Years 10 and 11 Personal Finance
|Teaching Objectives||Possible Teaching Activity||Learning Outcomes|
Pupils should have a basic understanding of:
At the moment you might not pay much attention to the Chancellor's budget speech in the House of Commons - unless he happens to raise the price of something that you spend your money on.
Taxation is the Government's way of getting its income. It uses the money raised to provide essential services like education, health, defence and social services. The Chancellor's job is to balance the amount he gets from taxation with the amount the Government plans to spend. This process of planning income and spending is known as budgeting.
Most of you may already have an income in the form of pocket money. You may have other earnings from weekend jobs or newspaper rounds and later on when you leave school you may go into full time employment. Whatever the source of your income, it will probably be fairly low to start with, so careful budgeting is very important.
Why You Need to Budget
There are 3 steps to budgeting:
Knowing Your Resources
First of all you need to know how much of your income is actually yours, because if you have a job you will have to pay income tax. This will automatically be taken out of your pay by your employer by a process called Pay As You Earn (PAYE for short). It really means that you don't receive the gross pay that you were offered when you took the job. Instead you receive your net pay which is the amount left over after deductions. Other deductions that may be made are:
As a rough estimate you can reckon to lose up to 25% of your gross pay when you start to earn from a full-time job. At the end of each week or month you will receive a pay slip. It tells you what deductions have been made and how much you are getting to take home - your net pay.
Keeping Spending Records
Like it or not, your net pay will probably be reduced even further by the number of bills that you will have to pay. Some of these will be fixed; you might give your parents a set amount towards your keep; you might have to pay a weekly lodging allowance; you might have bought something on HP; you will probably have fixed travelling expenses. All of these things have to be accounted and allowed for.
Later on when you set up your own home you will be involved in things like rent, gas, water and electricity bills, possibly a telephone bill or TV licence. You need to work out how much your bills are likely to come to and then put enough aside each week or each month to cover this total cost. This is the money that you are keeping in reserve.
Drawing up a Spending Plan
After you have set money aside in reserve from your net pay to pay for all your likely bills and have allowed something for daily food and travel, what's left is yours.
You'll probably want to spend some on clothes, on make-up, entertainment, maybe a motorbike or car. Whatever you choose remember that it pays to shop around. Don't buy on impulse - think very carefully before handing over your hard-earned cash. Compare prices, find out as much information as you can. If you're planning on buying a large item, like a stereo or motorbike, then it's even more important to get it right first time. If necessary get some advice; pop into your local library and look up their copies of Which? magazine, or find a Consumer Advice Centre to help you.
So far we've talked a lot about how you're going to spend your money but there's another important element to budgeting and that is saving. You might be planning a special holiday, getting married or moving into a flat of your own which needs furnishing. Give some thought to your aims and ambitions but don't try to over-reach yourself. It isn't sensible to save more than you can reasonably afford.
If you're planning on saving for some time it's wise to choose a scheme that will pay you interest. That way your savings will grow. Don't leave your money stashed away in the house. For one thing it's an open invitation to burglars and secondly it will simply be lying idle. You want to make your savings work for you.
Suggested Teaching Activity
Teaching Notes and Activities
Consuming Passions (www.citizen.org.uk/education/resources/consumer.pdf) is a FREE teaching pack designed specifically for teaching Consumer Education to Key Stage 4 students that has been developed by the National Consumer Council in conjunction with the Institute for Citizenship.
It contains a wealth of useful teachers' notes and teaching activities to ensure that you can offer your students a complete consumer education package as part of the Citizenship curriculum.
Making the Most of It! (www.pfeg.org/Resources/Detail/default.asp?ResourceID=42) has been developed by the Financial Services Authority and is aimed at the 14-19 age range. It consists of five modules exploring different aspects of personal finance education. The modules, each lasting three hours and divided into four sessions, cover risk, ethical investment, financial planning for the future, e-commerce and the impact of genetic testing on insurance.
Worksheets and Materials
Looking After the Penneys (www.pfeg.org/Resources/Detail/default.asp?ResourceID=233) is a series of three programmes produced by Channel 4 in association with the FSA that follows the fictional Penney family as they face various everyday financial situations. Targeted at the 14-19 age range, the FSA is supporting this with on-line materials including classroom-based activities with printable worksheets.
Face 2 Face With Finance - Basic Banking (www.pfeg.org/Resources/Detail/default.asp?ResourceID=133) contains individual and group activities using computer simulation, to help students prepare for budgeting and managing their finances when they progress to higher education.
Multimedia Teaching Resource
Switched On (www.switchedon.gov.uk/) is an exciting, free, multimedia teaching resource on CD-ROM. It helps teachers equip the next generation of consumers with essential consumer and financial skills.
Switched On has been designed for educational use throughout the UK and is aimed at students aged 14 to 16 years. Using a relevant and stimulating context Switched On supports the delivery of Education for Citizenship, Financial Education and PSE/PSHE. It can also help deliver key skills essential for work and life long learning.
Make Money Sense (www.moneymakesense.co.uk/) is a web-based resource by East Sussex Trading Standards which provides a range of teaching materials aimed at helping young people understand personal finances.
If you have not managed to save enough money to buy a certain item outright, then you may consider buying on credit.
Buying on credit can be simply described as having something now and paying for it later. It means you can choose the music centre you want now and enjoy listening to it while you pay for it. There's no need to save up for months on end and no need to dip into any savings you might have.
Tempting?..... Yes, but it's not always that easy.
Using credit involves borrowing someone else's money and it can be expensive. You will usually end up paying back more than you borrow. This is because the lender will probably charge you interest. The lender is in business and aims to make a profit.
Whenever you buy anything, it pays to shop around. The same principle applies to credit deals. Some are much more expensive than others because different companies charge different interest rates. Look out for the letters 'APR', usually followed by a percentage (%) eg 'APR 20%'. You'll see them on lots of advertisements for credit in newspapers, shop windows and leaflets. If you don't - ask - because it's your guide to the cost of credit deal. The importance of 'APR' is explained in more detail later but as a general rule, where the period of the loan is the same, the lower the 'APR' the better the deal.
Because buying on credit can be very costly, you must think very carefully before you commit yourself. Don't just hope you'll be able to afford the repayments. Do your sums and try to make sure that you will. Think about what would happen if you suddenly had to cope with a drop in income such as losing your job.
Never let yourself be coaxed or pressurised into taking out a credit agreement.
Don't sign any agreement until you've read it and can understand it. If you are in any doubt, get advice and do it quickly. Your nearest Consumer Protection/Trading Standards Department or Citizens' Advice Bureau (CAB) should be able to help. There's a useful leaflet called 'Shop around for Credit' which you can pick up from them. It's free and tells you what to look out for.
There are lots of different ways of getting credit. You can buy a car on hire purchase; use a credit card to fill up the petrol tank; open a budget account to buy clothes; take out a personal loan with a finance company to pay for some furniture; go to your bank and take out a loan to pay for a holiday or take out a mortgage from a building society, bank or finance house to buy a flat or house.
What Credit Means
Buying what you need now and then paying for it by regular instalments in the future. It also means getting into debt. So again you've got to budget carefully and plan your spending to make sure that you don't take on more than you can reasonably afford. Remember too that borrowing someone else's money will cost you. The instalments that you pay will include something called interest. This represents the actual cost of the loan.
So you must find out everything you can before you decide to buy anything on credit. Get some advice about the different types of credit facilities that are available. They include things like:
Interest rates on all of them will vary so shop around for the best deal.
Look for the letters APR They stand for Annual Percentage Rate of the total charge for credit. In other words they tell you how much you'll be paying in interest charges. The APR has to be worked out in a set way no matter which type of credit deal is being offered. So you can compare the APR on different sorts of loans and see which one is the cheapest.
Although it is quick and easy to borrow cash to spend as you choose or to help you out of financial difficulties, don't borrow money to get yourself out of debt. You'll only end up deeper in trouble than ever. If you have debt problems, ask a Citizens' Advice Bureau for help.
Suggested Teaching Activity
Project work and Resources
Dumfies and Galloway Trading Standards has developed a pack for teachers called Consumer Intelligence: Self-Discipline & Responsibilty in Shopping & Spending (www.pfeg.org/Resources/Detail/default.asp?ResourceID=121). The pack contains a series of teaching units which cover the question of consumer intelligence and aim to develop an awareness of self-discipline/responsibility when spending and shopping. It covers consumer society, consumer addiction, influences on consumer habits, advertising, shopping centres, control of spending and dangers of debt.
The Financial Services Authority has a website called Money Made Clear (www.moneymadeclear.fsa.gov.uk) which sets out where consumers can go for help and advice on a whole range of financial issues.
Make Money Sense (www.moneymakesense.co.uk/) is a web-based resource by East Sussex Trading Standards provides a range of teaching materials aimed at helping young people understand personal finances.
Before you start to use any type of credit, it's important that you know how they work. That way, you'll understand what you might be letting yourself in for before it's too late to change your mind. Here are some details about the different kinds of credit that you may come across:
1) HIRE PURCHASE
OPERATED BY - Finance Companies (although usually arranged by the shop or store where the goods are bought).
ADVANTAGES - Easily available
DRAWBACKS - Often an expensive form of credit and problems arise if you cannot keep up the payments.
HOW IT WORKS - You will usually have to pay a deposit (a small amount of cash) before you take the goods away with you. And you'll have to sign an agreement promising to pay the rest of the money (the balance) plus interest in regular amounts (instalments) over a fixed period of time. You may also be asked to pay something called an 'option to purchase fee' which is often added to your last instalment.
Until you have made this last payment the goods don't belong to you; they remain the property of the finance company. So you won't be allowed to sell them to anyone else without their agreement. If you do sell them without permission, the finance company is likely to take you to court.
If you don't keep up your payments, the lender (the finance company) may be able to take the goods away from you. This is called repossession. But once you've paid one-third of the total credit price the lender can't take them back without a court order.
If you find that you can't manage and you want to end your agreement, you must let the company know straight away. You are likely to have to return the goods and pay any outstanding money that you owe them. If you have paid less than 50% of the total credit price, you will continue to owe the finance company for the full amount of the agreement less any payments made by you and the money raised by the finance company when they sell the goods at auction. If you have paid 50% or more of the total credit price before the goods are returned, you will not owe the finance company any more money. However, if you've damaged or misused the goods, you may have to pay for the cost of repairs.
2) CREDIT CARDS
OPERATED BY - AII 'High Street' banks
ADVANTAGES - The card is easy to use and very convenient since it can be used in many places. There is also cheap (or free) credit if you settle promptly and don't take out a cash advance.
DRAWBACKS - Expensive if you let the debt run on for too long.
HOW IT WORKS - A lot of people are using, or are being persuaded to use, credit cards to buy all sorts of goods and services. The most popular are Access and Visa. You will be able to find out which credit cards, if any, a shop accepts because there will be signs in the window and around the shop telling you.
Credit card schemes are run by banks, finance companies, shops or companies that specialise in this type of finance. But watch out - the interest rates vary a lot; so find out the APR before you start and remember that some companies also charge you an additional annual fee.
If your application is accepted you will be given a plastic card that you can use instead of cash to pay for things.
You will also be given a credit limit. This means that you won't be allowed to spend more than a certain amount using your card.
Every month, you'll be sent a statement showing what you've bought and how much you owe. You'll have to pay back some of that amount each month. Your statement will show you the minimum you must pay in that month. You must pay at least the minimum but you can pay more. If you like, you can pay off the whole lot straight away. That's really the best option because you won't have to pay interest. Using a credit card in this way can be very useful. It gives you some short term interest-free credit, it's much easier to carry a plastic card than cash and you will also have extra legal rights if you buy goods that cost more than £100.
BUT if you pay back in instalments, you'll be charged interest on what's left after you've made your monthly payment. And that mounts up each month.
If you keep spending (you can spend up to your credit limit, remember) and just paying at the minimum each month, it could be very expensive indeed.
3) BANK OVERDRAFT
OPERATED BY - AII 'High Street' banks and most others.
ADVANTAGES - A cheap way to borrow in the short term. Interest is only paid on the balance of the loan outstanding at the time.
DRAWBACKS - Only for current account holders. Bank charges may be applied for the whole of a quarter.
HOW IT WORKS - A scheme for people who already have a current account with the bank. You get your bank manager's permission to overdraw on your current account (ie take out more than it contains) up to a specified limit and for an agreed length of time. Usually a short term arrangement.
4) CREDIT SALE
OPERATED BY - Finance Companies (although usually arranged by the shop or store where the goods are bought).
ADVANTAGES - Can be easily arranged and the goods belong to you straight away.
DRAWBACKS - Quite an expensive form of credit.
HOW IT WORKS - This is similar to hire purchase but there's one very important difference. The goods belong to you right from the start so you can sell them before you've finished paying for them if you want to. Of course, you'll still have to keep making the repayments because if you don't the finance company can sue you to recover their money. You may even have to pay back the whole lot in one lump sum. But they can't take the goods away from you or anyone you may have passed them on to.
5 ) MORTGAGE LOAN (A credit facility for buying your own home)
OPERATED BY - Building Societies and most 'High Street' banks.
ADVANTAGES - Buying your own home has proved to be one of the best possible investments in recent years.
DRAWBACKS - You are taking on a long-term arrangement.
HOW IT WORKS - You have to meet certain conditions. The building society or bank may give you more favourable consideration if you have already been saving with them for some time. You cannot usually borrow the entire cost of the home, so you will have to pay part yourself. There are different types of mortgage, and you should get expert advice on what kind is best to meet your needs and income before choosing. Remember that most mortgages last for 20-25 years, so it is important that you make the right choice.
6) PERSONAL LOAN
OPERATED BY - AII 'High Street' banks, building societies and even supermarkets.
ADVANTAGES - Fairly cheap form of credit and reasonably easy to arrange (best if you already have a current account).
DRAWBACKS - May be less straightforward if you don't already have an account with a bank.
HOW IT WORKS - Available to anyone and is usually granted for a specific item (eg home improvements or a car). You choose how much you want to borrow (the bank won't let you have more than it thinks you can afford). Repayments are in equal monthly instalments. The period of repayment can typically be up to 10 years - depending on the size of the loan and what it is for. The rate of interest is fixed for the whole period of the loan, and is paid back as part of the monthly instalments.
Some loans may be "secured on property". It means that if you fall behind with your repayments, the finance company might be able to force you to sell your home to get back the money you owe them. So think very carefully before you agree to anything like this.
Some companies advertise personal loans in the newspapers and allow you to borrow and use money in any way that you want. Don't fall for their sales talk.
Suggested Teaching Activity
Activities and Information
Colossal Cards (www.pfeg.org/Resources/Detail/default.asp?ResourceID=187) are suitable for use with students aged 10-16 and have been developed by the Financial Services Authority and are available from the Personal Finance Education Group (pfeg). This pack contains teacher-led activities to teach the wide range of ways in which money can be represented (credit cards, cheques, season tickets...) offering pupils opportunities to investigate in detail.
Make Money Sense (www.moneymakesense.co.uk/) a web-based resource by East Sussex Trading Standards provides a range of teaching materials aimed at helping young people understand personal finances.
When looking at the main types of credit agreement and the way they work, we've so far avoided any specific mention of the law. There are, in fact, very strict rules about lending and borrowing and most of them are laid down in the Consumer Credit Act 1974. They're there to protect you!
Most of the rules in the Act apply to credit agreements, regardless of the type of credit, where the amount you borrow is £25,000 or less. So most credit deals you're likely to take on in the future will be covered.
Before you take out a credit agreement
Before you get as far as taking out a credit agreement, the Consumer Credit Act protects you by having rules about:
The Act says that nearly everyone in the business of lending money, introducing their customers to credit deals or even hiring their goods out for long periods, must have a special licence. These licences are provided by the Office of Fair Trading (OFT) and then only if they are satisfied that the person or firm applying for one deserves it.
Advertising can be very persuasive. Phrases like.- 'No Deposit' and "This could be yours for only £5 per week" can be very tempting, So it's a rule that anyone advertising credit must tell you the truth about the deal they're offering you.
How to Shop Around for Credit
These are the things to look for and ask about and compare.
Buying on credit when you're under 18
It is illegal for traders to send anything through the post to people under 18 inviting them to borrow money or obtain other credit facilities. You may also find that if you approach shops about buying on credit when you're under 18, they will often be unwilling to consider doing business with you.
There is a good reason for this! If you don't keep up your repayments and you're under 18 (what the law calls a minor), the shop or lender may not be able to sue you successfully to recover their money. This is because the law says that if a minor fails to pay his debts, the person to whom he owes money will only succeed in suing if the goods bought with the money lent were real "necessaries" - ie things that the minor really needs rather than just things that he or she wants.
Because of this, many traders prefer to deal with the adults where expensive items are concerned or will require that an adult act as guarantor. That way, they make sure they get paid one way or another.
What if your credit application is turned down?
When you apply for credit, the lender will usually want to make sure that you are 'creditworthy'. In other words, that lending money to you is a safe bet. In order to check your creditworthiness the lender will usually consult a Credit Reference Agency, which may have some information about you. Credit Reference Agencies collect and store information about people's financial standing that they pass upon request to their clients - the people from whom you have asked for credit. The agencies must have a license under the Consumer Credit Act. They do not advise the lender on whether you may be a good risk or not, or comment in any way on the information that they provide.
This information may help the lender in deciding to give you credit. It may however, also make him or her think again.
If this happens, you can't insist on being given a loan, nor does a dealer or lender have to tell you why you've been turned down. But they must, if you ask in writing, tell you the name and address of any Credit Reference Agency which they have consulted about you.
The law says that you can find out exactly what a Credit Reference Agency has on file about you by writing to the Agency. If there's something on your file which is incorrect you can have it put right. But do remember that the lender may have turned you down for some reason that has nothing to do with what is recorded on your Credit Reference Agency file. This is called 'credit scoring' and you have no legal right to know on what grounds you were refused credit. For example, people who have not been living at a single address for 2 years are often refused credit as are people with no history of using credit.
When you take out a credit agreement
Comparing what's on offer, applying for credit and perhaps having your creditworthiness checked by the lender are only the beginnings of a credit deal. Before you're actually given credit, you'll be asked to sign a credit agreement. Again, there are rules set down in the Consumer Credit Act which aim to protect you. These include rules about:
Information which must be included in a credit agreement
A credit agreement must set out the terms of the deal you're taking on in detail and explain your rights under the agreement. For instance, if you're taking out hire purchase to buy a TV, the agreement must show:
If you're taking out a credit card agreement, it must show your credit limit or tell you how it will be worked out, give you details of how your monthly payment will be calculated and tell you the APR.
NEVER SIGN A BLANK FORM. Make sure all the financial details have been filled in first. Read it carefully and make sure you understand it. If you don't, seek advice before you sign it.
This briefly explains your rights under the Consumer Credit Act and tells you where to go for advice if you want to know more about them. DON'T SIGN A CREDIT AGREEMENT IF YOU HAVE ANY DOUBTS.
Copies of the Agreement - You should be given a copy of your agreement as soon as you sign it and usually you'll receive a second copy through the post within about a week. Keep these copies somewhere safe - you may need to refer to them one day.
Changing your mind when you sign at home - If you sign a credit agreement at home, you may have a few days in which to cancel. This short 'cooling-off period' only applies where the trader has discussed the deal with you in person (not on the telephone) and you then sign the agreement at home or anywhere other than at the trader's premises.
The cooling-off period is 5 days and starts from the day that you get your second copy of the agreement through the post.
Your agreement should give you clear details of your cancellation rights - read them carefully. When you sign a credit agreement in a shop, you don't have any 'cooling-off period', but you will often be able to 'withdraw' from the credit agreement if you're quick enough.
Once you've taken out a credit agreement - Once you've taken out a credit agreement, there are still problems you may come up against and it's as well to think about them before you have to deal with them. For instance:
What if something you've bought on credit turns out to be faulty? If this happens to you, don't stop making payments. Even though you may have a valid complaint, you'll be putting yourself in the wrong if you break your side of the deal.
When you have a hire purchase or credit sale agreement, your agreement is with the finance company and if things go wrong, you must make sure they know about your problems. Don't just tell the shop you went to for the goods. Legally, it's the finance company that you're dealing with.
Where you have purchased goods or services through a personal loan or through a credit card, both the company who lent you the money and the business from whom you bought the goods or services have to help you if something goes wrong with what you've bought. The goods or services must cost more than £100, but it does not have to be fully paid for through the credit arrangement. This can be very useful because it means that if the shop has closed down or gone out of business, you can make a claim against the lender. This is known as 'equal liability'.
If necessary, get some advice from your nearest Consumer Protection/Trading Standards Department or Citizens' Advice Bureau. They'll tell you how you should go about making your complaint - but do it quickly. The longer you leave it, the more tricky it becomes. If you have problems, remember to put things in writing and always keep copies of letters.
If you can't keep up the repayments - Sometimes, the most carefully thought-out plans go wrong. You may find yourself having trouble keeping up your repayments. If this happens, don't just sit back and do nothing. You must let the firm who lent you the money know straight away. Be honest with them and discuss ways of sorting the problem out. They may be willing to come to some arrangement with you.
It isn't a good idea to take out another loan to pay off a credit agreement. Once you start taking out loans to pay off existing loans, things can get rapidly out of hand and you could end up deeply in debt. Whatever the type of credit, if you find that you're getting into difficulties, get advice early on.
If the credit turns out to be extremely expensive - The Consumer Credit Act gives you the right to challenge a credit agreement if you think the interest and other charges are really sky-high, or what the law calls an 'extortionate' credit agreement. But it's not easy to successfully claim that an agreement's extortionate. If the lender is taking a big risk, high charges may be justified. Typically, APR's less than 100% would not be considered extortionate. Get advice if you think you're being charged far more than other similar lenders would charge.
If you want to settle an agreement early - If you decide to settle a credit agreement early, you can do so. You will be entitled to a rebate (ie a partial refund) in interest but ask for a settlement figure (ie a quote of what it will cost you ) in writing. Then you can think it over and decide whether it's the best thing for you to do with the money you have available.
If you buy something and then find out that the person 'selling' it only had it on hire purchase, the finance company (the owner) has the right to take it back. You aren't the legal owner. The only exception to the rule arises if you'd bought a car or motorbike, were genuinely unaware that it was already on hire purchase and you are the 'first innocent private purchaser'.
With anything else, the finance company can take the goods back and the only way you can recover the money you've paid is to try and get it back from the person who 'sold' the goods to you.
FINALLY - When you take out a credit or long-term hire agreement. you are making a commitment to repay what will often be a large sum of money.
Suggested Teaching Activity
Economic Citizenship (www.pfeg.org/Resources/Detail/default.asp?ResourceID=142) is available from the Personal Finance Education Group website and it shows students how to prepare budgets, outlines loans, and how to compare between offers. It also contains teachers' notes and pupils' worksheets on buying a car and credit rating.
A large range of teaching resources and case studies for Personal Finance Education, can be found on the website of the Personal Finance Education Group (www.pfeg.org/)