Lesson 2 Borrowing Saving And Investment PDF

Level 3 BTEC Foundation Diploma Business/Law/Finance Unit 3: Personal and Business Finance Lesson 2 – Learning Aim A Break Time – STARTS AT – 13.15(1.15PM) RETURN AT- 13.35 (1.35PM)  Recap from Last week Role of Money – Personal Attitudes, Life stages , Culture, life events...

Level 3 BTEC Foundation Diploma Business/Law/Finance Unit 3: Personal and Business Finance Lesson 2 – Learning Aim A Break Time – STARTS AT – 13.15(1.15PM) RETURN AT- 13.35 (1.35PM)  Recap from Last week Role of Money – Personal Attitudes, Life stages , Culture, life events, External influences Different types of Accounts used for personal use Advantages and Disadvantages of Accounts Why plan expenditure  Ground Rules Do not use your mobile phones unless you have been asked by a teacher Wear your lanyards at all times  Identify and list a range of Learning sources that could be used for personal borrowing. Outcomes Analyse the most effective borrowing method by investigating the advantages and disadvantages associated with each identified source. Evaluate and select the most appropriate method of borrowing.  Starter: Identify and share as many forms of borrowing you can think of. The different types of borrowing Managing personal finance  Suitability of different financial products and services will depend on a number of factors. Some of these include:  Personal circumstances e.g. fixed or varying monthly take home pay  Monthly amount that could be paid back  Nature of the good or service to be funded  Availability of an asset or guarantor to secure a loan against  Credit rating  Personal preferences  Types of borrowing Borrowing is a way of funding a purchase now but paying for it over a period of time. Overdraft An overdraft is the facility to overspend on a current account up to an agreed sum The individual in effect can withdraw money from the account that is not there meaning they go overdrawn or in the red Interest is charged on the overdrawn amount This is a good way to fund short-term cash shortages Overdrafts Advantages Disadvantages  Only borrowed when required  The bank can call it in at any allowing flexibility time  Only pay for the money  Only available from a current borrowed bank account  Quick and easy to arrange  Interest payments tend to be variable making it more difficult  No charges for paying off the to budget overdraft  Banks may secure the overdraft against an asset therefore there is a risk of repossession  Personal loans  Isa set amount of money provided, to an individual or couple, for a specific purpose, to be repaid with interest, over a set period of time  May be secured against an asset and if there is a default on repayments the asset can be taken  Financial institutions can vary interest rates depending upon the amount of risk placed on the loan  Generally considered to be more suitable for buying more expensive items that will be paid for over a longer period of time  Types of borrowing  Hire purchase  Spreading the cost of a purchase over a pre agreed period of time  The consumer gets to have the item straight away and pays in monthly instalments  The item technically remains owned by the seller until all instalments have been paid  Advantages:  Immediate use of the item  Spreads cost over a period of time  Fixed instalments  Disadvantages:  Additional costs e.g. interest  Payments have to be made or item will be repossessed What is a Mortgage What is a Mortgage? A long-term loan taken out to buy property or land. Repay the loan plus interest over a period of anything up to 35 years. A mortgage is the biggest, most expensive financial product most people ever take out. A mortgage is 'secured' against the property, if you don’t keep up with your mortgage repayments your lender can repossess your home. Different Types of Mortgage Offset Linked to your savings account, so you only pay interest on the difference. Offset mortgages can be an ideal option for anyone with a large amount of savings Buy-to-Let For landlords who want to buy a property to rent out to tenants. They are more expensive than ordinary residential mortgages because banks see rental property as higher risk  What you need to get a Mortgage A Deposit You need to save a deposit to get a mortgage, and the bigger the better. If you save a 10% deposit, your mortgage will be 90% of the property’s value. This is known as the loan-to-value (LTV). In general the lower the LTV, the better the interest rate you’ll be eligible for. A Good Credit History A lender will want to see how you’ve handled borrowing money in the past and if you pay bills on time. The better your credit history the lower the interest rate you will be offered on your mortgage. Proof of Affordability Mortgage lenders will check if you can afford your mortgage. To do this they look at your income and outgoings. A Potential Home So they can make sure it is worth what you intend to pay for it, so they can be sure they'd get their money back if they had to end up repossessing your home.  Activity Hussain and Rita are looking to buy their first house together. Provide Interes Term of Upfron Monthly r t rate agreeme t fees paymen Hussain currently runs his own nt with t security business and Rita lender works as a receptionist at her Barclays 3.2% 3 year £120 £727.50 local school. fixed Chelsea 2.5% 2 year £0 £920.30 Together they have a joint Building fixed income of £45,000 a year. Society They have managed to save a NatWest 3.5% 1 year £0 £869.25 deposit of £18,000. fixed The house they want to buy is on the market for £200,000. Evaluate which mortgage would be most suitable for Hussain and Rita. [12 marks] They would like to take out a mortgage for a maximum of 25 years. They have decided Types of borrowing  Credit cards Getting trapped in debt. Advantages Damaging your credit. Convenience. Extra fees. Spread out the costs. Limited use. Boost your credit. Purchase protection. Go interest free. Cashback and rewards. Slim down your debts. Disadvantages:  Types of borrowing Payday loans A short term loan, for a relatively small amount of money, to be repaid upon receipt of the lenders next wage Rates of interest are high Eases short term cash flow problems such as an inability to pay the rent Advantages:  Solves short term cash flow problems  Quick access to funds Disadvantages:  High rates of interest  Need to be repaid quickly  Can escalate out of control if not repaid quickly ACTIVITY 2 Working in teams of no more than four, you are required to provide information (Information sheet) to someone struggling with debt on how they could get control of their debt and start to pay it off.  Identify and list a range of Learning sources that could be used for personal borrowing. Outcomes Analyse the most effective borrowing method by investigating the advantages and disadvantages associated with each identified source. Evaluate and select the most appropriate method of borrowing. Break Be back and ready to start by Lesson Objectives – Part 2 Analyse each Identify a range of saving method by Evaluate the most techniques that investigating the appropriate could be used to advantages and method of saving invest and save disadvantages based on personal money. associated with need. each. Analyse the Identify and benefits and discuss a range of Explain the limitations of personal concept and varying insurances that purpose of ‘price insurances by may be needed comparison’ undertaking now or in the websites. various case future. studies Personal Savings Why do people save money? What considerations do people have when investing their savings? What is ‘opportunity cost?’ Types of saving and investment Discussion What is the difference between savings and investments? Which one do you think is the highest risk? Write a definition of: Saving Investment What is the difference between savings and investment? Saving  placing money in a secure place so that it grows in value and can be used in the future. Investment  speculative commitment to a business venture in the hope that it generates a financial reward in the future. Risks and rewards Savings are generally considered to be low risk The money is in a secure place and rewards set at an agreed, but flexible level However the reward is limited to the current rate of interest offered by the financial institution Investments are generally a higher risk The money could be lost Rewards are variable dependent upon external factors such as company profits However, there is potential for rewards to be significant ACTIVITY Carry out research and complete the table below Saving and Advantages Disadvantages investment ISAs Deposit and savings accounts Premium bonds Bonds and gilts Shares Pensions Insurance Insurance can be taken out against anything deemed to have a worth or where there is a risk of financial loss. A common type of insurance is against mobile devices. The premium paid will vary depending upon the amount of cover provided and the amount of risk as assessed by the insurance provider.  Assessment activity 1. Identify two disadvantages of using credit cards (2 marks) 2. Identify two advantages of using debit cards (2 marks) 3. Describe two examples of borrowing (4 marks) 4. Bethany and Mark have inherited some money from their grandfather. Bethany wants to save the money for future so use that she has something to rely on, while Mark thinks that he will make the best use of his money if he invests it. Assess the risks and rewards of saving verses investment (12 marks)  Activity 1 You have £2500 and must invest or save it for at least five years. Mind map all the options – showing risk versus potential rewards. Identify your preferred saving method. Find an account that offers the highest return. How much would your savings be worth in five years? You read about a new form of investment called crowd funding. Visit one of these websites as part of your research. Choose one or more businesses to invest in. Calculate your expected return on your £2500 in five years’ time. Upload your saving and investment options in a Word document to Teams Lesson Objectives – Part 2 Analyse each Identify a range of saving method by Evaluate the most techniques that investigating the appropriate could be used to advantages and method of saving invest and save disadvantages based on personal money. associated with need. each. Analyse the Identify and benefits and discuss a range of Explain the limitations of personal concept and varying insurances that purpose of ‘price insurances by may be needed comparison’ undertaking now or in the websites. various case future. studies