Making the most of your money. Twenty questions and answers about making financial decisions

Transcription

1 Making the most of your money Twenty questions and answers about making financial decisions

2 This Factbook has been compiled by the Commonwealth Secretariat. The main contents of the booklet have been sourced from various organisations including the UK based education charity the Personal Finance Education Group. PFEG s mission is to make sure that young people leaving school are equipped with the skills and knowledge to make wise financial decisions. The Commonwealth Secretariat was established in 1965, and is currently made up of 53 member countries. Trinidad and Tobago is a member of the Commonwealth. The role of the Commonwealth Secretariat is to help ensure peace, democracy, equality and good governance. The Secretariat works with countries to deliver programmes aimed at meeting needs in areas such as education, health, finance and government. Most of our work targets small developing countries; we work to ensure sustainable development and help eradicate poverty.

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4 Twenty questions and answers about making financial decisions Why should I save? 8 2. Where can I save and invest? 9 (i) Commercial Bank (Bank) (ii) Credit Unions (iii) Mutual Funds (iv) The Stock Market/Stock Exchange (v) Bonds 3. How can I decide where to place my money? What is an account and what are the different types of 14 accounts available? (i) Ordinary Savings Account (i) Current Account (ii) Time Deposit Account (iii) Foreign Exchange Accounts 5. What do I need to open an Account? What are my Balances? How can I get my money out of my accounts? What is the difference between a debit card and a credit card? What should I know about Interest? 24 (i) Loan Terms (ii) Simple Interest (iii) Compnterest 10. Should I Borrow? 29 4

5 11. Can Interest Rates work for me? What kind of Fees and Charges do I pay? What do I need to get a loan from a financial institution? 33 (i) A Steady Income (ii) Downpayment (iii) Collateral 14. What is Hire Purchase? How can I keep my debit and credit cards safe? What is the difference between Savings and Investment? What is the risk and return on an investment? How can I best manage my income and expenditure? 43 (i) Budgets 19. What can I do to protect myself from unforeseen events? 46 (i) Insurance 20. What are some other financial decisions I will 50 have to make as an adult? (i) Education (ii) Mortgages (iii) Pensions Important Tips!! 57 Financial do s and don ts 57 Review Exercises 59 Answers 66 5

6 Something to Reflect upon This booklet seeks to help you understand some important concepts about the financial world that surrounds you. We hope that it helps you make better financial decisions. You re not too young to make the most of your money. Developing good saving habits from young makes you more prepared for the future. Having a piggy bank at home is good, but it does not help your money grow. However, savings placed with a financial institution can earn you interest which will allow your savings to increase. Additionally, saving with a financial institution reduces the chance of losses, theft or the temptation to spend on the latest gadget or entertainment. Some financial institutions have special accounts for young people and may even provide you with your own bank card. Others require that your parent or an adult open the account on your behalf. So why wait? If you haven t already done so, you can open a savings account as soon as possible. Piggy banks and mattresses may be a good start to savings, but a smart saver knows the benefits of opening an account. Believe me it s exciting to watch your money grow. Why not get hooked on saving today? 6

7 Game 1: Savings Sudoku n g a v s v i v s a g a n i n s v s a The objective of this game is to fill all the blank squares in the game with the correct letters of the word SAVING. There are three very simple rules to follow: Every row of 6 letters must include all letters in the word saving Every column of 6 letters must include letters in the word saving You cannot use a letter more than once in each row or column Have Fun! 7

8 Question 1: Why should I save? There are lots of responses to this. Here are a few. 1) To develop a habit of saving 2) To store your money 3) To create a brighter future for tomorrow 4) To be prepared for important life events like university, weddings, buying a home etc 5) To keep your money safe 6) To earn interest and help your money grow 7) To reduce the temptation of spending irresponsibly 8) To make payments safer, less time consuming and less expensive 9) To improve your credit rating so that you can access a loan to help you in the future Can you think about other reasons? 8

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10 Credit unions offer members a range of financial services and some now offer debit or ATM cards. However they do not offer as wide a range of financial services as commercial banks. (iii) Mutual Funds A mutual fund is a form of collective investment because it pools money from many people and invests the money in various financial instruments. People who place their money with mutual funds are called investors. They purchase units in the fund. The money is managed by a fund manager. The returns from the investments are shared among the fund holders as dividends after deducting for operating expenses. Mutual funds pay higher interest than deposits because there is some chance or risk that the money invested may make a loss. The possibility of getting a higher return or growth on their money encourages people to invest. As discussed later, investors are prepared to take greater risks in the hope of earning greater returns. Countries like Trinidad and Tobago, have a financial institution like the Unit Trust Corporation that administers mutual funds. There are different investment options available to choose from. There is for example the Children s Investment Starter Plan (CISP) which is geared towards children but you must get an adult to open them for you. With this plan, an account can be opened for a child by the purchase of ten (10) units and the UTC will allocate an additional ten (10) units to that account. To encourage savings, the child is not allowed to make withdrawals from that starting amount for a given period of time. Some banks and other financial institutions also offer their own mutual funds. As you grow older you may wish to consider more complex options for saving and investing. These include equities; real estate and; corporate bonds. Two such options are discussed opposite. 10

11 (iv) The Stock Market or Stock Exchange The Stock Exchange provides a place for people to buy and sell shares in companies that are listed on the register. When you purchase a share in the company you become a part owner. That means you receive money (dividends) if the company makes profits. There is the risk however, that if the company makes a loss, no dividend will be paid. You can also sell your shares on the stock exchange. The price of your shares can go up or down depending on the profitability of the company. If the price of your share is higher than what you paid for it you have made a capital gain. This is why investing in the stock exchange is for the more experienced investor and for people who can afford to take the risk with their money. People who invest on the stock exchange hope to make a lot more money than with banks or mutual funds because they take more risk. Stock exchanges operate under strict rules, regulations and guidelines. (v) Bonds A bond is simply a loan provided to the government or a private company to help them raise money or capital to finance projects. When the government or a company issues a bond, it promises to pay you a specified amount of interest for a specified length of time and to repay you the full amount of the loan when the bond matures or comes to an end. Bonds generally pay higher rates of interest than savings because they may be held by the government for as long as 5, 10 or 20 years. In general, the longer the period for which the bond is kept the higher the rate of interest paid. Investing in a bond is a good way of setting aside money for future use. It is not as easily accessible as savings and earns a higher rate of interest. Government bonds are risk free which means that you should always get your money back at the end of the loan. Corporate or business bonds carry some risk. The company may be unable to repay the loan if it does not do well. 11

12 Activity 1: Use what you have learnt to complete the table below. The List of Features provides some clues for you. Features Financial of Entity Financial Institutions Features Commercial Bank Credit Union Mutual Fund or Unit Trust List of Random Features Loans Plastic cards Dividend payments Interest Accounts Investors Must be licenced Must open account with an adult Cash machine (ATM) You own part of the company Risk 12

13 Question 3: How can I decide where to place my money? People use a number of factors to guide them, they include looking at: Which institution is offering the highest rate of return? What type of charges will you pay for the services? How easy is it for you to deposit or invest your money? How customer friendly is the service being offered? What types of accounts and products do they offer? How soon do you need your money? How much risk are you prepared to take? Game Two Money Tic-Tac-Toe Choose Wisely $ % Play this game with a friend or by yourself. Choose a sign and take turns putting your sign in a block. The first person to get his or her sign straight across a row, column or diagonal is the winner. Remember MONEY ($) can earn interest (%) and grow! 13

14 Question 4: What is an account and what are the different types of accounts available? An Account is really a record that a bank or other financial institution holds on the transactions you have made with your money. The financial institution provides you with a number for each account you own. You use your account number whenever you are making a transaction such as a deposit or withdrawal. The number ensures that the money goes against the correct account. The bank normally provides a statement of the money you put into the account, the money you withdraw and the balance. It is good to verify that the statement on your account is true and reflects only the transactions you have made. It may be useful to keep your own records whenever you make a transaction. Typically you take money in and out of your account by visiting your financial institution or using a plastic card. Some accounts can be operated by phone or over the internet. Different types of accounts offer different types of services, different interest rates and different terms and conditions. (i) Ordinary Savings Account An ordinary savings account allows you to save and have access to your money at any time. Because you can access your money as you wish, ordinary savings account generally pay a lower interest. The interest paid is calculated on the average balance that was kept in the account during the month. 14

15 (ii) Current Account A current account is a type of savings account that allows you to write cheques or make payments to pay for day-to-day goods and services. Usually it pays no interest, however some may pay interest on an outstanding balance if it is greater than a given amount. There may also be a service charge for the cheque facility. (iii) Time Savings Deposit Account This is an account where money must be kept for a certain period of time if it is to earn a high rate of interest. The more money you decide to save and the longer you agree to save it, the higher the interest you will earn. When you start the account, you must agree with your bank, or other financial institution, on the amount to be kept in it, the rate of interest to be paid and the length of time for which the money is to be kept. For example, you may want to save $1000 for 6 months and the bank or financial institution agrees to give you an interest rate of say 3%. But if you save $5000 for 3 years you may be given an interest rate of say 7%. However, you must keep your money in for the agreed length of time. If you withdraw your money from a time deposit account before the term ends, you may have to pay a significant penalty sometimes as much as all the interest that was due to you. (iv) Foriegn Exchange Deposits Some banks allow you to open a United States or US dollars savings account. The deposits must be made in US dollars only and you receive your interest in US dollars. They generally pay higher interest than your local currency accounts. 15

16 Game 3: High Interest Hunt See if you can find your way through the maze of options. Start Finish 16

17 Question 5: What do I need to open an Account? The requirements for opening an account may vary from one financial institution to another. In general, financial institutions require that you have: Some proof of who you are e.g. birthpaper, passport or driving licence A picture ID Some proof of where you live (bills sent to your home) Money or funds. Some accounts, like time deposit accounts, require a lot more funds to start them up than others. If you keep a specified amount of money in your account you may not be charged for using some of their services Some financial institutions require you to be a certain age to open an account. If you are not, your parents can open them on your behalf. 17

18 Question 6: What are my Balances? A balance is the amount of money remaining on a given account on a given date. Financial institutions calculate your outstanding balance (or balance owed) at the end of the month. 18

19 Question 7: How can I get my money out of my accounts? You can either take your passbook to the bank or financial institution, fill in a form stating the amount of money you want and go to the teller to withdraw and collect your money. To get cash using a card you must have a - Personal Identification Number (PIN). You must never reveal your PIN to anybody; they could take money from your account. Activity 2: Watch your money grow Carla has been given $100 dollars as a birthday present. Carla is faced with different options as to where to put her money. The different options offer Carla different rates of interest. Below is a table of the rate of interest Carla can earn: However, Carla is reminded that investing in the mutual fund has a risk. If the fund does well, Carla makes a profit, if the fund does not do well, Carla will make a loss and lose some of the money she invested. 19

20 Questions: (a) Filling in the table Calculate where Carla should place her $100: First calculate how much Carla will make after 1 year using the table below. Based on this decision, decide whether Carla should invest her $100. Use as many of the following to match the features to each of Carla s options: Risk High interest Easy access Cannot withdraw money within a year Low interest Cash Card High level of safety Low level of safety Savings are insured up to $50,000 Carla s options to invest her $100 Carla's money after 1 year Should Carla Invest? Yes or No What Features does each option have? Piggy Bank Savings Account Fixed Deposit Account Mutual Funds 20

21 In reality, Carla does not have to invest all her $100 in only one of the options above. She can choose to save or invest her money in more than one option. This is what is meant by not putting all your eggs in one basket. Carla decides to put only $40 of her $100 into a Savings Account and put the remaining $60 into a Mutual Fund. (b) How much money will Carla have after 1 year? (c) What are the advantages of placing money in different types of investments? (d) Are there any disadvantages of placing money into different types of investments? 21

22 Question 8: What is the difference between a debit card and a credit card? Debit Card A debit card is a plastic card which you use to take out, deduct or withdraw money you have saved in your account. It gives you access to your money. Some businesses accept debit cards for payment of goods and services, treating them the same as cash. Debit cards are useful because they eliminate the need for carrying around large amounts of money. Credit Card This is a plastic card issued by a financial institution that allows you to make purchases now and pay for them later. It is in effect a loan. Each credit card has a credit limit. You can purchase goods up to that limit. Credit cards are useful because they allow you to make purchases, even if you don t have immediate cash. Interest rates on credit cards are very high much higher than ordinary loans; that s the reason why it is good to pay off the balance each month. Credit cards can therefore be very expensive facilities. You do not have to pay off the full balance of the loan each month however, it is a good practice to do so. If you only pay off a part of how much is owed on the card, interest will be compounded and the amount owed grows quite quickly. If you pay less than the minimum monthly payment required you can face an additional service charge. 22

23 Activity 3: Paying your way See if you know all the ways to pay. Match up the name with the description. 23

24 Question 9: What should I know about Interest? (The information provided from Maths is fun) on mathsisfun.com Interest is how much is paid for the use of money. Interest is normally quoted as a percentage. Money is Not Free to Borrow People can always find a use for money, so it costs to borrow money. Different financial institutions charge different amounts at different times and offer different returns or interest on your money. A savings account that was offering 8% would give you a better return than one that was offering 5%. Similarly borrowing money at 12% is going to cost more than borrowing at 8%. But financial institutions usually charge this way: % As a percent (per year) of the amount borrowed % It is called Interest Example: Borrow $1,000 from the Bank Alex wants to borrow $1,000. The local bank says "10% Interest". So to borrow the $1,000 for 1 year will cost: $1,000 * 10% = $100 24

25 In this case the "Interest" is $100, and the "Interest Rate" is 10% (but people often say "10% Interest" without saying "Rate") and the financial institution is a bank. Of course, Alex will have to pay back the original $1,000 after one year, so this is what happens: Alex Borrows $1,000, but has to pay back $1,100 This is the idea of Interest..paying for the use of the money. Note: I am showing a full year loan, but banks often want you to pay back the loan in small monthly amounts, and they also charge extra fees too! (i) Loan Terms There are special words used when borrowing money, as shown here: Alex is the Borrower, the Bank is the Lender The Principal of the Loan is $1,000 The Interest is $100 25

26 Note: The important part of the word "Interest" is Inter- meaning between because the interest happens between the start and end of the loan. More Than One Year... What if Alex wanted to borrow the money for 2 Years? (ii) Simple Interest If the bank charges "Simple Interest" then Alex just pays another 10% for the extra year. Alex pays Interest of ($1,000 * 10%) x 2 Years = $200 That is how simple interest works...pay the same amount of interest every year. Example: if Alex borrowed the money for 5 Years, the calculation would be like this: Interest = $1,000 * 10% x 5 Years = $500 Plus the Principal of $1,000 means Alex needs to pay $1,500 after 5 Years (iii) Compound Interest But a bank could say "What if you paid me everything back after one year, and then I loaned it all back to you again... I would be loaning you $1,100 for the second year!" 26

27 And Alex would pay $110 interest in the second year, not just $100. Because Alex is paying 10% on $1,100 not just $1,000 This may seem unfair... but imagine YOU were lending the money to Alex. After a year you would think "Alex owes me $1,100 now, and is still using my money, I should get more interest!" And so this is the normal way of calculating interest. It is called compounding With compounding, you work out the interest for the first period, add it to the total, and then calculate the interest for the next period, and so on..., like this: If you think about it... it is like paying interest on interest. Because after a year Alex owed $100 interest, the Bank thinks of that as another loan and charges interest on it, too. 27

28 After a few years it can get really large. This is what happens on a 5 Year Loan: Year Loan at Start Interest Loan at End 0 (Now) $1, $1, $1, $1, $1, ($1, * 10% = ) $ ($1, * 10% = ) $ ($1, * 10% = ) $ ($1, * 10% = ) $ ($1, * 10% = ) $ $1, $1, $1, $1, $1, $1, Source: Mathsisfun.com So, after 5 Years Alex would have to pay back $1, And the total Interest paid was $ it sure grew quickly! (Compare that to the Simple Interest of only $100 each year) In Summary: To calculate compound interest, work out the interest for the first period, add it on, and then calculate the interest for the next period, etc. 28

29 Question 10: Should I Borrow? Well... you may want to buy something you like. But as you can see, it will end up costing you a lot to pay back the loan. You should therefore use loans for essential items. It is always good to shop around for the cheapest deal or the lowest rate of interest on your loan. If you must borrow you should make sure the money is put to good used. For example if you are a business you may be able to use the money to make even more money. Example: Chicken Business You borrow $1,000 to start a chicken business (to buy chicks, chicken food and so on). A year later you sell the grown chickens for $1,200. You pay back the bank $1,100 (the original $1,000 plus 10% interest) and you are left with $100 profit. And you used someone else's money to do it! But... be careful. What if you only sold the chickens for $800?... you would still have to pay the bank $1,100 and would face a $300 loss. 29

30 Question 11: Can Interest Rates work for me? Compound Interest can work for you! Investment is putting money to use in a way that is expected to provide returns or profits, e.g business, bonds. If you invest your money at a good interest rate it can grow very nicely. This is what 15% interest on $1,000 can do: Year Loan at Start Interest Loan at End 0 (Now) $1, $1, $1, $1, $1, ($1, * 15% = ) $ ($1, * 15% = ) $ ($1, * 15% = ) $ ($1, * 15% = ) $ ($1, * 15% = ) $ $1, $1, $1, $1, $2, $2, Source: Mathsisfun.com It more than doubles in 5 Years! Of course, you would be lucky to find a safe investment at 15%... but it does show you the power of compounding. 30

31 Game 4: I Can Do the Math to Make My Money Grow 7 x x x - + x Try to fill in the missing numbers. Use the numbers 1 through 9 to complete the equations. Each number is only used once. Each row is a math equation. Each column is a math equation. Remember that when working a problem multiplication and division are performed before addition and subtraction. Tip: Start with the easiest line! 31

32 Question 12: What kind of Fees and Charges do I pay? Most financial institutions charge you for using their services. This is called a service fee or charge. There may also be service fees on other services such as writing cheques, buying travellers cheques, sending money abroad, taking a loan and withdrawing cash from your account. If you keep more than a certain minimum balance in your account you may avoid paying some service charges. Game 5: Taking Stock of My Balances Try to fill in the missing numbers. Use the balances given to figure out how the sums of money were spent. The missing numbers range between 0 and 9. The numbers in each row add up to totals to the right. The numbers in each column add up to the totals along the bottom. The diagonal lines also add up the totals to the right

33 Question 13: What do I need to get a loan from a financial institution? With financial institutions you need to meet certain criteria to be granted a loan. The most essential criteria are: (i) Steady Income Firstly you must be able to repay. To obtain either a loan or a credit card you must be an adult and show a steady income which must be sufficient to help you make the payment on the loan. Usually a financial institution tries to determine how likely you are to repay a loan. They review personal information about you. They consider factors such as your salary, whether you have other loans to repay, how much money you need to live on during the month and whether you have repaid other loans you took previously. If you don t meet the criteria you would be refused the loan. (ii) Down payment Instalment and Mortgage loans require some amount of down payment. A down payment is a percentage of the total loan you are seeking. If you are purchasing an expensive item such as a car or a house, the financial institution may ask you to pay down 10% of the costs of the item. It must be paid in cash. The remaining balance e.g. (90%) is then given as the loan. (iii) Collateral Most loans require some form of collateral. Collateral is an asset or something of value that is pledged to secure the loan or ensure that you pay up. This can be your savings deposits, property or an insurance policy. If the borrower is unable to repay the loan, the lender takes possession of the collateral. For example, if you get a mortgage or loan on house, your collateral would be your house. If you stop making payments, the bank can sell the house and get its money back. A credit union will use the shares you have as collateral. 33

34 34 REMEMBER: You always sign credit or loan agreements which will contain a lot of small print. The small print will contain your rights and obligations under the contract. ALWAYS read the small print and ask questions if you do not understand any of the terms. Once you sign the contract you may find it difficult to back out.

35 Question 14: What is Hire Purchase? Hire Purchase is one of the ways in which a person can purchase goods without paying the full amount upfront. If you wish to purchase a household item like a fridge or stove you can enter into a hire purchase agreement. Here you make a down payment and receive the use of the item immediately. You then make a number of monthly payments called instalments until you have paid off what you owe. In effect, it is like a loan contracted with the firm selling the item. The firm uses the item as a form of collateral. Because you did not pay for the full price of the good, interest accumulates on the balance. This means you will end up paying more than you would have if you bought the item using cash. However, you get to use the item straight away. The item becomes your property when you have paid the last instalment. If you fail to make payments, the firm can repossess the item and you lose all the money you have paid. Using personal financial services Credit/Borrowing: Examples of financial options in brackets Buying a new car / motor cycle Building an extension on your home Installing a new kitchen Being a university student Buying a new computer Buying a fridge / freezer or new furniture Buying a house Getting married Hire purchase agreement Personal Loan, Second mortgage Personal loan Student loan; government grant Credit card / Personal loan Hire Purchase agreement, personal loan, Credit card Mortgage Personal loan 35

36 Activity 4: How to pay for different items Look at the table below and decide on how you would pay for the items listed. Also decide and tick how long you think it will take you to pay off the debt. Some ideas for payment are: Discuss the advantages and disadvantages of your chosen method of payment. By Cash Personal Loan Mortgage Hire Purchase Credit Card Item Estimated cost Short Term (less than 1 year) Medium Term ( 1-5 years) Long term (5 years and over) How will I buy it (ByCash/Loan /Mortgage) CDs Gas Bill Car School Lunch Magazines House Clothes Wedding Electricity Bill MP3 Player Health Insurance University Fees Internet Access Dinner for two Trip to USA New Bed 36

37 Question 15: How can I keep my debit and credit cards safe? Store you cards in a safe place. Don t take your card to school unless you really need it that day. Don t leave your card in an unattended jacket or bag. Don t keep your card in an outside pocket where it could easily be stolen. Never reveal your pin to anyone. Try not to write your PIN down. If you write down your PIN try to disguise the number - e.g. as part of a phone number along with other numbers. Choose a PIN which you can remember easily, but stay clear of obvious numbers like your birth date or

38 Question 16: What is the difference between Saving and Investing? Saving Saving is putting aside money so that you can get your hands on it easily if you want to. Sometimes you save to have funds to meet emergency expenses or towards a goal such as going on a vacation. Most financial institutions have savings account plans where your money will earn interest and be safe. When you place money in a financial institution, you usually expect to have the amount you have not used available for use and to earn some interest. Because there is little or no risk associated with saving money, you earn lower returns than if you had invested the money. Investing Investing is putting your money to use so that it can earn even higher interest. Generally, money for investment purposes is put away for longer periods of time than savings. You usually hope to make a greater return on your money but the risks are also greater. When you take more risk or invest for a longer period of time you are paid more interest. Purchases of mutual funds, shares and real estate or housing are all forms of investment The value of an investment may increase, decrease or stay the same. If the value decreases you may not get back the full capital (money) that you put into the investment. 38

39 Game 6: Choices Solve the puzzle to determine a right lifestyle and money choice. Unscramble each of the clue words. Copy the letters in the numbered cells to other cells with the same number. VASE 2 KRWO DESPN TAYPR NOMEY DYUST 4 KANB I

40 Question 17: What is the risk and return on an investment? Capital The amount of money you have to save or invest. You can make interest on your capital Risk Risk is another name for chance or uncertainty. One type of risk you face is the chance that the value of your investment may decline. The more uncertainty there is about the investment, the higher the risk and the higher the interest that will be paid. An investment in a new company normally carries a higher interest because there is no proof of how well this company will perform, so the investment is more risky. Investing for longer periods also carries higher interest because it is more difficult to predict events further into the future. Return The amount of money you get back on your capital. A general rule is that you get a higher rate on more risky investments. Warning! High Interest High Risks higher the probability that you can lose your capital. Low Interest Low Risks Lower the probability that you can lose your capital. Always ask how the institution is earning the money to pay you high rates of interest. 40

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42 Activity 6: High, medium or low risk Below are ten different financial situations. Say whether you think they are low, medium or high risk activity and what the possible advantages and disadvantages would be. Burying your money in a hole in the backyard. Borrowing money from the bank to buy a second-hand car from the brother of a friend s friend. Using your savings to pay for an expensive weekend excursion that a shopkeeper in the village has organised. You are busy at work, so you give a colleague your credit card and PIN (Personal Identification Number) to get money out of the ATM machine and purchase lunch for you. Taking up a credit card which is offered and then spending up to your limit in one mad shopping spree. Having a student loan from the Student Loan Company. Borrowing money from a loan shark or unauthorised source. Lending large amounts of money to a friend. Getting three credit cards from different financial institutions. 42

43 Question 18: How can I best manage my income and expenditure? It is useful for you to develop the habit of making a budget. (i) Budgets A budget refers to a list of income (money you get) and planned expenses (money you hope to spend). Budgets can be made for a person, a family, a business, a government or a country. Each month you may receive a fixed or regular income which means that you have a fair idea of the amount of money you will get. In your case this may be your pocket change or allowance. In your parent s case this may be a salary. Your regular income should be used to meet your regular expenses such as groceries and electricity. You should also set aside money for a regular savings plan from your regular income. Sometimes you receive unexpected forms of income e.g. birthday gifts, Christmas gifts, prizes or rewards for doing well at school. In addition to your regular savings, you should try to save as much of your unexpected income as possible. It is good to save for things you want. Sometimes you may need to make sacrifices to increase your savings and meet your wants or needs. If you decide to give up the purchase of say one soft drink a day, you can set aside this money towards an item that you wish to purchase. In a personal or family budget, all sources of income e.g. salary, cash, gifts from grandparents, are identified. After this, expenses e.g. expenditure on groceries, utility bills, new school uniform, books, rent, are planned. The idea is to live within ones means or to make ends meet. To do this you must match your income with your expenditure. It is important that you put aside some of your income for savings even before you plan what you are to spend. Our savings is listed as an expense because it is one way we use our income. 43

44 When you spend more than you earn you are forced to borrow and end up in debt. Too much debt can land you in trouble if you find it difficult to make the payments. Activity 7: Buying, can you afford it? If you take time to think things through carefully, you can avoid unwise spending and avoid getting into too much debt. Number List Everything you bought during the month Cost per item Which items could you really afford Which items do you regret buying Budget Planner It s a good practice to get accustomed to making a budget. You could do this on a weekly or monthly basis depending on how often you receive your main income. Use the budget planner format provided overleaf to help you plan your own budget. Feel free to add to the list. 44

45 My Budget Planner Week Beginning: Income Amount( $) Expenditure Amount( $) Fixed or Regular Income Allowance Other Earnings Fixed or Regular Expenses Donations Savings Cell phone minutes After school Snacks Groceries Transport Stationary Unexpected or Irregular Income Gifts Prizes Other Total Income Unexpected or Irregular Expenses Movies Arcades Shopping Outings Presents Medicine Cellphone repairs Total Expenditure Balance (Total Income - Total Expenditure) 45

46 Question 19: What can I do to protect myself from unforeseen events? While it is useful to have savings for a rainy day there are some events which may be too costly for even your savings to cover. This is why people use insurance. (i) Insurance Insurance is protection against unwelcome/unexpected events. You can take out an insurance policy to protect against damages to your home, your car and even your health. If you do have an accident or become so ill that you need costly medical care, you can make a claim on your policy and the insurance company would pay a given amount depending on what was agreed in your policy. Sometimes you may not need to make a claim and some people feel that they have wasted their money. What you need to remember is that having a policy provides you with the comfort of knowing you have some protection against losses. Imagine trying to rebuild a home that was destroyed by fire on your savings only. An insurance policy provides funding to help meet this need. Some parents take out insurance policies for their children while they are still quite young. Usually, an insurance policy for a child is cheaper than that of an adult. One useful insurance policy for children is education insurance. It is somewhat like a savings plan and is useful, as the child can only have access to the money when he or she enters say university or college, The money placed in the policy therefore grows as the child grows. 46

47 Insurance: Examples of financial options in brackets 47

48 Game 7: Money Snakes and Ladders Rules: Throw a coin and move two blocks when a head is thrown. Move one block for tail thrown. Bad choices bring snake bites and you slide down the snake. Good financial decisions help you move up the ladder. First one to reach the last block wins! Use your head make wise decisions!! WIN! OWN HOME GOOD OLD LIFE HIGH DEBT UNIVERSITY SPEND INVEST MONEY GIFT SAVE Start 48 Art:

49 Activity 8: Using personal financial services - Good or Bad financial decisions Financial Decisions Good or Bad Idea Reasons for answer Taking a Mortgage to buy a house Applying for a loan to start a business Using money from saving to buy concert tickets Investing all my money in high risk accounts Placing money in non interest earning accounts Using a piggy bank Telling my friends or family my PIN number Not paying my credit card bill on time Saving at least 10% of my monthly income Constantly checking my account balances Making a weekly or monthly budget Using all the money I get Using a University loan to buy a car Saving to buy a car Buying Government Bonds Writing a cheque when there are not enough funds in my account Buying shares in a company that gives high dividends Saving in an account that pays high interest Paying into a pensions account from when I start working 49

50 Question 20: What are some other financial decisions I will have to make as an adult? (i) Education Today, having a formal education is more important than ever and young people are investing in a good education to secure a good job for themselves. They recognise that there is much competition in the job market and that they must have the right tools to take part in that competition. You cannot win a raffle if you don t have a ticket. Whether you want to be a banker, teacher, cook or plumber, you should undergo some form of formal training. This costs money. You can meet you education needs using savings, a loan or some type of government grant. Most countries offer student loans at a low rate of interest and the student only begins repaying the loan when he or she starts working. The government also offers grants to help people further their education. Depending on the national budget, in some years, the government may repay you all of the money you use to fund your education or sometimes only a proportion, say 50%. You must check to see what type of assistance the government is offering to help you further your education and make the most of it. (ii) Mortgages One of the most important financial decisions you will have to make is whether to live with family for the rest of your life, rent, build or purchase a home. Renting your own home brings you some independence but you keep paying money for something that will never be your own. Building or purchasing a home is one of the single biggest expenditures you may make in our life. Most people cannot do so from their own savings. They need to take a loan. These loans are called mortgages. Mortgages are loans from financial institutions that help people to buy, and eventually to own their own property, whether this is land, an apartment or a house. You might also use a mortgage to pay for improvements to your home. The main difference between a mortgage and most other types of borrowing is that it is secured against your home. 50

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52 But I m still at School!! Three Points of View I am not worried about my old age. You should be looked after by your family children, grandchildren and other relatives when you grow old. It is up to them to provide for you, look after you and see that you are OK. As soon as I get too old to look after myself, I will go and live with them. They know how best to look after me The Government should look after you when you grow old. You pay your taxes for all those years after all. I think the Government should pay you a large enough pension to make sure you can live comfortably. They should provide help with electricity bills and the cost of your health care if you need to go into a nursing home. 52

53 You must take responsibility for your own future, which includes planning for your retirement. If you plan carefully and don t spend all your earnings on things like luxury holidays abroad and large expensive cars, you can save enough to have a very good retirement. The trouble is you must start early. If you leave it too late you may still not have enough money to live on. Make the most of it!!! 53

54 Activity 9: Think about your future - Personal life-time plan When I reach 18, my plan is to... When I reach 25, my plan is to... When I reach 40, my plan is to... When I reach 65, my plan is to... When I reach 80, my plan is to... 54

55 My Hopes and Fears The hopes for my future are: The fears for my future are: Hope & Fears Action Plan Hopes for the future Action to take Fears for the future Action to take

56 Some Useful Information about Pensions State pension A pension provided by the Government. In order to receive the state pension you must pay National Insurance Contributions which is a form of tax on earnings - payable during your working life. A person must normally pay National Insurance Contributions for a minimum number of payments/ contributions to qualify for a full basic government pension. Occupational pensions A pension linked to a job or profession. Many employers offer a pension as part of your job. In most cases you are asked to pay some money (called a contribution ) which is taken from your salary or wage. The employer must also contribute to the scheme. In some cases an occupational pension is called non-contributory, which means that your employer pays all the contributions. Personal pension plan This is a pension an individual can take out with an insurance company, bank, building society or investment organisation. It is suitable for those who do not have access to a work scheme, are self-employed or who do not wish to join their occupational scheme. A personal pension plan can also be used to top-up the pension from an occupational scheme. Tax Treatment All pension arrangements, whether they are work schemes or personal, enjoy favourable tax treatment to encourage people to save for their retirement. There is very little tax charged on the investment return earned and, with most schemes, part of the proceeds at retirement can be taken as a lump sum which is paid free of all tax. Any lump sum paid on death is also free of tax. 56

57 Important Tips!! Now that you are a bit more educated about the financial world here are some tips for you to follow: Financial do s and don ts Use your common sense If you get into financial difficulties, the worst thing you can do is pretend the problem will go away. It won t and you can end up in court. Trust no one Especially with your PIN (Personal Identification Number). If someone knows it and he or she gets hold of your card they can collect your money from an ATM machine. They may also tell other people what the number is. If you have to write it down, try to disguise the number and/or keep it in a separate place to your bank / credit card. Save something Build up an emergency fund so you can cope financially in a crisis without being forced to borrow. Saving is also a good discipline regardless of how little you can afford. Don t be ashamed to start small. Every dollar counts! Get a savings account with a decent rate of interest. Get a good deal Shop around for credit or loans the way you shop for anything else. Look around for the best credit deals. Avoid getting into too much debt! Think ahead You may think pensions are just for old aged people, but the best time to start paying into a pension scheme is around 25, or even earlier. You can have a pension plan from any age. Get help If you re worried about your finances talk to someone who can help. 57

58 Take action Personal Finance needs a degree of planning. Use a budget planner. You can also do a lot more to get your money working harder, starting with where you choose to put it. REMEMBER: Start a committed saving plan today Read the fine prints on all your contracts The cost of loans can vary according to the type of loan and the lender Credit cards are easy to use but it is important to pay off all or as much as you can on a monthly basis. 58

59 Review Exercises Game 8: Financial Terms U I D Y C Z E T F O C W C D I P N X Z G O I X N U I E N S N A V C X E D N C P T N E V E T Y E Q E E C A T H E D D C T E M S N R R C N D R I N N S A R E T C O C T R A V A A S D L E N M N O I A A I R L C E E U S T E U R W S D I A U B T L C T O N H A U C N B N T S O P L S T T L P T T O E O T A N E A E C U S T O M E R P N Y J I C G T I S O P E D R E V E N U E R B T F A R D R E V O X Q V Z A E U Q E H C S H A R E S I C H E R U T U F V B U D G E T Z C ACCOUNT BALANCE BUDGET CALCULATE CHARGES CHEQUE CONTRACT CREDIT CUSTOMER DEBTOR DEPOSIT DIVIDEND EXPENSE FUNDS FUTURE INSURANCE INTEREST INVESTMENT LOAN OVERDRAFT PAYMENT PENSION RETURN REVENUE SHARES UNCERTAINTY WITHDRAWAL 59

60 Game 9: Your Crossword Puzzle ACROSS 2. loan made to purchase a property 4. form of savings that carries risk 5. protection against damages and injuries 7. amount of money owing on a given date 8. personal identification number 9. person granting a loan 10. lists of planned revenue and expenditure 12. to put money into an account 13. scheme to provide income in old age 15. charges made by financial services on services used 16. male in family on state pension 17. asset used to secure a loan DOWN 1. earnings from savings and investments 3. chance or uncertainty 6. amount of money to invest 11. return paid by credit union on shares 14. when you put aside for the future you. 60

61 Activity 10: Funding the Future - So you think you know about pensions? Carefully read through the statements in the table. They all refer to pensions. Firstly decide which ones you think are true and which ones you think are false. Tick the appropriate box to indicate your decision. For those statements that you think are false, write a sentence that would be correct. Statement TRUE False: it should say The state pension is provided by the Government. A person will automatically receive the full basic government pension. A pension linked to a job or profession is called an occupational pension. The amount you pay towards your occupational pension is called your instalment. A person who works for themselves (self-employed) will receive an occupational pension. Most pensions give you the option to take a tax-free lump sum at the expected date of retirement. Personal pensions are a waste of money since you will receive a government pension anyway. You re too young to think about pensions. You should think about enjoying life, studying, getting a job and finding the right gentleman or lady! 61

62 Activity 11: What do you think? Here are three decisions someone might make regarding his/her financial future. For each decision how could the scenarios below affect his/her plans: Decision 1 You decide not to take the offer of an occupational pension or to take up a personal pension plan. As an only child, you decide to rely on inheriting money from the sale of your parents house when they die. Decision 2 You join an occupational pension scheme as soon as you start work. Decision 3 You are self-employed and therefore cannot join an occupational pension scheme. As you are worried about relying on the government pension you decide, after careful consideration to join a personal pension plan. 1. You work for ten years then retire and stay at home 2. You were made redundant. 3. Your parents needed long-term care in a nursing home when they got old. In order to pay the cost of this, their house had to be sold. 62

63 Activity 12: Revision Do you know Yes No Describe it What a savings account is? What a cheque book is for? What credit is? What benefits are? What pensions are? What tax and national insurance are? What insurance is for? What is meant by debt What is meant by budgeting How household bills, such as gas and electricity, are paid? Can you Yes No Explain how Keep a record of your spending? Decide what is good value for money? Plan your spending in the next week and the next month? Name the different ways of paying for goods? 63

64 Do you Yes No Write about it Have a bank or savings account? Have a regular income, such as by pocket money? Know how much money you receive in a week, a month and a year? Know how much you spend in a week? Activity 13: What have you learned? I have learned the following things from Making the Most of Your Money

65 When thinking about my future I need to remember

66 Answers Game 1: pg 7 Savings Soduku n g i a s v s a v g i n i v n s g a g s a v n i a i g n v s v n s i a g Activity 1: pg 12 Commercial Bank: Loans; Plastic cards; Accounts; Cash machine; Must open account with an adult; Must be licenced; Interest; Credit Union: Loans; Cash Machine; Account; Must open account with an adult; Dividend payment; Interest; You own part of the company Mutual Fund: Interest; Dividends; Must open account with an adult; Investors; Risk Activity 2: pg 19 Carla s options to invest her $100 Carla's money after 1 year Should Carla Invest? Yes or No What Features does each option have? Piggy bank 0 No Easy access; Low level of safety Savings account 103 Yes Easy access; Low interest; Cash card; High level of safety; Savings are insured up to $50,000 Fixed Deposit Account 107 Yes High interest; Cannot withdraw money within a year; High level of safety; Savings are insured up to $50,000 Mutual Funds 108 Yes High interest; High level of safety b) $106 c) Can earn different interest rates; Invest in low risk and high risk options; If the value of one investment drops you will not lose all your money; Spread your risk ; Learn about different investment opportunities; Learn how to save. d) Must have up to date information on different investments; Could invest in too many accounts you do not understand; Place too much money in accounts that you cannot easily access; The value of your investment may fall if not monitored. 66