Award in Personal Finance - The London Institute of ...



Award in Personal FinanceWe want to do what we can to support teachers and their students who may have to spend long periods at home during the COVID 19 outbreak. We've pulled together some useful activities your students can do at home. While the materials are taken from a previous qualification, they are all relevant to modern-day personal finance. There are several activities and questions for your students to work through. The answers to questions are at the end, so they can check their knowledge themselves. We hope that these topics may be useful and support your work with your students during these challenging circumstances. Catherine WinterManaging Director of Financial CapabilityTopic 4: Exchanging items for moneyAfter completing this topic, you will be able to:list and explain ways of exchanging items for money, including auctions, eBay, car boot sales, pawnbrokers and cash converters;appreciate that gold can be recycled for cash; andappreciate that mobile phones can be recycled for cash.Sources of moneyOne source of money is to sell something that you own, but no longer want.475615-7239000Suppose that you want to sell something you own. How would you tell people about what you have to sell?33147014986000Activity 4aOmar has grown too big for his bicycle. He and his parents decide to sell it and put the money towards buying a new one. They place the following advertisement in the local newspaper’s ‘For Sale’ column.FOR SALEBoy’s bike. Nearly new Good size for 11–12-year-oldCall 07700 900789FOR SALEBoy’s bike. Nearly new Good size for 11–12-year-oldCall 07700 900789Think about the people who may be interested in buying a bike. What other information are they likely to want to know before they can make a decision about buying Omar’s bike?Where you can sell thingsThere are different places that you can sell those things that you no longer want – starting with your circle of family and friends, and spreading out into wider circles of people, as illustrated below.Family andfriendsLocalpeoplePeople in theUKPeople acrossthe worldFamily andfriendsLocalpeoplePeople in theUKPeople acrossthe worldYou can sell things in different ways, as follows.To local peopleYou can sell to local people by:advertising in local newspapers or using online local ads via gumtree.co.uk or freeads.co.uk;putting an advert on a notice board in a local post office, shop, library or school (if this is allowed);offering the things to a shop that buys second- hand goods; orsetting up a stall at a car boot sale.To people in the UKYou can sell to a larger number of people in the UK by:advertising in national newspapers or magazines; orputtingyouritemintoanauctionthatis advertised on a website and through catalogues.To people across theworldYou can even sell to people across the world byadvertising on eBay.To people across theworldYou can even sell to people across the world byadvertising on eBay.462280-6985000What do you think might be the advantages of advertising where more people will see your advert? What might be the advantages of selling your item locally?Auctions384937011684000An auction is a way of selling items to whomever offers the most money for them, instead of selling them for a fixed price, as you would if you were to sell them in a shop.Most auctions are arranged by ‘auction houses’ – that is, businesses that can tell you how much goods are worth and then sell them at auction for you. You might have heard the names of the auction houses Sotheby’s, Christie’s and Bonhams when the media report on something famous or very expensive being sold.The person who is in charge of selling at the auction is called an auctioneer.In April 2014, the last surviving letterever to be written on the Titanic was sold at auction.EstherHartandherseven-year-olddaughterEvacomposed the letter only eight hours before the ship hit an iceberg and sank on its 1912 voyage.At auction the letter was sold for ?119,000.In April 2014, the last surviving letterever to be written on the Titanic was sold at auction.EstherHartandherseven-year-olddaughterEvacomposed the letter only eight hours before the ship hit an iceberg and sank on its 1912 voyage.At auction the letter was sold for ?119,000.414765179705Selling at auction involves the following steps.Get a ‘valuation’ – that is, find out how much items are worthSuzi visits her local auction house to get a ‘valuation’ of the silver jug. A valuation involves an expert in selling that type of item telling the owner how much they think it could make at auction.0Selling at auction involves the following steps.Get a ‘valuation’ – that is, find out how much items are worthSuzi visits her local auction house to get a ‘valuation’ of the silver jug. A valuation involves an expert in selling that type of item telling the owner how much they think it could make at auction.4879340646000417668881862Decide a ‘reserve price’Suzi can set a minimum price for selling the silver. This is called the ‘reserve price’. If no one offers as much as this reserve price, the auctioneer will not sell the jug. Because the valuation for the silver is ?250–?300, Suzi sets a reserve price of ?250.Put the item into a saleThe expert advises Suzi to put her jug into a specialist silver sale. This means that people who want to buy silver will be at the sale and that Suzi will be more likely to sell her jug for a good price. The information about her jug will be put into a ‘sales catalogue’.People view the itemThe silver sale starts at 2 pm. In the morning, Suzi’s jug and all of the other items for sale in that auction are put on display in the saleroom. This means that people who are interested in buying something can examine it in detail. This helps potential buyers to decide how much they are willing to pay for the item. People who cannot get to the saleroom can make a decision about buying an item based on its description online or in the auction catalogue.People may give bids to the auctioneer before the saleSometimes, people want to buy an item, but cannot be at the auction in person or on the telephone. In this case, they may tell the auctioneer how much they are willing to pay for it.6. People bid for the item at the saleAt the sale, the auctioneer tells people which item they are selling by giving the ‘lot number’. A porter holds the item up or points to it, so that everyone is clear what is being sold.The auctioneer then asks for bids. People who want to buy get the auctioneer’s attention by raising their hand or their buyer number. People who cannot be in the saleroom can arrange to bid by telephone.00Decide a ‘reserve price’Suzi can set a minimum price for selling the silver. This is called the ‘reserve price’. If no one offers as much as this reserve price, the auctioneer will not sell the jug. Because the valuation for the silver is ?250–?300, Suzi sets a reserve price of ?250.Put the item into a saleThe expert advises Suzi to put her jug into a specialist silver sale. This means that people who want to buy silver will be at the sale and that Suzi will be more likely to sell her jug for a good price. The information about her jug will be put into a ‘sales catalogue’.People view the itemThe silver sale starts at 2 pm. In the morning, Suzi’s jug and all of the other items for sale in that auction are put on display in the saleroom. This means that people who are interested in buying something can examine it in detail. This helps potential buyers to decide how much they are willing to pay for the item. People who cannot get to the saleroom can make a decision about buying an item based on its description online or in the auction catalogue.People may give bids to the auctioneer before the saleSometimes, people want to buy an item, but cannot be at the auction in person or on the telephone. In this case, they may tell the auctioneer how much they are willing to pay for it.6. People bid for the item at the saleAt the sale, the auctioneer tells people which item they are selling by giving the ‘lot number’. A porter holds the item up or points to it, so that everyone is clear what is being sold.The auctioneer then asks for bids. People who want to buy get the auctioneer’s attention by raising their hand or their buyer number. People who cannot be in the saleroom can arrange to bid by telephone.449847140847The auctioneer asks for more money each time there is a new bid. If two or more people want an item, they can keep increasing the amount of money that they bid – trying to bid more than others and so get the item for themselves. This can be very exciting. Buyers have to be careful or they can get carried away and end up paying more for something than they planned!In Suzi’s case, two bidders want the silver jug. They bid against each other until the price reaches ?310, at which point one bidder decides not to take the price any higher.00The auctioneer asks for more money each time there is a new bid. If two or more people want an item, they can keep increasing the amount of money that they bid – trying to bid more than others and so get the item for themselves. This can be very exciting. Buyers have to be careful or they can get carried away and end up paying more for something than they planned!In Suzi’s case, two bidders want the silver jug. They bid against each other until the price reaches ?310, at which point one bidder decides not to take the price any higher.44437781403350044984727490In Suzi’s case, two bidders want the silver jug. They bid against each other until the price reaches ?310, at which point one bidder decides not to take the price any higher.If the item is sold, the seller will get the money and pay chargesSuzi’s jug sells for ?310. The auction house sends her a cheque for this amount, minus its charges for selling the silver.If the item is not sold, the seller will decide what to do nextIf no one had wanted to pay Suzi’s reserve price of ?250, the auctioneer would not have sold the jug. Items that are not sold can either be put into another auction or the owner can decide to keep them.00In Suzi’s case, two bidders want the silver jug. They bid against each other until the price reaches ?310, at which point one bidder decides not to take the price any higher.If the item is sold, the seller will get the money and pay chargesSuzi’s jug sells for ?310. The auction house sends her a cheque for this amount, minus its charges for selling the silver.If the item is not sold, the seller will decide what to do nextIf no one had wanted to pay Suzi’s reserve price of ?250, the auctioneer would not have sold the jug. Items that are not sold can either be put into another auction or the owner can decide to keep them.434340-15176500Do people who sell at auction know how much money they are going to get?eBayeBay is an internet marketplace. The UK site is ebay.co.uk. People sell things on eBay in two different ways: they either auction items or sell them for a fixed price (known as ‘Buy It Now’). Sellers must make it clear whether they want people to bid on their items or want to sell for a fixed price in their online advert.46101059753500Selling something on eBay means that people from around the world can look at the item. They can then decide whether or not to bid for it online or to buy it straight away if the item is on sale as a ‘Buy It Now’.How do you think people decide how much their item is worth when they want to sell on eBay?The steps involved in auctioning an item on eBay are very similar to those for selling at a local auction house.8026782027493Barek needs to include a clear description of the drums, where he lives, how he wants to be paid and how much postage he wants to charge.He decides to include a photo of the drums. Also, instead of shipping the drums to the buyer, he wants the buyer to collect the drums from his home.Decide starting and reserve pricesBarek must set a starting price. This should be an amount that will attract bidders, so he decides on ?10.He decides not to set a reserve price, because he is confident that his drums will sell and because eBay charges an extra fee for items with a reserve price.Decide how long the eBay auction will lastBarek must also decide how long his listing will be on eBay – that is, the length of time that people will have in which to make bids. When the listing period comes to an end, Barek will sell his drums to the highest bidder.eBay listings can last one, three, five, seven, or ten days. ‘Buy it Now’ listings can be for longer because they are not being auctioned; rather, they are being sold for a predetermined price. Barek decides to list the drums for seven days.Decide on the style of the listingeBay offers different styles of listing for different costs – for example, you can choose to use photos, bold text and background colour.00Barek needs to include a clear description of the drums, where he lives, how he wants to be paid and how much postage he wants to charge.He decides to include a photo of the drums. Also, instead of shipping the drums to the buyer, he wants the buyer to collect the drums from his home.Decide starting and reserve pricesBarek must set a starting price. This should be an amount that will attract bidders, so he decides on ?10.He decides not to set a reserve price, because he is confident that his drums will sell and because eBay charges an extra fee for items with a reserve price.Decide how long the eBay auction will lastBarek must also decide how long his listing will be on eBay – that is, the length of time that people will have in which to make bids. When the listing period comes to an end, Barek will sell his drums to the highest bidder.eBay listings can last one, three, five, seven, or ten days. ‘Buy it Now’ listings can be for longer because they are not being auctioned; rather, they are being sold for a predetermined price. Barek decides to list the drums for seven days.Decide on the style of the listingeBay offers different styles of listing for different costs – for example, you can choose to use photos, bold text and background colour.802678164317Case studyBarek wants to auction his drum kit using eBay, which will involve the following steps.List the item on eBayBarek uses eBay’s online form, headed ‘Sell Your Item’, to put information about his drum kit onto the website.00Case studyBarek wants to auction his drum kit using eBay, which will involve the following steps.List the item on eBayBarek uses eBay’s online form, headed ‘Sell Your Item’, to put information about his drum kit onto the website.477357416431600935990-2794000People view the item online and make bidsPeople who are interested in buying drum kits visit eBay and see what is available. They then bid on the items that they want.After seven days, Barek’s highest bid is for ?145. The buyer has the online name ‘musicman’.If the item is sold, the seller will get the money and pay the eBay chargesBarek contacts musicman by email to let him know how to pay the ?145.Barek decided to use eBay’s ‘PayPal’ system for payments when he first created his listing, because it is very secure. PayPal works like a bank account. Both the buyer and the seller need to have PayPal accounts. Musicman pays by transferring money from his account to Barek’s account. When Barek receives an email from PayPal saying that the money has been paid, he contacts musicman (whose real name is Joe) to arrange for him to collect the drum kit.Barek also pays charges to eBay for using the site and the PayPal system.If the item is not sold, the seller will decide what to do nextIf no one had bid on Barek’s drum kit, he could have tried to sell it again or he might have decided to keep it.If he had decided to auction the drums again, he may have wanted to check his listing details. Perhaps his drum kit would have attracted more buyers if he had worded the description in a better way, had written a better title for the advert or had taken a better photo.The seller and the buyer give each other feedback44894575882500An important part of the eBay service is that sellers and buyers leave information about the sale on the site. This is called ‘feedback’. This feedback means that other eBay users can check if the buyer or seller is trustworthy.How old do you think you would need to be to buy or sell on eBay?A mobile phone sells every minute and a car sells every four minutes on ebay.co.ukA mobile phone sells every minute and a car sells every four minutes on ebay.co.ukCar boot salesCar boot sales can be small affairs, such as a one-off school fundraiser or massive, carefully managed, regular events. They can be a way of selling off unwanted items.The benefit of a car boot sale is that buyers can take a closer look at the goods – something that they cannot do when buying on eBay, for example.33464514922500Activity 4bUsing your own experience and perhaps some of the following websites, compile a presentation of the best way in which to prepare your stall for a car boot sale. You should imagine that you are presenting to someone who has never been to a sale before.You might undertake an internet search on the phrase ‘car boot sale advice’. This is likely to give you some useful links to sites such as ebay.co.uk and megacarbootsale.co.uk/car_boot_sales_top_tips.htmFollowing your presentation, make a list of the advantages and disadvantages of a car boot sale.10864852794000Garage salesA garage sale is different from a car boot sale in that the sale is held at your own home. Sometimes called a ‘yard sale’ or ‘rummage sale’, this is an event at which you sell household items that you no longer want from your garage, garden or home. Because there are no fees to pay, you get to keep all of the money that you make.PawnbrokersThe pawnbroker's symbol is three ballssuspended from a bar. The three golden balls were originally the symbol that medieval Lombard merchants hung in front of their houses. Lombard merchants were bankers that originated from the prosperous northern Italian region of Lombardy (hence the name).Source: The pawnbroker's symbol is three ballssuspended from a bar. The three golden balls were originally the symbol that medieval Lombard merchants hung in front of their houses. Lombard merchants were bankers that originated from the prosperous northern Italian region of Lombardy (hence the name).Source: Instead of selling something, people can raise money by borrowing against it. Pawnbrokers are businesses that will lend money against a valuable item.The process involves the borrower signing a loan agreement with the pawnbroker, who gives the borrower a receipt for the valuable item. When the borrower pays back the loan and presents the pawn receipt, the pawnbroker will give back the ‘pawned’ item.The borrower and pawnbroker will agree a period of time for which the pawnbroker will hold the item, at the end of which period the borrower must pay back the loan amount with interest. People usually borrow money for up to six months from a pawnbroker.If the borrower is not able to repay the loan and interest when the money is due, the pawnbroker can sell the item to get the money owed.887854150605Case StudyViv borrows money against her diamond ring. The pawnbroker gives her cash and keeps the ring. When Viv pays back the loan and interest, she hands the pawn ticket back to the pawnbroker, who gives her back the ring.0Case StudyViv borrows money against her diamond ring. The pawnbroker gives her cash and keeps the ring. When Viv pays back the loan and interest, she hands the pawn ticket back to the pawnbroker, who gives her back the ring.Although ‘pawnbroker’ is the correct name for these businesses, many people consider it an old-fashioned word. Shops tend to use more modern descriptions, such as ‘cash converter’, or simply display signs that say ‘cash paid for…’. How old do you think you have to be to sell something to a pawnbroker?Pawnbrokers have been making loans for thousands of years. There is evidence that pawnbrokers worked in China around 3,000 years ago.Pawnbrokers must follow the law, just like banks and other organisations that make loans. They must quote an annual percentage rate (APR) and the total amount that the borrowing will cost.Source: Pawnbrokers have been making loans for thousands of years. There is evidence that pawnbrokers worked in China around 3,000 years ago.Pawnbrokers must follow the law, just like banks and other organisations that make loans. They must quote an annual percentage rate (APR) and the total amount that the borrowing will cost.Source: Cash converters415163023749000Cash converters will buy an item from you for cash. It can be a quick way to get urgently needed cash – but you will be unlikely to get the best price for the item compared, for example, with the price that you would have got had you sold the item on eBay.You can also use cash converters like a pawnbroker and try to repay the loan at a later date. In this case, the cash converter will have to tell you its APR and cost of borrowing.485838523114000Recycling gold for cashIf you have some unwanted gold jewellery, you might be able to sell this for cash. Although the price of gold fluctuates, it is a valuable metal that will always sell. There are many businesses that will buy your old jewellery and give you cash for it. You may have seen some of the adverts on television.Gold is quite soft and so it is often mixed with other metals to make it stronger. The amount that you will get for your gold will depend upon its weight and how pure it is. The purer the gold and the heavier the item of jewellery, the more money you will get for it.Remember, however, that if you were to send the company a really pretty, delicate piece of jewellery, such as a brooch or an engraved pendant, it would make no difference to the amount of money that you would receive. The company plans to melt it anyway and is interested only in the quantity of pure gold that it can extract from your unwanted item.1203325584200Consumer magazine Which? Money picked out three items of gold jewellery on the high street ??a?115 bracelet, a ?215 bangle and a ?399 necklace ??and purchased four of each. In November 2009, it sent them to four of the gold buyers advertised on TV, as well as asked for quotes from three high-street pawnbrokers and three jewellers, from which it drew an average.The results were as follows.00Consumer magazine Which? Money picked out three items of gold jewellery on the high street ??a?115 bracelet, a ?215 bangle and a ?399 necklace ??and purchased four of each. In November 2009, it sent them to four of the gold buyers advertised on TV, as well as asked for quotes from three high-street pawnbrokers and three jewellers, from which it drew an average.The results were as follows.If the piece that you are considering selling is attractive, you might consider visiting a high-street jeweller that deals in second-hand jewellery and selling it there instead.Bracelet (9ct)Bangle (9ct)Necklace (9ct)Purchase price?115.00?215.00?399.00FirmPrice offeredCashMyGold?6.43?9.64?22.50Postal Gold?7.97?10.89?25.041697990241236500Money4Gold?8.17?11.26*Cash4Gold?10.31?14.57?31.48Pawnbroker?26.00?32.00?80.00Jeweller?33.00?46.00?102.00* The firm wrongly claimed that the item was not gold and demanded a ?9.95 postal order (involving an additional ?1 Royal Mail charge) to return it.1611630-1501775Source: Which? Money, cited in the Daily Mail, January 201000Source: Which? Money, cited in the Daily Mail, January 20103397254000500Activity 4cBased on the table above, which do you think would have been the best place to sell the unwanted jewellery? Why might you choose a pawnbroker rather than a jeweller?549719539751000Recycling mobile phonesBecause we all get new handsets, has estimated that there are as many as 80 million unwanted mobile phones in the UK. Some of these have a high value because they can be recycled. One method of recycling is to contact a phone recycling company, get a price and then send the phone in the bag that it will provide. You may have seen the TV adverts for some of these companies.So what happens to the phone once the recycler receives it?First, it is checked to see if it still works. Even if there is something wrong with it, there is a good chance that it can be repaired. It will then either be sold to those people who cannot afford the latest models or donated to charity. Those phones that cannot be repaired will be broken up because they contain small amounts of gold, silver, platinum and copper.32639016573500Activity 4dChoose three different models of mobile phone. Visit some different phone recycling websites and see what prices they will offer. Draw up a table of your results.Costs and chargesSelling items, or exchanging them for money, is a good way of raising cash, but you have to be aware of various costs and charges involved in such activities. If you advertise something for sale in the paper, you will be charged by the newspaper for the advert. Even if you put an advert in a local newsagent’s window, the newsagent may charge you a small fee.If you decide to sell a few items in a car boot sale, there is usually an entrance fee, payable to the people who arrange the event or to the people on whose property it is being held.Auctions, including auction websites such as eBay, charge a commission for their services. This is usually a percentage of the sale price of the item being sold.Cash converters, which buy items from people who want to raise money in a hurry, will not make a charge as such, but they will give you less for the item than it is worth – this is how they make their money.Selling unwanted gold is a popular way of raising cash – again, the buyer of the gold will not necessarily give you the full value of your gold, although whether you get a good deal or not will depend on how the price of gold fluctuates. The buyer of the gold will hold on to it until the price of gold goes up and then will sell it. Review questionsWhat does an auction house do?Why would you set a reserve price on something that you are selling at auction?Do auction houses make charges for selling items in a sale?What selling services does eBay offer?What is a ‘listing’ on eBay?For what do people use PayPal?Why do you think you have to be aged 18 or over to sell something at auction, on eBay or to a pawnbroker?When does a borrower get their item back from a pawnbroker?Cassie wants to sell her mobile phone because her parents have bought her a new one for her 18th birthday. She is considering different selling options such as:placing an advert in her local newspaper;putting the mobile into an auction for general household items;listing it on eBay; orsending it to a mobile phone recycling company.Advise Cassie which selling option you think is the best for her and why.Learning activities3333756540500InternetVisit and search for a local auction house with a website. Visit the website and find out what advice the auction house gives to people selling items. Then look at information about sales that the auction house has held in the past and the sales that it is planning on holding in the future. What different sorts of things does the auction house sell?Visit ebay.co.uk/help/ and, under ‘Selling & seller fees’, click on and read ‘Selling basics’; then, under ‘Bidding & buying’, read ‘Buying basics’.Visit ebay.co.uk and look for an electric guitar or another item that interests you. What do you think makes one advert more appealing than another?4305304572000GroupDivide the group into teams and stage an auction. Each team needs to:cut a picture from a magazine or draw a picture of an item that the team wants to sell;set a reserve price for their item; andselect someone to be the team’s auctioneer.Each person is told an (imaginary) amount of money that they can spend at the auction, such as ?200, and is given a buyer number.Before the auction starts, each auctioneer introduces the item that they have for sale to the whole class and explains why it is an attractive thing to buy. The rest of the class think about what they want to buy at the auction.Then the auction starts. The auctioneer takes turns to describe their lot and invite bids. Others in the class can bid on items that they want, but cannot ‘spend’ more than the amount of money that they have been allocated.Auctioneers invite bids that increase by:?2 for values up to ?20;?5 for values between ?20 and ?50;?10 for values over ?50.For example, ‘Who’ll start me at ?20?’, then ‘Who’ll give me ?25?’, etc.In small groups, write a newspaper advert to sell a musical instrument, unwanted present, piece of old sports equipment or mobile phone. Decide what you needto include in the advert to attract buyers, but use as few words as possible because the newspaper charges for each word printed.Look in local newspapers for adverts from pawnbrokers or cash converters. Discuss why you think there are fewer pawnbrokers in towns now than there were in the past.7639053111500IndividualWatch TV programmes that show auctions, such as Bargain Hunt, Flog It!, orHomes under the Hammer, to see how auctions work.If you know someone who has sold or bought something on eBay, ask that person to explain to you how the sale worked.If your family goes to car boot sales, try haggling for an item that you want to buy. Notice what items tend to sell at car boot sales (for example, clothes, music players or ornaments).3968756604000Key points for Topic 4You should now understand:how auctions work, including the meaning of ‘valuation’, ‘reserve price’, ‘catalogue’ and ‘lot number’;how eBay works, including what ‘PayPal’ is, and the advantages and disadvantages of eBay;what ‘car boot sales’ are, including their advantages and disadvantages;what a ‘pawnbroker’ is, including an advantage and a disadvantage of using a pawnbroker;what ‘cash converters’ are, including their advantages and disadvantages;how you can recycle gold for cash, including an advantage and disadvantage of doing so;how you can recycle mobile phones for ic 5: Different types of spendingAfter completing this topic, you will be able to:understand which types of spending are essential;understand which types of spending are non-essential (that is, luxuries);explain and recognise different attitudes to spending (savers and spenders).How we spend our moneyWe choose to spend our money on the things that are most important to us. First, we satisfy our basic needs (that is, food, shelter and clothing) and then, if we still have money left over, we spend money on less necessary items. People have their own ideas about what is necessary and what is not, and this is a personal choice.3562355905500Activity 5aLook at this list of items on which people spend money (in no particular order). Some are items on which you will not have to spend money until you leave home.How much do you spend each week on these items?Speak to a friend. How much do they spend each week?Speak to someone who is at least ten years older than you and who lives in their own home. How much do they spend?Fill in the following table.Item of expenditureAmount spent per week (?)YouA friendSomeone olderBooksCDs, DVDs and gamesClothesComputer equipment and softwareFoodGoing outMobile phone costsRentBillsTransportResearch has shown that university students worry more about not having enough money to spend on everyday items than they do about the amount of debt that they are building up. Many are more likely to worry about not having enough money to go out in the evening with their friends than about the amount of money that they will owe when they finish university.Research has shown that university students worry more about not having enough money to spend on everyday items than they do about the amount of debt that they are building up. Many are more likely to worry about not having enough money to go out in the evening with their friends than about the amount of money that they will owe when they finish university.487680-18288000Why do you think this might be the case?Essential and non-essential expenditure‘Essential’ expenditure refers to those items for which you have to pay. If you live in your own home, there are many essential items for which you will need to pay, such as:rent;electricity;gas;telephone;water;TV licence;insurance;food and cleaning materials.There are other items of essential expenditure that apply to everyone. If you still live at home, your parents will probably pay for some of these items:transport (such as petrol or bus fares);toiletries;lunch (while at school or college);clothes and shoes; andbooks.‘Non-essential’ expenditure refers to those things that you can live without, but which you really want, such as:fashion accessories (for example, a new bag or jewellery);money for going swimming; orthe cost of meals out.3429002603500Activity 5bCan you think of some other items of non-essential expenditure? Think about the things that you like to buy with your spare cash, and the things on which your parents, friends and family like to spend their money.You might consider some of these items to be ‘essential’, but ask yourself whether you might be able to live without them, if necessary.108521513652500Attitudes to spendingDifferent people also have different approaches to spending. Some people are natural savers and spend as little as possible; others spend their money as soon as they get it – it is said to ‘burn a hole in their pocket’. You can often spot these tendencies in young children.Even if you are a natural spender, it is important to think about the things that you have to buy before you splash out and treat yourself. Your parents make sure that you have most of the essential items that you need to survive, but one day you will have to do this for yourself. Learning to manage your money is very important and it is never too early to start!3562354953000Activity 5c42195755905500Kadim, Liam and Emily are three friends aged 15. They get the same pocket money every week, but they all have different approaches to spending it.Kadim never spends his money unless he is forced to; instead, he tries to get his parents to buy him what he wants. He is saving his pocket money in a bank account and already has?500. He does not know on what he might spend it eventually; he just likes having the money there.Liam is a spender. He spends his pocket money every week on sweets and CDs, and he often asks his mother to give him his money in advance. The only money that he has in his bank account is ?50 that his mother made him save.Emily’s attitude lies somewhere between those of her two friends. She spends some of her pocket money, but she saves some as well. She makes careful decisions about what she spends. She has ?300 in her bank account and she is hoping to buy a car when she reaches the age of 17.What do you think about the attitudes of Kadim, Liam and Emily?Which approach do you think is the most sensible?3657604064000Activity 5dConsider your own attitudes to spending.Which of the approaches of Kadim, Liam and Emily above is the closest to your own?Do you think that their attitude might cause problems for any of the three individuals at whom we looked above?3619502349500Activity 5eDiscuss and try to decide whether the following items are essential or non-essential expenditure.ItemEssential expenditureNon-essential expenditurea) A mobile phoneb) A car or mopedc) Petrol for the car or mopedd) A pair of jeans for everyday weare) Buying a coffee from a coffee shopf) Buying sandwiches for lunchCosts linked to spendingMaking a list of all of your essential bills and other essential expenditure (such as food and transport), and balancing your finances so that you can also afford some non-essential items too, can be quite a juggling act.It can be even more of a challenge if your income is not regular, or if it is not the same amount each week or month, and choosing how to pay for something is also important.4713605312420005212715-4064000There are a number of charges of which you have to be aware when using cards or credit.First, if you borrow money to pay for something (either by taking out a loan, or using a credit card or overdraft), there will be interest to pay on any money that you borrow. If you use a credit card and pay off the balance as soon as the statement arrives, you will pay no interest. If you leave the balance, or part of it, outstanding beyond the payment date specified on the statement, the credit card company will charge you a percentage of the money owed. When you use an overdraft, you are charged interest for every day that you are overdrawn.Also, certain shops or retailers will make a transaction charge if you choose to pay by credit card rather than debit card or cash. A good example of this is when you buy something online. The transaction charge can be a small percentage of the value of the purchase, or a small fixed fee, such as ?5 or ?3.50.Another charge linked to spending is the fee that you might have to pay for using an automated teller machine (ATM) to withdraw cash. If you use an ATM at a branch of your own bank, you will not be charged, but if you use an ATM at another bank, or one that is located in a shop, pub or leisure centre (or abroad), you may be charged a fixed fee for using the machine.There are other charges too, such as booking fees for theatre or concert tickets, or for a holiday.When working out your finances, or deciding if you can afford to treat yourself, you need to take into account all of these various costs and charges before deciding the most economical and practical way in which to pay.4768857239000Review questionsWhat is meant by ‘essential expenditure’?What is ‘non-essential expenditure’?Why is it important to make sure that essential expenditure is covered before buying treats and luxuries?Make a list of essential expenditure for a student at university living in a house shared with other students.You have just had your monthly salary paid into your account. Put the following expenses in order of priority – with the most important essential item first:food;repaying a ?75 overdraft;a birthday present for your best friend;a new CD by your favourite artist;rent; andbus fares to work and back.You want to book a holiday on the internet. The cost of the holiday is ?450 and you have only ?300 in your current account. What factors would you consider when deciding whether to:pay by debit card (which will make your account overdrawn)?pay by credit card (for which there is a ?5 transaction fee)?wait for a couple of months until you have saved up enough money to pay for the holiday?Learning activities36512520701000InternetVisit , move your cursor over ‘Banking & Saving’, go to ‘Current Accounts’ and click on ‘Budget Planner’. Complete the online budget planner. Try entering different amounts for the income and expenditure, and see how the program converts that information into a pie chart.4584704889500GroupTry to watch a TV programme in the series Til Debt Do Us Part. Make notes about how much or how little expenditure is actually essential. Alternatively, discuss which items and services your family wants and/or needs in the course of a month, then make notes about how much or how little expenditure is actually essential.7499351206500IndividualIf you were to want to save for a holiday, how would you reduce your spending so that you could save? What items of your own expenditure might be said to be non-essential and so could be used for savings?3968756604000Key points for Topic 5You should now understand:what is meant by ‘essential’ expenditure and be able to give examples;what is meant by ‘non-essential’ expenditure and be able to give examples;what an ‘attitude to spending’ is, including the characteristics of a spender and the characteristics of a saver;why essential expenditure is important in planning your ic 6: Basic tools used to manage a personal financial budget and to make calculationsAfter completing this topic, you will be able to:explain how the following can help you to manage your finances – a bank statement, regular balance enquiries, online banking, telephone banking and a cash flow forecast;use calculations to manage a personal financial budget;calculateapersonalfinancialbudget,taking intoaccountincomeand expenditure;keep track of your savings;understand the terms ‘surplus’ and ‘deficit’;budget for both short and long terms, and adjust for next time; andappreciate that plans may change over time and that budgets need to adapt.40132021780500What is a budget?443166515875000The word ‘budget’ comes from an old French word bougette, which means ‘purse’.A budget is an organised plan of all of the money that you are expecting to receive and all of the money that you expect to have to pay out over a period of time. A budget can cover a week, a month or a year, or even longer. Budgeting properly enables you to plan ahead, giving you an accurate picture of how much money you have left to spend on luxuries and treats, after all of your essential expenses are paid.Sometimes, budgeting involves making an estimate of your living expenses by looking at previous bills. It also involves making other calculations so that you can accurately predict how much money you have to set aside for things such as bus fares, train fares, lunch money, etc, over a whole week or month.If your income is not so regular, or it is a different amount each week or month, budgeting is even more important because you may have to take into account bills and other expenses that may fall due before you next receive any money.Keeping track of your financesIn order to keep track of your finances, you need to know how much is in your bank account or your savings account at any one time. Without knowing what you have in your account, you cannot budget for the next week or month.Of course, you could go into your bank and ask how much you have in your account, but this is not always convenient and you might want this information at a time when the bank is closed.There are a number of ways in which you can check your balance without actually going into the bank itself, including:48583855778500bank statements;getting a balance from the automated teller machine (ATM);online banking; andover the telephone.What are bank statements?Bank statements list all of the transactions that put money into and take money out of a bank account. The types of transaction that appear on a statement depend on the type of bank account to which it refers – for example, a current account or a savings rmation shown on a current account bank statementA bank statement records the transactions on the account for a specified time period. Each line on the statement is a separate transaction. Statements are increasingly paperless due to online banking, instead available to view on a computer.Let us look at an example.3352802540000Activity 6aTeo has just received the statement for his current account with Big Bank plc. The top part of the statement is reproduced overleaf.Use Teo’s bank statement to answer the following questions.What is the number of the account that this statement is for?Current Account StatementAccount number: 71290439Statement number: 8Statement for 16 April to 15 May 201X Page 1 of 1Mr Teo Szabo 28 Oak Street Midtown MT51 6PNBig Bank plc12 The High Street MidtownMT4 17JBranch number: 91-20-07Telephone: 01632 960960Date201XDetailsPaymentsReceiptsBalance15 AprBalance from statement 7200.0018 AprCash machine wdl30.00170.0021 AprDirect debit – Umbrella Insure Co12.50157.50Where is the branch located?What is the sort code of the branch at which this account is held?If Teo were to have a question about a transaction on this statement, what telephone number should he call?How many pages are there for this bank statement?What do you think ‘wdl’ means?How much money was in Teo’s bank account at the end of business on 18 April 201X?How much did Teo pay the insurance company in April?Understanding current account statement entriesThere is no standard format for bank statements. Each bank or building society can use a different layout and way of describing the information shown. They do, however, all tend to use five columns:one for the date;one showing a description of each entry;a column for amounts paid in;a column for amounts paid out; anda balance column.The following table shows some of the entries that appear on statements and what they mean.BalanceStatements usually start with the balance from the previous statement, ie the amount of money that the account holder had in the account on the last day of the last statement. Transactions are listed and each time that money is added to the account or taken out of the account, the total amount held or owed after this transaction (ie the balance) is also entered. A new balance is therefore entered after every transaction. Statements end with the balance at the statement date.Cash machineThis details any money withdrawn from the account through a cash machine. Entries can also be described as ‘ATM’.ChequeThis will detail any money taken out of the account because the account holder has written a cheque to pay a person or an organisation. Statements show the number of the cheque, as well as the amount paid out.CreditThis refers to money paid into the account.Direct debitWhere a direct debit has been taken, it shows the name of the organisation that has collected the money and the amount taken.OverdrawnWhere the account holder has spent more than they have in their account, the balance will be shown as a minus figure – eg ‘–?23.47’ – or it might say ‘?23.47DR’, meaning that the account is ?23.47 into its overdraft.Page numberThe account holder may have made so many transactions on the account that the statement list runs to more than one page. Each page will be numbered.PaymentsThis refers to money taken out of the account. This column can also be called ‘Withdrawn’ or ‘Debits’.ReceiptsThis refers to money put into the account. This column can also be called ‘Paid in’ or ‘Credits’.Standing orderThis is a regular, automated payment from the account that is the same amount of money each time. This will show to whom the money was paid and how much.Statement dateThis is the date on which the statement was printed. Transactions made on the account after that date will appear on the next statement.Statement numberThe statements for an account are numbered from 1 upwards.3435353492500Activity 6bSome statements show descriptions for entries in full and some use abbreviations. Complete the table to show what you think these abbreviations might mean.AbbreviationMeaningCHGCHQD/DINTO/DS/OTRFChecking current account statementsWhen you receive a bank statement, it is very important that you check the entries to be sure that there are no mistakes or missing items.109855051181000How to check statementsYou must always keep the following documents to be able to check your current account statement:ATM receipts;withdrawal slips from transactions completed at the bank;paying-in slips; anddebit card vouchers.Paying-in book stubs and chequebook stubs are also important.You will need to check the following when you are trying to make sure that there are no mistakes in your statement.ATM withdrawals listed on the statement should match up with your ATM receipts (that is, the date of the withdrawal and the amount should be the same).Withdrawals listed on the statement should match up with the withdrawal slips that you kept when you withdrew the money.Credits listed on the statement should match up with your counter receipts and paying-in book stubs showing money that was paid into the account at a branch on that day.Payments listed on the statement showing as debit card transactions should be the same as the debit card vouchers that you kept from the shop.Cheques paid should match with the information on your chequebook stub (that is, the date, amount and cheque number should all be the same).Automated payments, such as direct debits and standing orders, should be for the amounts expected.Payslips from employers should detail the same amount as that shown as a direct credit on your bank statement.Your bank will already have advised you of any bank charges or interest due on your account and you should check that the figures on the statement agree with the advice.What to do if you find a mistakeIf you find a mistake on a bank statement, you should contact the bank branch immediately. Banks can make mistakes and they will always correct them.There may also be a transaction that you do not recognise and, if this is the case, you should tell your bank about it straight away. It might be that someone has accessed the money in your account and made a fraudulent transaction. This is rare, but if you tell the bank immediately and if it is definitely not a transaction that you, the account holder, have authorised, you will get your money back. This is why it is important to keep all of your receipts and slips, and to check your statements carefully.It might be that the mistake you find on your statement is a credit of which you are not aware ? that is, that some extra money has been put into your account by mistake. No matter how tempting it is to keep the money and say nothing, you should always tell the bank always.Keeping the money could lead to criminal charges againstyou for the offence of ‘retaining wrongful credit’.It might be that the mistake you find on your statement is a credit of which you are not aware ? that is, that some extra money has been put into your account by mistake. No matter how tempting it is to keep the money and say nothing, you should always tell the bank always.Keeping the money could lead to criminal charges againstyou for the offence of ‘retaining wrongful credit’.3308353429000Activity 6cThe below is a statement that Maria has received from her bank.998855-893445Statement of Account Current Account: 22187655 Overdraft limit: ?1001 July to 31 July 201XMs Maria DaneFlat 4A, Apartment Heights 17 Chestnut Road AnytownAK6 2BXDateDetailsPaymentsReceiptsB?alanceBalance from Statement 4256.003 JulyBank Credit PEABODY LTDA600.00656.004 JulyATM Withdrawal30.00626.007 JulyCheque 102234200.00426.0012 JulyStanding Order BARNADOSB3.00423.0014 JulyCheque 10223545.50377.5014 JulyATM Withdrawal30.00347.5017 JulyDirect Debit HOPE INS COC12.00335.5018 JulyDebit Card Cinema NowD14.95320.5521 JulyATM Withdrawal130.00190.5524 JulyDebit Card Food Store66.21124.3428 JulyCounter Credit 12?34?56E44.14168.4828 JulyATM Withdrawal30.00138.4800Statement of Account Current Account: 22187655 Overdraft limit: ?1001 July to 31 July 201XMs Maria DaneFlat 4A, Apartment Heights 17 Chestnut Road AnytownAK6 2BXDateDetailsPaymentsReceiptsB?alanceBalance from Statement 4256.003 JulyBank Credit PEABODY LTDA600.00656.004 JulyATM Withdrawal30.00626.007 JulyCheque 102234200.00426.0012 JulyStanding Order BARNADOSB3.00423.0014 JulyCheque 10223545.50377.5014 JulyATM Withdrawal30.00347.5017 JulyDirect Debit HOPE INS COC12.00335.5018 JulyDebit Card Cinema NowD14.95320.5521 JulyATM Withdrawal130.00190.5524 JulyDebit Card Food Store66.21124.3428 JulyCounter Credit 12?34?56E44.14168.4828 JulyATM Withdrawal30.00138.489Can you identify what each of the items marked A?E represents?Bank statements are received regularly, but they do not give you an up-to-date balance. They show only the balance on the last day of the period that the statement represents.Balances553720014795500We have already seen in previous topics that it is very easy to make a mistake by not budgeting correctly for all payments that are due out of your account. You need to look at the balance at the end of the statement period and then work out what payments may have been deducted, or are about to be deducted, from your account since that day to give you a more accurate picture – that is, to give you an up-to-date balance on your account.There are a number of ways in which you can get a more up-to-date balance on your account, including:visiting the branch;getting a balance from the ATM;checking your account using online banking;checking the balance over the telephone; and45402531305500keeping your own record of how much you have spent.What do you think might happen if you were to use the ATM after the statement date? Case studyMollie got her bank statement on Tuesday in the post. It was dated Friday 20 February and showed a balance of ?47. On Monday evening, she checked her balance on the ATM and it said that her balance was ?22.This is because Molly drew out ?25 cash over the weekend.Case studyMollie got her bank statement on Tuesday in the post. It was dated Friday 20 February and showed a balance of ?47. On Monday evening, she checked her balance on the ATM and it said that her balance was ?22.This is because Molly drew out ?25 cash over the weekend.3473451143000Activity 6dAntonio goes to the ATM on Thursday and sees that his balance was ?77. On Monday, his bank statement shows that his balance is ?145. On his mobile, he has a reminder that he is expected to pay his phone bill of ?35 on Tuesday and his chequebook shows he has issued a cheque for ?33 that has not yet shown on his bank statement.Can you complete a simple calculation to show that the ATM balance is correct?3302003746500Activity 6ePierre checked his balance by logging onto the bank’s website and using online banking. His balance is shown as ?117, but he knows that there are a few transactions that he has carried out that are not yet showing on his account.What documents will he use to work out how much he really has left to spend?Keeping track of expenditure397446561277500We have seen what happens if you fail to keep a record of the money that you spend or the money that is paid regularly out of your account. If you do not keep track of your transactions, the consequences can include:being unable to get cash out of an ATM, because you have no money left in your account;being unable to buy something for which you have saved up, because you have spent the money on something else; andbank charges, because the bank has either given you an unauthorised overdraft or has not been able to make a payment.3625853111500Activity 6fList some of the ways in which you might make sure that you keep track of your money.Which one of these do you think is the best?3486152349500Activity 6gMaria knows that her bank balance is ?67. Her notebook looks something like this:ExpenseBalance?67MondayATM?10?57TuesdayNew bus pass?15?42ATM?10?32FridayCinema?7.50 Cash?12 Fill in the balance boxes for Friday to show how much Maria has left.3352803810000Activity 6hSercan has made the following notes in his diary about his money. He had ?54 in his bank account on Wednesday.Thursday: had to get a new T-shirt – set me back?15Thursday: had to get a new T-shirt – set me back?15Friday: big night out – cash ?20 and pizza ?15Friday: big night out – cash ?20 and pizza ?15How much does Sercan have left to spend on Saturday?We are now going to look at how a student might manage their spending.3352803873500Activity 6iAbbas is in his first term at university. He is living in halls of residence, so all accommodation costs and bills have already been paid. Below is a record of Abbas’ spending during his first ten weeks.Student expenditure for a term of ten weeksExpense?Balance?Allowance1,000Week1Freshers’ Week (lots of money, but everyone spends loads that week)200Food (including all of the stuff you forget to bring from home)50At end of week750Week 2Books60Food35Going out50At end of week605Week 3Food35Going out with mates for someone’s birthday50Toiletries20At end of week500Week 4Food35Cleaning stuff (flat inspection)10Mobile contract30Last-minute gig15At end of week410Can you work out how much Abbas has spent during his first four weeks at university?How much does he have left to spend during the remaining six weeks of term?Can you see what is going to happen here?Discuss how Abbas might plan to get through the next six weeks. What would you do if you were Abbas? (You should include in your discussion the ideas about essential and non-essential expenditure that we met in the previous topic.)Surplus and deficitThere are two words that are often used when talking about budgeting, as follows.Surplus means that you have money left over. When you make a budget and stick to it, you usually have a surplus at the end of the week or month.Deficit means that you have spent more than you should. An example of when a deficit occurs is when you spend everything in your current account and you go overdrawn.484568515367000In the previous example, Abbas spent more than half of his allowance in his first four weeks of term – but he still had six weeks to go. If he were to continue to spend at the same rate, he would have a deficit. He might have to borrow in order to meet his essential needs.This is why is important to make a budget and stick to it. Abbas should have made a list of the things that he has to buy before he started and, if he had done this, maybe he would have spent less during Freshers’ Week!Plans for the short and long termsWe have looked at plans and expenditure for short periods of time, such as a few weeks. This is the type of planning that you are more likely to do, because your allowances and wages will be paid weekly or monthly.As we saw with Abbas, however, things get harder if you get an allowance for a term of ten weeks. This will demand longer-term planning.Long-term planning is also needed once you move into your own home or if you have decided to borrow using personal loan for a car, for example.109728018478500Cash flow forecastsA cash flow forecast is a calculation undertaken to work out what will happen in the future. It is a plan for the money going into and coming out of a bank account.It is always a good idea to prepare a cash flow forecast, because this will help you to decide which non-essential items you can afford to buy and which ones you cannot afford just yet.734352190118Case StudyAbbas has a number of ways in which he might solve his budget problem. You have discussed ideas about how Abbas might get through the next six weeks. The following is he might prepare his cash flow forecast:Cash flowWeek 5Week 6Week 7Week 8Week 9Week 10Balance?410?355?300?245?160?105Food?35?35?35?35?35?35Phone?30Going out?20?20?20?20?20?20?355?300?245?160?105?50Abbas knows that he has ?50 left to spend on his birthday, or clothes, or a treat, during the next 6 weeks.00Case StudyAbbas has a number of ways in which he might solve his budget problem. You have discussed ideas about how Abbas might get through the next six weeks. The following is he might prepare his cash flow forecast:Cash flowWeek 5Week 6Week 7Week 8Week 9Week 10Balance?410?355?300?245?160?105Food?35?35?35?35?35?35Phone?30Going out?20?20?20?20?20?20?355?300?245?160?105?50Abbas knows that he has ?50 left to spend on his birthday, or clothes, or a treat, during the next 6 weeks. Adapting your budget when things changeAlthough it is important to stick to a budget once you have taken the trouble to create one, it is equally important to adapt it if your circumstances change.A change in financial circumstances can either result from an increase in expenses, or a reduction in income. Even if the change is only small (such as an increase in the cost of electricity, or an increase in the cost of petrol), it is still important to update your budget so that it continues to reflect an accurate picture of your finances.For example, for someone who does not earn very much, an increase of ?20 on their electricity bill could mean that they have to go without something else to pay for it.If one of the household income earners loses their job, the household budget will have to be changed quite dramatically in order that the family can continue to afford necessary items. It may mean fewer trips to the cinema or fewer meals out until they find another job; even then, their wages might be lower than before, so the budget will have to be adapted to reflect this.If a person changes their job from one that paid monthly to one that pays weekly, this too will require some additional budgeting, so that they set aside some money each week to put towards the bills that fall monthly.4787907493000Review questionsWhat is a budget?How old should you be before you should start budgeting?Name three ways in which you can obtain an up-to-date bank balance.Why do you think bank statements use abbreviations, such as ‘WDL’ instead of ‘withdrawal’, or ‘D/D’ instead of ‘direct debit?Why is it important to complete a chequebook stub?What should you check against your bank statement and for what are you looking?Why can you not rely on an ATM balance as a true indication of the balance of your account?What does ‘surplus’ mean when talking about budgeting?What does ‘deficit’ mean when talking about budgeting?Why is it important to update your budget if your circumstances change?What can happen if you do not budget your finances properly?Learning activities32131020320000InternetVisit . Choose ‘Managing your money’ and then ‘Budgeting’. Under ‘Planning tools’, choose ‘Weekly budget’, then choose ‘Budgeting for a holiday’, followed by ‘Case study: a personal budget’.Visit .uk and select ‘Young people’, then ‘Money’ and ‘Managing your money’. Look at the advice given for managing your money and keeping your finances under control.4318002603500GroupIf you have any iPhones or Android phones in your class, look at the list of free finance apps and download a couple. Use the apps to record someone’s spending and see how easy they are to use.7366002095500IndividualTalk to family and friends about how they manage their money. What mistakes have they made? What do they think works for them?If you have an iPhone or Android phone, download a finance app and try to record your expenditure.3968756604000Key points for Topic 6You should now understand:what a ‘bank statement’ is;methods of checking your balance;how to calculate the balance of your account;why an ATM balance might not be correct and be able to give an example;how to calculate how much you have got left to spend;what ‘surplus’ and ‘budget’ mean;the difference between short-term and long-term planning;what a ‘cash flow forecast’ is and for what it is used;why keeping a record of expenditure might help you to plan for next ic 7: Protection through insuranceAfter completing this topic, you will be able to:explain what ‘insurance’ is;list some things that can be or should be insured;explain ‘compulsory insurance’ and give examples; andexplain ‘voluntary insurance’ and give examples.What is insurance?397891011239500Insurance is a service offered by financial services companies to take on certain ‘risks’ in return for a ‘premium’.For example, if someone’s house were to burn down, it is very unlikely that they would have enough money saved up to be able to pay for the house to be rebuilt, never mind to replace all of the furniture and other items that would also be destroyed.A house fire is rare, but nevertheless it could still happen – that is, it is a risk. So the person who owns the house buys an ‘insurance policy’ to insure against this risk. This is an agreement under which an insurance company promises to pay for the house to be rebuilt in case of fire and, in return, the householder pays the insurance company an amount of money every year – that is, a premium. It will not stop the house from being burned to the ground, but at least the householder knows that, should this happen, the insurance company will pay for them to build or buy another house to replace it.Case studyBob’s house would cost him ?150,000 to rebuild if it were to burn to the ground. Bob takes out an insurance policy with Insurance Co.Insurance Co asks him to pay ?250 a year, in return for which it promises to pay for the house to be rebuilt if it does burn down.Case studyBob’s house would cost him ?150,000 to rebuild if it were to burn to the ground. Bob takes out an insurance policy with Insurance Co.Insurance Co asks him to pay ?250 a year, in return for which it promises to pay for the house to be rebuilt if it does burn down.How do insurance companies make money?Insurance companies have many customers. Some of them buy an insurance policy to insure their house; some buy a policy to insure their car. A policy to insure a car not only insures the customer against the risk of fire, but also insures them against the risk of the car being stolen.The insurance company collects premiums from all of its customers – totalling millions of pounds every year. But not all of its customers will have a house fire and not all of them will have their car stolen. The insurance company has to pay out only for those events that do happen and it keeps all of the other premiums. Case studyBob never claims on his policy and ends up paying ?250 a year to Insurance Co for 25 years, which means that he has given the company a total of ?6,250. Bob knows, however, that if he were to have had a fire, Insurance Co would have paid out 24 times that amount to build him a new house.Insurance Co worked out that the risk of the fire happening was very small, and that there was a very good chance that it would get to keep all of Bob’s premiums and never have to pay out.Bob might not like giving ?6,250 to an insurance company, but it is certainly better than having to pay?150,000 for a new house, or finding himself homeless! The premium of ?250 a year has given Bob some ‘peace of mind’.Case studyBob never claims on his policy and ends up paying ?250 a year to Insurance Co for 25 years, which means that he has given the company a total of ?6,250. Bob knows, however, that if he were to have had a fire, Insurance Co would have paid out 24 times that amount to build him a new house.Insurance Co worked out that the risk of the fire happening was very small, and that there was a very good chance that it would get to keep all of Bob’s premiums and never have to pay out.Bob might not like giving ?6,250 to an insurance company, but it is certainly better than having to pay?150,000 for a new house, or finding himself homeless! The premium of ?250 a year has given Bob some ‘peace of mind’.We can see, then, that insurance is about the risks and likelihoods of certain events.What can you insure?You can insure almost anything, as long as the insurance company can calculate the level of risk involved. The following list summarises the main types of insurance.Motor insuranceYou can insure your car against general damage, fire, theft and third-party liability. ‘Third-party liability’ means any compensation that you may have to pay to a third party (ie someone else) if you hit them with your car. You are required by law to have third- party cover on a motor vehicle.House and contents insuranceYou can insure the buildings and the contents of your home against a range of risks, such as fire, burglary, flood or aeroplane damage.Travel insuranceYou can insure yourself against medical costs (ie having to pay a hospital or a doctor in a foreign country if you fall ill) and you can insure your possessions against loss or damage while you are travelling or on holiday.Pet insuranceYou can insure your cat, dog, horse or any other pet for vet’s expenses in the case of an illness or injury.Other types of coverThere are some other unusual insurance policies. For example, if a school is holding an outdoor event, it can insure against bad weather on the day. It pays a small premium to an insurance company and, if it is bad weather, the insurance company will pay out enough money to cover the expenses that the school incurred for an event that could not take place. Another example of an unusual policy is a footballer insuring their legs or a film star insuring their face.1163955-54229000Insurance companies judge risk by studying what has happened in the past. Car insurance is a good example.A 17-year-old wanting to insure his or her own car will pay an extremely high premium, which could be more than ?2,000 a year.A 50-year-old who has not made any claims will pay only around ?200 for his or her policy.These figures also depend on the size and make of car, and on the area in which the car is kept.The reason for the large difference in the premium between a young person and a middle-aged person is not age discrimination, but the likelihood of a claim being made. Insurance companies can see from their statistics that far more accidents involve young people, who are less experienced and more likely to take risks while driving, than 50-year-olds, who tend to drive more carefully.772340111452This is, of course, a general conclusion: there will be careful young drivers and risk-taking middle-aged drivers, but insurance companies can only base their judgements on total figures.The more likely the insurer’s statistics say you are to have an accident, the higher your premium will be.0This is, of course, a general conclusion: there will be careful young drivers and risk-taking middle-aged drivers, but insurance companies can only base their judgements on total figures.The more likely the insurer’s statistics say you are to have an accident, the higher your premium will pulsory insurance49771305524500There are some types of insurance that you must buy if you purchase particular products.For example, if you own a car, you are obliged by law to buy insurance to cover you against liability for injury and damage to third parties – that is, to other people besides yourself, such as other drivers and pedestrians. This is known as ‘third-party insurance’. If you drive a car without third-party insurance, you are breaking the law and will be prosecuted if you are caught.Voluntary insuranceOther types of insurance are voluntary – that is, it is up to you whether you buy them or not. To decide whether or not to insure, you have to balance the cost of the policy against the cost to you if the insured event were to happen.For example, if you have a car, you do not have to buy only the compulsory third-party cover; you can also buy a more comprehensive policy that covers more risks. You can insure your car against fire and theft, and you can even take out a comprehensive policy, which covers your car against damage. Your decision probably depends on the value of the car: comprehensive car insurance is quite a bit more expensive and is worth buying only if your car is quite valuable.1082675-1778000Another example is travel insurance: all travel agents will suggest that people buy travel insurance for the period during which they will be away from home. This insurance covers people against loss or damage to their property and for medical expenses if they are injured or become ill. It can be arranged through the travel agent or through many other providers.3435355778500Activity 7aAmy is going on holiday with her parents. They have bought a travel insurance policy, but Amy thinks that it is a waste of money. She tells her mother:1097915-4445?70 is very expensive and nothing’s going to happen. We’ll come back without any problems, just like we always do, and you’ll have wasted your money. Why don’t you give me the money instead?00?70 is very expensive and nothing’s going to happen. We’ll come back without any problems, just like we always do, and you’ll have wasted your money. Why don’t you give me the money instead?Do you agree with Amy?What could happen on the family’s holiday that would make them really pleased that they bought travel insurance?3435352857500Activity 7bVisit the website of a travel insurance provider, such as Direct Line, and look at the summary of its travel insurance to see what sort of risks it will cover and how much it will pay out for each risk.Protecting your assets383476514986000We spend some of our money on physical goods, which are known as ‘assets’ – that is, those items of value that belong to us, such as houses, cars and TV sets. It is good to have assets, because they make our lives easier and more comfortable. But there is always a risk that we might lose them or that they might get damaged in some way.Because that risk exists, we have to protect our assets.3441702794000Activity 7cList some ways in which the following assets might get lost or damaged.CashAn MP3 playerA carA houseRisks or ‘threats’ to assetsLet us list some of the possible threats to assets under different headings.TheftMost physical assets can be stolen.Items that you carry around with you, such as a mobile phone, or your purse or wallet, can be stolen by muggers or pickpockets, or you might leave them lying around by mistake and someone else may take them.Car theft does happen and there are cases of people who return to where they parked their car only to find it gone.Bicycles and mopeds can also be stolen.431736522225000Accidental damageSome assets are more fragile than others, but most things can be broken.You might drop your phone or MP3 player, meaning that it no longer works.People have accidents in their cars. The car will be expensive to repair and it may even be ‘written off’ – that is, judged by the insurance company to be too expensive to repair.Domestic items can get damaged – for example, you might spill a tin of paint on the carpet while you are decorating.3327401016000Activity 7dThink about all of the accidents that you have heard about involving mobile phones.Would you have any protection if your mobile phone were to be stolen or damaged?Do you think that it is worth paying for insurance?Do you have a back-up copy of your contacts list?4521208318500Review questionsWhat are the main risks in relation to a house and its contents?What are the main risks in relation to someone on holiday?Does insuring a risk make the risk less likely to happen?Is it true that the higher the risk of someone suffering a loss, the higher will be the premium charged by an insurance company?Are the following insurance policies compulsory or voluntary?Comprehensive motor insuranceHealth insurance on a pet rabbitTravel insurance for a holiday to SpainThird-party car insuranceLearning activities30861020256500InternetVisit and choose ‘Pet insurance’. Click on ‘Get a quote’ and you will be transferred to a secure connection. You will then be asked to enter some personal details – for example, a postcode and address, and your age. Type in that you are aged 18 or over. (It does not matter if it is not true, because you are not going to buy the insurance.) You will then be asked questions about the pet that you want to insure: you can put in details of your own pet or you can make them up. Click on ‘Continue’ and you will be given a quote. How much is it?Visit . Choose ‘Insurance’, then ‘Home insurance’ and then ‘What’s covered’. Find the answers to the following questions concerning buildings and contents cover.How much contents cover is provided as standard?What appliances are covered against accidental damage?How much is covered in legal downloads under this policy?What will the policy pay for in the event of stolen keys?If an insured person’s house becomes uninhabitable, how much money will the policy provide to pay for alternative housing?4324353683000GroupMake a list of all of the items in your house of value, such as TVs, computers, kitchen appliances, etc, and think of all of the things that could happen to them against which you might insure. For example, you might include a freezer and the fact that if there were to be a power cut, all of the food inside it would defrost and be ruined.7372353556000IndividualAsk your parents (or other relatives) how much they spend on insurance premiums in a year. This will include insurance on their house, contents, car, holidays, mobile phone, pets and medical expenses. Ask them how often they have had to make a claim on their insurance policies and if they would ever consider not taking insurance for any reason.3968756604000Key points for Topic 7You should now understand:what is meant by ‘insurance’, including the meaning of the terms ‘risk’ and ‘premium’;what things can be insured;the main points about the following types of insurance – car/motor insurance, personal possessions, home contents insurance, travel insurance and pet insurance;what is meant by ‘compulsory insurance’ and be able to give an example;what is meant by ‘voluntary insurance’ and be able to give examples. ................
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