A1 Functions and role of money
The ability to handle money received, and to control money paid, is a fundamental requirement for personal and business success. This success relies on understanding what ‘money’ is.
• Functions of money:
o unit of account
o means of exchange
o store of value
o legal tender.
• Role of money is affected and influenced by a number of factors:
o personal attitudes towards risk and reward, borrowing, spending and saving
o life stages (childhood, adolescence, young adult, middle age, old age), key features of each stage, financial needs and implications at each stage
o culture, including religious and ethical beliefs
o life events can vary the personal life cycle from individual to individual o external influences/trends and the financial-related effects
o interest rates, cost of borrowing versus reward of saving.
• Planning expenditure, common principles to be considered in planning personal finances:
o to avoid getting into debt
o to control costs
o avoid legal action and/or repossession
o remain solvent
o maintain a good credit rating
o avoid bankruptcy
o to manage money to fund purchases
o generate income and savings
o set financial targets and goals
o provide insurance against loss or illness
o counter the effects of inflation.
Kagan Pair Discussion
What is money?
What do we do with money?
Why do we still use money today?
What are our opinions on a cashless society?
How many of us have physical money in our pockets today?
Money has a range of different functions. It is used as a...
Unit of account- It is used to place a value on goods and services.
Means of exchange- It allows us to trade, we can exchange money for goods or services.
Store of value- It allows us to use it in the future as it keeps its value.
Legal Tender- It is a legally recognised form of payment and can be used for a wide range of transactions.
Different people and cultures will have different attitudes to money. This attitude may change over time or due to circumstances. The following factors affect the role of money...
Personal Attitudes-Different people will vary in their attitude to risk and reward as well as saving and borrowing.
Life stages- As you grow up your financial needs change.
Chidren have limited needs, are reliant upon their parents and may spend money on toys or sweets.
Adolescence- Want to be more independent from family may spend money socialising with friends.
Young Adult-Many young adults will be starting their career and trying to be more independent. They may need to buy a car or rent/but a house or flat.
Middle Age-In this stage adults start thinking about saying money for their children's futures or to improve their lifestyle.
Old Age-The elderly tend to have fewer dependents and fewer financial needs although health care can be costly for those who need it.
Culture
Different cultures affected by tradition, religiona nd 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 buy on credit.
Life Events
Events throughout your life will impact on your attitude to money. These events may be within your control, for example going to university, traveling abroad, getting married or starting a family or outside of your control for example, illness financial gains or loses.
External Influences
Factors outside of your control, including the state of the economy, will have an impact. For example, the state of the economy will impact on wages, jobs and the price of goods and services. Government decisions will also affect the amount of tax you pay or the amount you receive in benefits. These affect your ability to spend and save.
Interest Rates
These are the proportion of an amount that is charged as interest to the borrower. 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.
Kagan Mix, Pair, Share
Make a list of 10 things you might spend money on in a standard month.
Make a list of 10 things your parents/guardians might spend money on in a standard month.
How does age affect our attitudes towards spending?
What other factors fight affect our attitude towards spending?
When planning expenditure (money we pay out) it is important to consider a number of common principles. These are important to ensure that you avoid over spending which will put you at risk of financial difficulties now and in the future. You should look to control costs in order to avoid getting into debt in the future. If your spending is too high, this may mean more money is going out than is coming in which will lead to the build-up of debt. Debt is expensive as interest will be charged on money owed. If debts are not paid or not paid on time, this will affect your credit rating. A poor credit rating will affect your ability to borrow in the future. In extreme cases, an individual may be declared bankrupt if their debts have spiralled out of control.
To remain solvent, you should set financial targets and goals. These should consider how much money you want to earn and place limits on the amount you want to spend. If you save some of your income, this can help generate future income as you earn interest on savings. Savings also help to provide a safety net for the future, for example to provide insurance against loss or injury. What would happen if you could not work in the future? Sometimes you will also want to save to fund future purchases, for example to but a car or pay a deposit on a house.
Inflation is general rises in prices. This leads to the value of money falling, that is, £10 today is worth less than £10 ten years ago. Expenditure can help counter the effect of inflation. Many people invest money in property or other areas which typically grow in value over time.
When planning personal finance it is important to consider the following principles:
Avoid debt (money owed)
Control costs
Avoid legal action or repossession
Remain solvent (the ability to meet day-to-day expenditure and repay debts)
Maintain a good credit rating (a score given to individuals on how likely they are to repay debts based on previous actions)
Avoid bankruptcy (When an individual or organisation legally states its inability to repay debts)
Manage money to fund purchases
Generate income and savings
Set financial targets and goals
Provide insurance against loss or illness
Counter the effects of inflation (Spend less, invest savings)
Kagan Jot Thoughts / Rally Coach:
What is a credit rating?
How might a good/bad credit rating affect an individual?
What causes a credit rating to go down?
What causes a credit rating to go up?
This is a numerical value used to determine how good a person is at mangaing their personal finances and therefore how likely they are to be able to repay credit offered. It is an important part of the application process when getting loans or mortgages. The following things can help you to have a good Credit Rating score.
Register on the electoral role
Keep track of credit score
Pay bills/loans/credit cards on time
Check links to other people
Check for fraudulent activity
Avoid court judgements
Avoid high levels of debt or applying for credit too often
Do not move home regularly
Get a credit builder card
Have records of transactions
Kagan Quiz Quiz Trade:
Think of 4 possible questions for this topic, write them in your book along with the answer.
Now quiz your partner and take their quiz.