Unit 3 - Sustainability of an individual\'s finance
Institution
AQA
This document covers the whole LIBF (DipFS) Unit 3: Sustainability of an individuals finances text book. All information is condensed and has been produced by a A* student.
Unit 3 - Sustainability of an individual's finance
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Finance Unit 3 - Topic 1 - Personal Financial Sustainability
1.1 The importance of sustainable personal finances:
Achieving sustainable personal finances over a long term requires you to:
- Be aware of how much you spend and what you spend it on
- Use weekly or monthly budgets and cash flow forecasts to plan your spendings
- Know your finances in future events and aspirations
- Have a savings plan to build up capital sums that the would need in the future
- Plan any borrowing that is made and only borrow amounts that you can pay back
- Have an adequate emergency fund for any unforeseen events
- Pay into a pension scheme to ensure you have an adequate income through retirement
- Look for ways to increase your income (Promotion, Overtime work, Second job)
- Make use of appropriate insurance products to protect you through life
- Monitor, Review and change your financial plans to make them suitable to you
- Have clear, Realistic Contingency plans to deal with unexpected events
- Be aware of spending
- Budgets and cash flow forecasting
- Implications of future events
- Saving plan
- Emergency fund
- Pension schemes
- Increase incomes
- Insurance products
- Monitor plans and amend them
- Contingency plan
Contingency Plan: A plan to deal with unexpected changes in income or expenditure.
1.2 Individual budgeting and financial planning:
- Budget can be how much someone has to spend on an event
- Financial planning refers to short, medium and long term detailing expected income and expenditure
- Government annual budget is the predicted income from taxation and what it will spend it on
- Companies have annual budgets If more then surplus and less it is a deficit
1.3 Flexible financial planning:
- Financial planning means planning future expenditure and deciding how this will be financed Anticipation of future
expenditure will depend on anticipated future income, savings and borrowing attitude, and other financial products like
insurance
- Monthly current account statements show direct debits and standing orders
- Plan bills that do not occur every month like road tax.
- Plan for extra costs like home maintenance and car bills
- Long term financial plans - need to think of costs to raise a child or pay for luxury family holiday
- Unexpected events
1.4 The characteristics of a flexible financial plan
A flexible financial plan should include these following features:
- Balanced between different time periods
- Informed
- Able to adapt to changing products and services
- Fluid
- Realistic
1.5 Setting priorities
- For those on limited incomes, who may struggle even to be able to afford to buy all of the things that they really need, the
task could be to decide which items are most necessary.
, - Those with a higher income may be able to cover all of their essential and mandatory expenditure, and also have money left
over to pay for some discretionary items that they want to buy - although most people still have to prioritise their
purchases.
- Cash-flow forecasts are short-term and relatively straightforward.
- For more complicated medium-term and long-term plans there are software programs that help to construct your plan.
1.6 The obstacles to sustainable personal finances
Number of obstacles that can prevent an individual from achieving sustainable personal finances. The most common include failing
to:
- Make short-term, medium-term and long-term financial plans that are flexible
- Compare actual weekly or monthly income and expenditure with the amounts predicted in forecasts
- Amend plans when circumstances change or when monitoring reveals a significant difference between predicted and actual
outcomes
- Take appropriate steps to avoid predicted and actual outcomes
- Make adequate contingency plans to deal with unexpected changes in income or expenditure
1.7 Contingency planning
- Attempting to plan for unexpected events is known as contingency planning - usually involves planning for undesirable or
unfortunate events
Favourable events
- Getting a job
- Being given a salary increase or promotion
- Winning money on the lottery
- An increase in the value of an asset
- Paying off personal loan
Unfavourable events
- Losing a job or receiving a pay cut
- An increase in the rate of income tax
- Becoming ill and having to stop work for a period of time
- Major car repair costs
1.8 Financial products and services
- Current accounts: allow for safe storage of money and can be used in a wide range of ways to make payments to and to
receive.
- Basic bank accounts: for people who can't open current accounts. They have fewer facilities than current accounts, but
allow account holders to deposit and withdraw cash.
- Savings accounts: customers are effectively lending money to that financial institution, which the institution can then use to
fund loans, overdrafts etc. In return they will pay interest on your savings.
- Borrowing products: different borrowing products meet different needs. For people who have not been able to save up an
emergency fund, credit cards (and overdrafts) provide an alternative way of paying unexpected bills. For a large one-time
purchase such as buying a house they will need to get a mortgage loan. Normally mortgage loans have lower interest rates
than other forms of borrowing.
- Insurance: without adequate insurance events such as car crash, serious illness, redundancy could all have a damaging
impact on an individual's finances
- General insurance: usually short term (12 months or less) protects your home, car, income and health, holidays.
- Life insurance: pays out a sum of money when someone dies, to protect the dependents from the financial
consequences of their death.
- Income protection insurance: provides a monthly income to replace salary or wages if you are unable to work as a
result of illness or disability.
- Accident, sickness and unemployment insurance: pays out income for a limited time, typically 12 to 24 months if
you are unable to work due to an accident or sickness or if you lost your job through no fault of your own.
- Critical illness cover: a lump sum is paid out to protect you from the financial consequences of suffering an illness
such as cancer, stroke, heart attack or multiple sclerosis
- Pensions: long term of investment that has tax benefits for investors. People save in pension schemes throughout their lives
so they will have income when they retire. There are several types of pension:
- State pension
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