value, branded and premium versions of the same good)

Better quality (e.g. McDonald’s improved the quality of its coffee by buying better quality beans)

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1.3 Markets and how they Work

There can also be disadvantages:

  • Quality can be lowered as businesses try to cut costs
  • After-sales service can suffer if too many resources are put into sales
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1.4 Why do People Save?

  • To buy something special, like a car, a wedding celebration or a house
  • To put money aside for an emergency such as replacing a fridge or a TV
  • To save for retirement
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1.4 Methods of Saving

  • Bank/building society savings account – an account for which the main objective is to gain interest and keep money safe
  • Internet only banks
  • National savings and investments
  • Post office card account – saving account offered by the Post Office – a simple account mainly for pensioners or those receiving benefits. It only allows you to withdraw cash using the card. You cannot get overdrawn, but you won’t get any changes
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1.4 Methods of Saving

There are also many different types of account within each of the main savings institutions:

  • ISA – Individual Savings Account on which interest is tax free
  • Fixed term investment accounts – savings cannot be withdrawn for an agreed length of time (term)
  • Share-based savings (e.g. unit trusts) – there are savings products that spread risk by investing in a range of shares
  • Government securities – bonds issued by the government through National Savings and Investments
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1.4 Methods of Saving


  • The government charges tax on interest from all other savings accounts
  • Interest rates – an annual rate which is charged to borrowers or paid to savers
  • Gross interest – interest rate before tax has been deducted
  • Net interest – the rate you receive after tax has been taken off
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1.4 Interest Rates

The longer you leave your money in the bank; generally, you will get a higher rate of interest (a higher return).

You will get higher interest rates if you save larger amounts of money or if you have to give notice.

Internet-only banks have a higher interest because of the low running costs.

Savings Accounts

By saving regular amounts every month or saving money on a fixed term, you usually get a higher interest rate

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1.4 The Annual Equivalent Rate (AER)

Annual Equivalent Rate (AER) – a figure quoted in savings advertisements to help people compare one savings product with another:

  • Given so that different savings accounts can be accurately compared
  • It shows what the interest rate would be if interest was paid and compounded once each year
  • It calculates compound interest, because of compounding, the total amount of interest you receive in one year would be higher if credited monthly than if calculated only once, at the end of the year
  • Removes any temporary promotional offers
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1.4 Risk and Reward

Reward – the return received for taking risks

Risk – the chance that something may not succeed and its consequence

Stock market – the place where stocks, shares and bonds are traded

Some of the riskier but potentially higher-return methods of saving are:

  • Shares – certificate representing a unit of ownership in a company

A broker is someone who buys or sells on behalf of another

Shares are a risk, if the company is likely to make a large profit, demand for its shares will rise, causing the share price to rise

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1.4 Risk and Reward

  • Unit trusts – a pooled investment fund usually in shares-based investments
  • They do this to benefit from greater security as the fund is managed by an experienced fund manager. It is, however, important to choose a fund with a good track record

  • Government securities (gilts) – stocks, bonds and bills of exchange issued by a government to raise the funds
  • There are bonds (IOUs), known as bills of exchange, issued by the government, they paid a fixed rate of interest twice a year

    Gilts are considered very safe investments as the government is unlikely to go bankrupt or to fail to pay back the interest payments. Gilts are bought and sold on the stock market by brokers or high-street banks. Although fairly safe, their price can go down as well as up, just like shares.

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1.5 Why Borrow?

Borrowing/debt/credit – getting money from a lender that must be repaid in the future (e.g. a mortgage)

Loan – amount of money borrowed

Term of a loan – the length of time over which the loan can be repaid

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1.5 Methods of Borrowing

  • Mortgage
  • Credit card
  • Store card – cards that may be used to buy products and services on credit from the shop that issued the card, up to a pre-arranged limit. Repayment terms are similar to credit cards – cards that may be used repeatedly to buy products and services on credit or to borrow pre-arranged limit. Each month, you must pay the minimum repayment required (usually around 3-5%) of the outstanding balance. You can pay more if you want, and this will reduce the interest you pay. Credit card interest rates are high – a loan to finance the purchase of real estate. A mortgage is secured on the house, which remains the property of a bank until it is fully paid off
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1.5 Methods of Borrowing

  • Personal loan – a loan given for personal or household use (e.g. to buy expensive household items like new furniture)
  • Hire purchase – installment plan whereby the loan company owns the item, but it becomes yours when the agreement (debt) is fully paid off
  • Overdraft – borrowing up to an agreed limit on a current account. Overdrafts must be paid back on demand
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1.5 Interest Rates and APR

The interest rate is the cost of taking out a loan. The higher the rate of interest, the more you have to repay in total

Annual Percentage Rate (APR) – the interest rate published on loans to help compare their true costs. This is the interest rate quoted on loan and credit card advertisements; it helps compare the costs of different loans

APR takes into account the basic interest rate and how it is charged (e.g. daily or annually), plus any additional costs (e.g. arrangement fees)

Mortgages charge lower interest because the bank can sell the house and get its money back if someone defaults on the repayments, and the loan is usually over a much longer term

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1.5 Interest Rates and APR

Credit cards have a higher interest rate because no security has to be provided by the card holder

A loan is usually repaid in monthly instalments – equal amounts every month for the period of the loan. At the beginning of the loan period there is a lot of money owed (the capital), so the interest payments are high. Each loan instalment is made up of two parts, an interest payment and a repayment of the amount borrowed (the capital). As you make more repayments you pay off more of the capital, so the interest component of each instalment reduces the amount of capital paid off increases

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1.6 The Need for Financial Planning and Budgeting

Financial planning and budgeting

Financial planning – a process for ensuring that financial goals are met

Budget – a financial plan of future income and spending

Financial advisor – a professional offering financial advice

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1.6 The Need for Financial Planning and Budgeting

What happens if you do not make effective financial plans?

Debt management – taking the help of an expert to solve a debt problem

Debt management plan – a structured repayment plan

A debt management plan will determine what an individual can afford to pay off each month. Very often the expert or debt counsellor can negotiate with some of the creditors (the people to whom money is owed e.g. banks) to reduce the amount of interest paid over the period of the plan

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1.6 Ethical Issues to do With Saving

Social, moral or ethical dilemma – a problem with no absolute right or wrong solution

Ethical lending policy – a statement that loans will only be made to business that act in a socially responsible manner

Ethics – the ‘rights’ and ‘wrongs’ of an issue

An example of a company with ethical standards is those that pay their workers a fair wage or do not employ child labour, especially that from poorer countries, or have high environmental standards. Some businesses, such as armament producers, might be considered unethical and you may not wish to buy their shares

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1.6 Ethical Issues to Do With Borrowing

Those with good credit histories and secure incomes can get loans from reputable banks, which operate within the law. However, people refused credit from banks are often tempted to approach lenders operating illegally (‘loan sharks’) who make unsecured loans at very high interest rates, bat charge astronomical interest, sometimes between 100 and 1000 per cent per year, using threats of violence if people fail to repay on time

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