Making the most of your money

Twenty questions and answers about making financial decisions…

This Factbook has been compiled by the Commonwealth Secretariat. The main contents of the booklet have been sourced from variousorganisations including the UK based education charity the PersonalFinance Education Group. ‘PFEG’s’ mission is to make sure that youngpeople leaving school are equipped with the skills and knowledge tomake 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 helpensure peace, democracy, equality and good governance. The Secretariat works with countries to deliverprogrammes 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 helperadicate poverty.

Twenty questions and answers aboutmaking financial decisions...

1. 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? 13

4. What is an account and what are the different types of 14accounts 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? 17

6. What are my Balances? 18

7. How can I get my money out of my accounts? 19

8. What is the difference between a debit card and a credit card? 22

9. What should I know about Interest? 24(i) Loan Terms(ii) Simple Interest(iii) Compnterest

10. Should I Borrow? 29

4

11. Can Interest Rates work for me? 30

12. What kind of Fees and Charges do I pay? 32

13. 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? 35

15. How can I keep my debit and credit cards safe? 37

16. What is the difference between Savings and Investment? 38

17. What is the risk and return on an investment? 40

18. 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 50have 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

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This booklet seeks to help you understand some important concepts about the financialworld 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 yoursavings to increase. Additionally, saving with a financial institution reduces the chance oflosses, theft or the temptation to spend on the latest gadget or entertainment.

Some financial institutions have special accounts for young people and may evenprovide you with your own bank card. Others require that your parent or an adult openthe account on your behalf. So why wait? If you haven’t already done so, you can open asavings account as soon as possible. Piggy banks and mattresses may be a good start tosavings, but a smart saver knows the benefits of opening an account. Believe me it’sexciting to watch your money grow. Why not get hooked on saving today?

Something to Reflect upon…

Game 1:Savings Sudoku

The objective of this game is to fill all the blank squares in the game with the correctletters 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!

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­­n g a v

s v i

v s a

g a n

i n s

v s a

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Question 1:

Why should I save ?

There are lots of responses to this. Here are a few….

1) To develop a habit of saving2) To store your money3) To create a brighter future for tomorrow4) To be prepared for important life events like university, weddings, buying a home etc5) To keep your money safe6) To earn interest and help your money grow7) To reduce the temptation of spending irresponsibly 8) To make payments safer, less time consuming and less expensive9) To improve your credit rating so that you can access a loan to help you in the future

Can you think about other reasons?

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Credit unions offer members a range of financial services and some now offer debitor ATM cards. However they do not offer as wide a range of financial services ascommercial banks.

(iii) Mutual FundsA mutual fund is a form of collective investment because it pools money from manypeople and invests the money in various financial instruments. People who placetheir 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 areshared 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 orgrowth on their money encourages people to invest. As discussed later, investors areprepared to take greater risks in the hope of earning greater returns.

Countries like Trinidad and Tobago, have a financial institution like the Unit TrustCorporation that administers mutual funds. There are different investment optionsavailable 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 foryou. 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. Toencourage savings, the child is not allowed to make withdrawals from that startingamount 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 andinvesting. These include equities; real estate and; corporate bonds. Two such optionsare discussed opposite.

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(iv) The Stock Market or Stock ExchangeThe Stock Exchange provides a place for people to buy and sell shares in companiesthat are listed on the register. When you purchase a share in the company you becomea part owner. That means you receive money (dividends) if the company makesprofits. There is the risk however, that if the company makes a loss, no dividend willbe paid. You can also sell your shares on the stock exchange. The price of your sharescan go up or down depending on the profitability of the company. If the price of yourshare 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 andfor people who can afford to take the risk with their money. People who invest on thestock exchange hope to make a lot more money than with banks or mutual fundsbecause they take more risk.

Stock exchanges operate under strict rules, regulations and guidelines.

(v) BondsA bond is simply a loan provided to the government or a private company to helpthem raise money or capital to finance projects. When the government or a companyissues a bond, it promises to pay you a specified amount of interest for a specifiedlength of time and to repay you the full amount of the loan when the bond maturesor comes to an end. Bonds generally pay higher rates of interest than savings becausethey may be held by the government for as long as 5, 10 or 20 years. In general, thelonger 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 aseasily accessible as savings and earns a higher rate of interest. Government bonds arerisk free which means that you should always get your money back at the end of theloan. Corporate or business bonds carry some risk. The company may be unable torepay the loan if it does not do well.

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Activity 1: Use what you have learnt to complete the table below. The List of Features providessome clues for you.

Features of Financial Institutions

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

Financial Entity Features

Commercial Bank

Credit Union

Mutual Fund or Unit Trust

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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 TwoMoney Tic-Tac-Toe – Choose Wisely

Play this game with a friend or by yourself. Choose a sign and take turns putting yoursign in a block. The first person to get his or her sign straight across a row, column ordiagonal is the winner.

Remember MONEY ($) can earn interest (%) and grow!

$

%

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Question 4:

What is an account and what are thedifferent types of accounts available ?

An Account is really a record that a bank or other financial institution holds on thetransactions you have made with your money. The financial institution provides you witha number for each account you own. You use your account number whenever you aremaking a transaction such as a deposit or withdrawal. The number ensures that themoney goes against the correct account.

The bank normally provides a statement of the money you put into the account, themoney you withdraw and the balance. It is good to verify that the statement on youraccount is true and reflects only the transactions you have made. It may be useful tokeep your own records whenever you make a transaction.

Typically you take money in and out of your account by visiting your financial institutionor 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 anddifferent terms and conditions.

(i) Ordinary Savings AccountAn ordinary savings account allows you to save and have access to your money at anytime. Because you can access your money as you wish, ordinary savings accountgenerally pay a lower interest. The interest paid is calculated on the average balancethat was kept in the account during the month.

(ii) Current AccountA current account is a type of savings account that allows you to write cheques ormake 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 agiven amount. There may also be a service charge for the cheque facility.

(iii) Time Savings Deposit AccountThis is an account where money must be kept for a certain period of time if it is toearn a high rate of interest. The more money you decide to save and the longer youagree to save it, the higher the interest you will earn.

When you start the account, you must agree with your bank, or other financialinstitution, on the amount to be kept in it, the rate of interest to be paid and thelength 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 interestrate of say 3%. But if you save $5000 for 3 years you may be given an interest rate ofsay 7%. However, you must keep your money in for the agreed length of time. If youwithdraw your money from a time deposit account before the term ends, you mayhave to pay a significant penalty — sometimes as much as all the interest that wasdue to you.

(iv) Foriegn Exchange DepositsSome banks allow you to open a United States or US dollars savings account. Thedeposits 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.

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Game 3:High Interest HuntSee if you can find your way through the maze of options.

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Start

Finish

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Question 5:

What do I need to open an Account ?

The requirements for opening an account may vary from one financial institution toanother. 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 fundsto start them up than others. If you keep a specified amount of money in youraccount 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 youare not, your parents can open them on your behalf.

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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 ofthe month.

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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 formstating the amount of money you want and go to the teller to withdraw and collect yourmoney.

To get cash using a card you must have a - Personal Identification Number (PIN). Youmust 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 optionsas 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 doeswell, Carla makes a profit, if the fund does not do well, Carla will make a loss and losesome of the money she invested.

Questions:

(a) Filling in the tableCalculate 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

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Carla’s options toinvest her $100

Carla's money after 1 year

Should CarlaInvest? Yes or No

What Features doeseach option have?

Piggy Bank

Savings Account

Fixed DepositAccount

Mutual Funds

In reality, Carla does not have to invest all her $100 in only one of the options above. Shecan choose to save or invest her money in more than one option. This is what is meantby 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?

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Question 8:

What is the difference between adebit card and a credit card ?

Debit CardA debit card is a plastic card which you use to take out, deduct or withdraw money youhave saved in your account. It gives you access to your money. Some businesses acceptdebit cards for payment of goods and services, treating them the same as cash. Debitcards are useful because they eliminate the need for carrying around large amounts ofmoney.

Credit CardThis is a plastic card issued by a financial institution that allows you to make purchasesnow and pay for them later. It is in effect a loan. Each credit card has a credit limit. Youcan purchase goods up to that limit. Credit cards are useful because they allow you tomake purchases, even if you don’t have immediate cash.

Interest rates on credit cards are very high…much higher than ordinary loans; that’s thereason why it is good to pay off the balance each month. Credit cards can therefore bevery expensive facilities. You do not have to pay off the full balance of the loan eachmonth however, it is a good practice to do so. If you only pay off a part of how much isowed on the card, interest will be compounded and the amount owed grows quitequickly. If you pay less than the minimum monthly payment required you can face anadditional service charge.

Activity 3:Paying your waySee if you know all the ways to pay…. Match up the name with the description.

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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 apercentage.

Different financial institutions charge different amounts at different times and offerdifferent 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 borrowingmoney at 12% is going to cost more than borrowing at 8%.

But financial institutions usually charge this way:

Money is Not Free to Borrow

People can always find a use for money, so it costs to borrow money.

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

% As a percent (per year) of the amount borrowed %It is called Interest

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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 whathappens:

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 theloan in small monthly amounts, and they also charge extra fees too!

(i) Loan TermsThere are special words used when borrowing money, as shown here:

Alex is the Borrower, the Bank is the LenderThe Principal of the Loan is $1,000 The Interest is $100

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Note: The important part of the word "Interest" is Inter- meaning betweenbecause 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 InterestIf 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.

(iii) Compound InterestBut 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 thesecond 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

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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 yearyou would think "Alex owes me $1,100 now, and is still using my money, I should getmore 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, andthen 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.

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After a few years it can get really large. This is what happens on a 5 Year Loan:

Source: Mathsisfun.com

So, after 5 Years Alex would have to pay back $1,610.51

And the total Interest paid was $610.51 ... 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, andthen calculate the interest for the next period, etc.

Year Loan at Start Interest Loan at End

0 (Now) $1,000.00($1,000.00 * 10% = )

$100.00$1,100.00

1 $1,100.00($1,100.00 * 10% = )

$110.00$1,210.00

2 $1,210.00($1,210.00 * 10% = )

$121.00$1,331.00

3 $1,331.00($1,331.00 * 10% = )

$133.10$1,464.10

4 $1,464.10($1,464.10 * 10% = )

$146.41$1,610.51

5 $1,610.51

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Well ... you may want to buy something you like. But as you can see, it will end upcosting 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 onyour loan.

If you must borrow you should make sure the money is put to good used. For example ifyou are a business you may be able to use the money to make even more money.

Question 10:

Should I Borrow ?

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.

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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 orprofits, 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:

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 youthe power of compounding.

Year Loan at Start Interest Loan at End

0 (Now) $1,000.00($1,000.00 * 15% = )

$150.00$1,150.00

1 $1,150.00($1,150.00 * 15% = )

$172.50$1,322.50

2 $1,322.50($1,322.50 * 15% = )

$198.38$1,520.88

3 $1,520.88($1,520.88 * 15% = )

$228.13$1,749.01

4 $1,749.01($1,749.01 * 15% = )

$262.35$2,011.36

5 $2,011.36

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Game 4:I Can Do the Math to Make My Money Grow

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 performedbefore addition and subtraction.

Tip: Start with the easiest line!

7 x -

+ + x

+ 2 +

- x -

+ x

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12

81

2 7 12

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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 feeor 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 cashfrom your account. If you keep more than a certain minimum balance in your accountyou 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.

8

3

7

15

10

12

14

4

14 15 8

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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 IncomeFirstly you must be able to repay. To obtain either a loan or a credit card you must bean adult and show a steady income which must be sufficient to help you make thepayment on the loan. Usually a financial institution tries to determine how likely youare to repay a loan. They review personal information about you. They considerfactors such as your salary, whether you have other loans to repay, how much moneyyou need to live on during the month and whether you have repaid other loans youtook previously. If you don’t meet the criteria you would be refused the loan.

(ii) Down paymentInstalment and Mortgage loans require some amount of down payment. A downpayment is a percentage of the total loan you are seeking. If you are purchasing anexpensive item such as a car or a house, the financial institution may ask you to paydown 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) CollateralMost loans require some form of collateral. Collateral is an asset or something ofvalue that is pledged to secure the loan or ensure that you pay up. This can be yoursavings deposits, property or an insurance policy. If the borrower is unable to repaythe loan, the lender takes possession of the collateral. For example, if you get amortgage or loan on house, your collateral would be your house. If you stop makingpayments, the bank can sell the house and get its money back. A credit union willuse the shares you have as collateral.

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REMEMBER: You always sign credit or loan agreements which will contain a lot of ‘smallprint’. 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 theterms. Once you sign the contract you may find it difficult to back out.

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Question 14:

What is Hire Purchase ?

Hire Purchase is one of the ways in which a person can purchase goods without payingthe full amount upfront. If you wish to purchase a household item like a fridge or stoveyou can enter into a hire purchase agreement. Here you make a down payment andreceive the use of the item immediately. You then make a number of monthly paymentscalled instalments until you have paid off what you owe. In effect, it is like a loancontracted 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 thebalance. This means you will end up paying more than you would have if you boughtthe item using cash. However, you get to use the item straight away. The item becomesyour property when you have paid the last instalment. If you fail to make payments, thefirm can repossess the item and you lose all the money you have paid.

Using personal financial servicesCredit/Borrowing: Examples of financial options in brackets

Buying a new car / motor cycle Hire purchase agreement

Building an extension on your home Personal Loan, Second mortgage

Installing a new kitchen Personal loan

Being a university student Student loan; government grant

Buying a new computer Credit card / Personal loan

Buying a fridge / freezer or new furnitureHire Purchase agreement, personal loan,Credit card

Buying a house Mortgage

Getting married Personal loan

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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 decideand 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

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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 phonenumber along with other numbers.

• Choose a PIN which you can remember easily, but stay clear of obvious numbers likeyour birth date or 1234.

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Question 16:

What is the difference between Saving and Investing ?

SavingSaving 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 suchas going on a vacation. Most financial institutions have savings account plans whereyour money will earn interest and be safe. When you place money in a financialinstitution, you usually expect to have the amount you have not used available for useand to earn some interest. Because there is little or no risk associated with savingmoney, you earn lower returns than if you had invested the money.

InvestingInvesting 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 valuedecreases you may not get back the full capital (money) that you put into theinvestment.

Game 6:ChoicesSolve 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

1

TAYPR­­

5

NOMEY­­

3

DYUST­­

4

KANB­

­

1­­­­­­­2­­­­­­3­­­­­­­4­­­­­­5I

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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

RiskRisk is another name for chance or uncertainty. One type of risk you face is the chancethat the value of your investment may decline. The more uncertainty there is about theinvestment, 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 noproof of how well this company will perform, so the investment is more risky. Investingfor longer periods also carries higher interest because it is more difficult to predictevents further into the future.

ReturnThe amount of money you get back on your capital. A general rule is that you get ahigher 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.

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Activity 6: High, medium or low risk

Below are ten different financial situations. Say whether you think they are low, mediumor 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 afriend’s friend.

• Using your savings to pay for an expensive weekend excursion that a shopkeeper inthe village has organised.

• You are busy at work, so you give a colleague your credit card and PIN (PersonalIdentification Number) to get money out of the ATM machine and purchase lunch foryou.

• Taking up a ‘credit card’ which is offered and then spending up to your limit in onemad 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.

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Question 18:

How can I best manage my incomeand expenditure ?

It is useful for you to develop the habit of making a budget.

(i) BudgetsA budget refers to a list of income (money you get) and planned expenses (money youhope to spend). Budgets can be made for a person, a family, a business, a governmentor a country.

Each month you may receive a fixed or regular income which means that you have a fairidea of the amount of money you will get. In your case this may be your pocket changeor allowance. In your parent’s case this may be a salary. Your regular income should beused to meet your regular expenses such as groceries and electricity. You should also setaside 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 shouldtry to save as much of your unexpected income as possible. It is good to save for thingsyou want. Sometimes you may need to make sacrifices to increase your savings and meetyour 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 fromgrandparents, are identified. After this, expenses e.g. expenditure on groceries, utilitybills, new school uniform, books, rent, are planned. The idea is to live within ones meansor 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 planwhat you are to spend. Our savings is listed as an expense because it is one way we useour income.

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When you spend more than you earn you are forced to borrow and end up in debt. Toomuch 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 andavoid getting into too much debt.

Budget Planner

It’s a good practice to get accustomed to making a budget. You could do this on a weeklyor 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.

Number List Everything you boughtduring the month

Cost per item Which itemscould you really afford

Which items do you regretbuying

1

2

3

4

5

6

7

8

9

10

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My Budget Planner Week Beginning:

Income Amount( $) Expenditure Amount( $)

Fixed or Regular Income

Fixed or Regular Expenses

Allowance Donations

Other Earnings Savings

Cell phone minutes

After school Snacks

Groceries

Transport

Stationary

Unexpected or Irregular Income

Unexpected or Irregular Expenses

Gifts Movies

Prizes Arcades

Other Shopping

Outings

Presents

Medicine

Cellphone repairs

Total Income Total Expenditure

Balance (Total Income - Total Expenditure)

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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 toocostly for even your savings to cover. This is why people use insurance.

(i) InsuranceInsurance is protection against unwelcome/unexpected events. You can take out aninsurance 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 canmake a claim on your policy and the insurance company would pay a given amountdepending on what was agreed in your policy. Sometimes you may not need to make aclaim and some people feel that they have wasted their money. What you need toremember is that having a policy provides you with the comfort of knowing you havesome protection against losses. Imagine trying to rebuild a home that was destroyed byfire 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 usefulinsurance 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 sayuniversity or college, The money placed in the policy therefore grows as the child grows.

Insurance: Examples of financial options in brackets

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Game 7:Money Snakes and Ladders

Rules: Throw a coin and move two blocks when a head is thrown. Move one block fortail thrown. Bad choices bring snake bites and you slide down the snake. Goodfinancial decisions help you move up the ladder. First one to reach the last block wins!

Use your head make wise decisions!!

GOOD OLD LIFE HIGH

DEBT

OWNHOME

UNIVERSITY

MONEYGIFT

Start

WIN!

SAVE

INVEST

SPEND

Art: www.adrianbruce.com

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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 concerttickets

Investing all my money in high riskaccounts

Placing money in non interest earningaccounts

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 monthlyincome

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 notenough 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

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Question 20:

What are some other financial decisions I will have to make asan adult ?

(i) EducationToday, having a formal education is more important than ever and young people areinvesting in a good education to secure a good job for themselves. They recognise thatthere is much competition in the job market and that they must have the right tools totake part in that competition. You cannot win a raffle if you don’t have a ticket. Whetheryou want to be a banker, teacher, cook or plumber, you should undergo some form offormal training. This costs money.

You can meet you education needs using savings, a loan or some type of governmentgrant. Most countries offer student loans at a low rate of interest and the student onlybegins repaying the loan when he or she starts working. The government also offers grantsto 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 orsometimes only a proportion, say 50%. You must check to see what type of assistance thegovernment is offering to help you further your education and make the most of it.

(ii) MortgagesOne of the most important financial decisions you will have to make is whether to livewith family for the rest of your life, rent, build or purchase a home. Renting your ownhome brings you some independence but you keep paying money for something thatwill never be your own.

Building or purchasing a home is one of the single biggest expenditures you may makein 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 toown their own property, whether this is land, an apartment or a house. You might alsouse a mortgage to pay for improvements to your home. The main difference between amortgage and most other types of borrowing is that it is ‘secured’ against your home.

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But I’m still at School!!

Three Points of View

“I am not worried about my old age. You shouldbe 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 bestto look after me”

“The Government should look after you whenyou grow old. You pay your taxes for all those years after all.

I think the Government should pay you a large enough pension tomake sure you can live comfortably. They should provide help with

electricity bills and the cost of your health care if you need togo into a nursing home.”

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Make the most of it!!!

“You must take responsibility for your ownfuture, which includes planning for your retirement. If you

plan carefully and don’t spend all your earnings on things like luxuryholidays abroad and large expensive cars, you can save enough to have avery 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.”

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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...

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My Hopes and Fears

The hopes for my future are:123456

The fears for my future are:123456

Hope & Fears Action Plan

Hopes for the future Action to take1 1

2 2

Fears for the future Action to take1 1

2 2

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Some Useful Information about Pensions

State pensionA pension provided by the Government. In order to receive the state pension you must payNational Insurance Contributions – which is a form of tax on earnings - payable during yourworking life. A person must normally pay National Insurance Contributions for a minimumnumber of payments/ contributions to qualify for a full basic government pension.

Occupational pensionsA pension linked to a job or profession.Many employers offer a pension as part of your job. In most cases you are asked to paysome money (called a ‘contribution’) which is taken from your salary or wage. Theemployer must also contribute to the scheme. In some cases an occupational pension iscalled ‘non-contributory’, which means that your employer pays all the contributions.

Personal pension planThis is a pension an individual can take out with an insurance company, bank, buildingsociety or investment organisation. It is suitable for those who do not have access to awork 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 occupationalscheme.

Tax TreatmentAll pension arrangements, whether they are work schemes or personal, enjoy favourabletax treatment to encourage people to save for their retirement. There is very little taxcharged on the investment return earned and, with most schemes, part of the proceedsat retirement can be taken as a lump sum which is paid free of all tax. Any lump sumpaid on death is also free of tax.

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Important Tips!!

Now that you are a bit more educated about the financial world here are some tips foryou to follow:

Financial do’s and don’ts

• Use your common senseIf you get into financial difficulties, the worst thing you can do is pretend theproblem will go away. It won’t and you can end up in court.

• Trust no oneEspecially with your PIN (Personal Identification Number). If someone knows it andhe 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, tryto disguise the number and/or keep it in a separate place to your bank / credit card.

• Save somethingBuild up an emergency fund so you can cope financially in a crisis without beingforced to borrow. Saving is also a good discipline regardless of how little you canafford. Don’t be ashamed to start small. Every dollar counts! Get a savings accountwith a decent rate of interest.

• Get a good dealShop around for credit or loans the way you shop for anything else. Look around forthe best credit deals. Avoid getting into too much debt!

• Think aheadYou may think pensions are just for old aged people, but the best time to start payinginto a pension scheme is around 25, or even earlier. You can have a pension planfrom any age.

• Get helpIf you’re worried about your finances talk to someone who can help.

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• Take actionPersonal Finance needs a degree of planning. Use a budget planner. You can also do alot 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.

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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 BUDGETCALCULATE CHARGES CHEQUECONTRACT CREDIT CUSTOMERDEBTOR DEPOSIT DIVIDENDEXPENSE FUNDS FUTUREINSURANCE INTEREST INVESTMENTLOAN OVERDRAFT PAYMENTPENSION RETURN REVENUESHARES UNCERTAINTY WITHDRAWAL

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Game 9:Your Crossword Puzzle

ACROSS 2. loan made to purchase a property4. form of savings that carries risk5. protection against damages and

injuries7. amount of money owing on a given date8. personal identification number9. person granting a loan10. lists of planned revenue and

expenditure12. to put money into an account13. scheme to provide income in old age

15. charges made by financial services onservices used

16. male in family on state pension17. asset used to secure a loan

DOWN1. earnings from savings and investments3. chance or uncertainty6. amount of money to invest11. return paid by credit union on shares14. when you put aside for the future you.

1 2 3

4

5 6

7 8

9

10 11

12

13

14

15

16

17

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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. Firstlydecide which ones you think are true and which ones you think are false. Tick theappropriate 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 theGovernment.

A person will automatically receive thefull basic government pension.

A pension linked to a job or profession is called an occupational pension.

The amount you pay towards youroccupational 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 expecteddate 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!

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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:

1. You work for ten years then retire and stay at home2. 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.

Decision 3You are self-employed and therefore cannot join an occupational pension scheme. Asyou are worried about relying on the government pension you decide, after carefulconsideration to join a personal pension plan.

Decision 2You join an occupational pension scheme as soon as you start work.

Decision 1You decide not to take the offer of an occupational pension or to take up a personalpension plan. As an only child, you decide to rely on inheriting money from the saleof your parents’ house when they die.

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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 nationalinsurance are?

What insurance is for?

What is meant by ‘debt’

What is meant by ‘budgeting’

How household bills, such asgas and electricity, are paid?

Can you Yes No Explain how

Keep a record of yourspending?

Decide what is ‘good value’for money’?

Plan your spending in the next week and the next month?

Name the different ways ofpaying for goods?

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Activity 13: What have you learned?

I have learned the following things from “Making the Most of Your Money”1

2

3

4

5

Do you Yes No Write about it

Have a bank or savingsaccount?

Have a regular income, suchas by pocket money?

Know how much money youreceive in a week, a monthand a year?

Know how much you spendin a week?

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When thinking about my future I need to remember…

1

2

3

4

5

AnswersGame 1: pg 7Savings Soduku

Activity 1: pg 12Commercial Bank: Loans; Plastic cards; Accounts; Cash machine; Must open account with an adult; Must belicenced; 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

b) $106c) Can earn different interest rates; Invest in low risk and high risk options; If the value of one investmentdrops 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 notunderstand; Place too much money in accounts that you cannot easily access; The value of your investmentmay fall if not monitored.

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­­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

Carla’s options to investher $100

Carla's money after 1 year

Should CarlaInvest? 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; Highlevel of safety; Savings are insured up to$50,000

Fixed Deposit Account 107 Yes High interest; Cannot withdraw moneywithin a year; High level of safety; Savingsare insured up to $50,000

Mutual Funds 108 Yes High interest; High level of safety

8 6 1

5 2 3

1 7 4

15

10

12

14

4

14 15 8

Activity 3: pg 23

Game 4: pg 31

Game 5: pg 32

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Credit card A way of paying for something before you have the money

Accounts A record of transactions

Dividend Payment made on Mutual Fund or Unit Trust shares

Cash/ATM Machine Place where you can withdraw cash

Stock Exchange Buy and sell shares here

Debtor The person borrowing money

Debit CardA card that allows you to pay for things from your bank account at astore, over the telephone or Internet

Balance Amount in your account at a given date

Shares A part ownership in a company

Cash Coins and notes we often use for smaller purchases

Overdraft Borrowing more than you have saved

Mortgage Long term loan used to buy a house

7 x 5 - 3

+ + x

3 + 2 + 7

- x -

8 + 1 x 9

32

12

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2 7 12

Activity 4: pg 36Short Term: CDs (Cash); Gas Bill (Cash); School Lunch (Cash); Magazines (Cash); Clothes (Cash); Electricity Bill(Cash); MP3 Player (Cash); Health Insurance (Cash); Internet Access (Cash); Dinner for two (Cash)Medium Term: Car (Cash/Loan); Wedding (Cash/Loan); MP3 Player (Cash); Health Insurance (Cash); InternetAccess (Cash); New Bed (Cash/Loan)Long Term: House (Loan); Wedding (Cash/Loan); University Fees (Loan); Trip to USA (Cash/Loan)

Game 6: pg 39VASE – SAVE; KRWO – WORK; DESPN – SPEND; TAYPR – PARTY; NOMEY – MONEY; DYUST – STUDY; KANB – BANKFinal word: INVEST

Activity 5: pg 41Watching TV – 1, Playing games on a computer – 2, Walking down a flight of stairs – 3, Going to a Nationalteam football match – 4, Playing tennis/Golf – 5, Getting a lift in a friend’s car – 6, Crossing a very busy highway– 7, Riding a bicycle without a crash helmet – 8, Making a parachute jump – 9, Smoking Cigarettes – 10.

Activity 6: pg 42High Risk; Medium Risk; Medium/High Risk; High Risk; Medium Risk; Low Risk; High Risk; Medium/High Risk;High Risk

Activity 8: pg 49

Good Idea:Taking a Mortgage to buy a house - Houses are very expensive. Mortgages are loans specific to buying ahouse. Buying is better than renting a property that will never be yours.Applying for a loan to start a business - Enables you to start a business despite not having enough money tocover the start up costs.Saving at least 10% of my monthly income - Helps you develop good saving habits. Can use savings for futureinvestments.Constantly checking my balance - Good to know how much you have and to monitor your income andexpenditures.Buying shares in a company that gives high dividends - You shall receive regular payments from yourinvestment.Making a weekly or monthly budget - Helps you know your income and expenditure and therefore you canmake wise decisions on how to spend your money.Saving to buy a car - Good to save for a specific item.Buying Government Bonds - You are ensured of getting your money back plus interest.Saving in an account that pays high interest - Compounded interest is accumulated; Your money increases ata high rate.Paying into a pensions account from when I start working - The earlier you start saving, the more you willhave at retirement.

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Bad IdeaUsing money from my savings to buy concert tickets – It is better to use Savings for investment and needs. Investing all my money in high risk accounts - Even though high risk lead leads to high returns, if the valueof the investment decreases you will lose money.Placing money in non interest earning accounts - Your money does not increase in value therefore it remainsthe same.Using a piggy bank - Money is not secure, no interest is earned and you are more likely to use or spend yourmoney.Telling my friends or family my PIN number - They may use your card to withdraw money or pay forpurchases.Not paying my credit card bill on time - The card user will charge you a penalty for late payments and maylater cancel your card.Using all the money I get - You do not save anything for the future.Using a University loan to buy a car - Use a university loan to go to university and save to buy a car.Writing a cheque when there are not enough funds in my account – Your cheque may bounce; You may gointo your overdraft; If your account does not allow for this you may be charged or penalised or worse, youaccount may be closed down.

Game 9: pg 601. Returns; 2. Mortgage; 3. Risk; 4. Investment; 5. Insurance; 6. Capital 7. Balance; 8. PIN; 9. Creditor; 10. Budget; 11. Dividends; 12. Deposit; 13. Pension; 14. Save; 15. Fees; 16. Grandfather; 17. Collateral

Activity 10. pg 61True Statements: The state pension is provided by the Government; A pension linked to a job or profession is called anoccupational pension; Most pensions give you the option to take a tax-free lump sum at the expected date ofretirement.

False Statements and Reasons:A person will automatically receive the full basic government pension – You must pay National InsuranceContributions during your working life to receive a government pension.The amount you pay towards your occupational pension is called your instalment – It is called a“contribution”.A person who works for themselves (self-employed) will receive an occupational pension – No, this personwill have to take out a personal pension plan.Personal pensions are a waste of money since you will receive a government pension anyway – The moneyyou receive from the Government may be much less than you were accustomed to earning therefore it is agood idea to put money into a fund so that you can receive more at retirement.You’re too young to think about pensions. You should think about enjoying life, studying, getting a joband finding the right gentleman or lady! – It is important to think about who will take care of you when yougrow older, this can help you ensure a good quality of life in your old age.

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Notes

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Notes

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