High_Inflation_and_Interest_Rate

Introduction The effect of adverse event, its impact on Household finances and UKs economy. The need of using Financial Planning to overcome the Social and Economic Effect. Careful Budgeting leads to financial benefit, reduce expenditure in order to save and invest. A Magdi has no Child, he lives on his own, working 35 hours a week in commission based-sale. His net-income is £19.412, the equalised scale of £31.823. Gross In-come of £26.000, equivilised scale of £42.623. Magdi’s girlfriend Sara, a student and has no income or grant moves in with him. Their new equivalised income will be the Net. Income of £19.412 or Gross income £26.000. Because they are partner living together, the MC clement equivalised scale of Head 0.61 plus Partner 0.39 equals to 1. Income divided by one is one, No Change. Net income of £19.412. or Gross income £26.000 The equivalised income of both is higher than Magdi’s half equivalised income, because the equialised scale only consider cost of expenditure. The cost of Consumption reduces by sharing. Magdi income falls by $9.000, because of recession, but still works 35 hours a week. Gross income of £26.000 minus £9.000 equals to £17.000.The Couple will receive £178.80 Tax Credit. Sara, does not think it’s a good idea for her to work, despite the extra income, because as Couples without Children and Equivalised disposable income above low income threshold they will not be eligible for certain benefits. Magdi’s father, who is disabled moved in with them to be cared for, Magdi, had to cut his working hour to fifteen and his annual income falls again by £9.000, that is £17.000 minus £9.000 equals to £8.000. The couple will not be eligible for Tax credit because Magdi works less than 16 hours a week. If Magdi takes on more work, doing more than 35 hours a week brings in more income and Magdi can still maintain his Skill without being Rusty. If Magdi reduces his working hour further, so as to spend more than 35 hours caring for his father,which will make him eligible for carer Allowance. CA is not a mean tested but designed to replace income. B In the effect of Unemployment, State benefit are Paid out. The Social Security benefit depends on the level of Contribution to National insurance influences the entitlement.Allso, depending on the number of years you and your employer contributed to the Scheme. The reason why their Insurance payout do not match the full amount of their income lost depends on the type of premium rate taken out, because, the higher the Premium the better the paid out, or due to mis-selling of insurance Product. And also depends on the Protection gap done enabling Surviving Family member to continue receiving income even after the insured person dies. This is a type of Term insurance that pay income, the amount covered will remain the same during the whole covered term or Decrease when the amount covered will fall over the length of term depending on agreement. The protection gap for Household increases one year after the adverse event, because Household think with an uncertain economic outlook, it made Sense to most people to think about long-term financial wellbeing. Plan to cope with sudden loss of income or debt that is secured on Home. Asymmetries information is where the Person wanting insurance, has better information about the precise individual risk that they face but did not disclose them to the insurers. The insurers, believe that the decision of some Household to buy insurance against adverse even that they are aware off, while other do not, Signals a problem of Asymmetries information because insurers realising that they don’t know the risk as accurately as the individuals do know about their risk. Because those who know them self to be high risk are the one that continue to take insurance. The Government want to make a type of health insurance Compulsory as national insurance is for the Uk, eliminating the problem of adverse selection. The principle of the new insurance is to create the largest possible pool of people that are collectively insured, that allows substantial pooling of risk by every one of working age within its scope. This will reduce the cost because they will be shared out widely as possible. For those whom are ask to join, everyone has to pay the same Premium rate, which the lower risk find unfair because they have to pay for high risk people.Goverment argued that fairness is when everyone can have a certain supporting service or benefit, such as health care in time of misfortune regardless if they can pay the Premium or not.( 745 words) . High Inflation and interest Rate High Inflation in UK between 2007 and 2008 had a different impact on household Finances, as Money loses purchasing power. This means that the given amount of Money will buy few goods and services. Example, If the inflation rate was 4%,this will mean that you need £104 to buy the same goods and Services that you would have paid £100.(Economic help) This increase the Expenditure of Household because, Household have to spend more on essential goods like foodstuffs, gas, electricity and fuel. The impact more severe to the Low income Household, as their greater share of their income goes into this basic items. Even their basic spending needs could get them in the hands of Lenders that Charge higher interest rate. High income household also been facing a higher than average inflation as a result of increasing transportation cost. They may have an attitude of drawing liquid saving balances, in this time the Household saving is low. Inflation discourages inward investment and Growth.. High interest rate does not affect Household equally, but do create personal hardship for individual affected by employment, Bankruptcy and falling income. If people are unemployed, it becomes more difficult to get work in the Future. High interest rate increases the return of saving in an interest paying account. The increase in borrowing cost will reduce investment and level of debt is high. Household with loan will have less disposable income, because they spend more on interest rate if it’s Variable. Although, it discourages household or individual from Borrowing. The reduction of House price in this time is no more acting as an effective saving Vehicle (Economic Help) for Household and creating a Prospect of Negative equity for some first time owner. Uks Economy growth is largely dependent on the growth of Consumer Spending. Interdependence between household, Corporation and Government. The overall Balance sheet will change due to price increase. Revisiting the financial Balance sheet allows household to have a snap shot of their financial position at a particular point in time in order to make adjustment to expenditure. The net worth provided by the balance Sheet is an over view of this household Financial Position. As assets and liability is interrelated to income and Expenditure. [pic] All assets Shot or long term minus all liability shot or long term equals to net Worth. The Result of the Balance sheet, Household or individual will then be able to adjust their Expenditure through Budgeting. Household will face different inflation rate, base on their expenditure pattern such as age income and Household size. Budgeting Estimate income and expenditure over a future time Period, it allows aims to be achieved, it’s all about reducing household pattern of spending. Examine income and expenditure flow, weekly or monthly, individual circumstances influence this decision. Uneven distribution of income result in uneven distribution of spending (Family spending) Households in high social class can afford more expensive lifestyle, while household on low income or on few assets is the temptation to borrow money there.(Bourdieu 1977) Household avoid symbolic consumption or the Manipulation of Advertisement that persuade people to spend money. Example Secured or unsecured debt, credit card or overdraft. Spending more than individual or household income will lead to debt, whereas spending less than income will allow saving to be accumulated. Individual or household need to know how much income they have available to save or invest. Budgeting is the most effective in Managing Finances when it’s used as part of an ongoing process. From cash flow statement, you can set a goal. The individual decision is shaped by wider Context. Being able to manage finance to influence the outcome will in turn benefit them self. A new Budget is required, if goals for which the budget was design changes, e.g if income changes. [pic] Gross income does not provide this information, because income Tax and other deduction are not taken into consideration, whereas Net income takes such deduction into account. There is different option to increase income, such as Make further investment by further Studying or Training Eliminating non-essential expenditure, e.g. spending less on entertainment. Work longer hour or do over time. Take on two paid jobs at the same time. Take in lodger to make up deficit. Check all benefit entitlement and do not over pay income Tax- Putting Money aside for the rainy day e.g. regular saving ,increase Pension and insurance contribution Sell some shot term assets e.g. paintings, Car. Adult, Student share to profit potential economy of scale. Search for Bargains. Career break reduces Job Knowledge. Cheaper to care for a member of a family at home rather in a Home or a Child in a Nursery. Those on loan will pay lower interest if they, repay the principal sum Monthly, because the. Household should avoid debt product that are calculated on annual basis, and also avoid the risk of debt going compounding. . The Need of Individual or Household, enable a Plan, this encourages the urge to save or to meet their needs. Any Financial Decision affects other member of the household. Using the Financial Planning Model [pic] Financial planning are worked out at the basis of Goal, that provides a structured Way of thinking about financial decision short or long term. A goal of having a comfortable lifestyle Then individual have to build up long term saving. Or the goal to reduces financial worries, then financial plan will be better money management Liberalisation of financial service allows competition, shop around, compare price to meet individual circumstances and need, avoid mis-selling. Stage one, asses your situation, clarifying and prioritising goals, working out constraints and resources and finding out relevant information and perhaps seek Processional Financial Adviser. Example Affordability, Demographical and geographical. Stage Two, Decide on Financial, decision also depends on attitude towards risk, the investment time horizon and ethical consideration. Contribution into an insurance scheme will pay income in time of uncertainty Household on negative equity decides to make up through other resources by saving Household building up saving, should save in a Tax incentives and may be advantageous to spread this across all member of household, this reduces future liability to capital gain. Having private insurance, may reduce the of mean-tested state, which needs to be taken into account. Stage Three acts on decision, having individual saving as well as joint saving provide more financial security for people in a relationship. Variable rate prefer if rate falls and fix interest rate if interest rate goes high. Save up to £3000 a year in an interest bearing account with cash ISA. Building up emergency fund, instant access account, lower interest rate, but has access to the Money at any rainy day. (Comparing AER) Household on higher income,, invest in shares, Bond ,reduce risk ,Diversification of portfolio with market timing. Invest in equity to make profit, when later its value increases. Insurance premium for Mortgage, Unemployment or Sickness. That pays income in time of adverse event. When Buying Property, Fix rate Mortgage, protected by interest rate rise, with low APR. Household on Budget, choose fix rate because this could provide certainty of Monthly Expenditure. Elderly and less Mobile individual have access to Range of Financial Product available through the internet (social trend. 2006,p,191.figure 13.5) has high interest. Stage four, reviewing the process of the investment regularly and making adjustment where needed as financial planning is an ongoing process and so involves numerous problem of uncertainty e.g. Inflation erodes the real value of saving and pensions Stock Market Votality Level of employment. Economic growth Housing Market Votality Change of Government Policy Choosing Index linked product Changes in average longevity Demographic pattern High student indebtedness might impact upon their ability to save Cheaper when renting than buying. Liquidating other assets e.g. moving downmarket to a smaller home, personal equity release, Scheme/selling an investment such as buy to let. (Tutor Mr Gordon Shape) There are need to plan effectively over life course using the financial planning Model To meet needs.. Conclusion The impact of recession on Household Finances/Balance Sheet and how to manage the adverse event Financial planning is an ongoing Process. Budgeting is about reducing pattern of spending which can lead to Surplus Money. Household. Knowing their Goal uses financial planning Model to plan for this need. The importance of Planning along life course. (1400 words) References Bourdieu,P. (1977) outline of Theory and practice, Cambridge university Press. Calaghan,G,Frebbance,I,and Higginson,M, Eds(2006) personal finance, Chicester, John wiley/the open university Economic Help accessed on the 29.09.2009 Social Trend (2006) no.36 Basingstoke and New York, Palgrave Macmillan for the office for national statistic (ONS) website http:/ /www.statistic.gov.uk/downloads/ theme_social_Trend36/social_Trend_36.pdf (Accessed 20 April 2006). Tutor Gordon Brown (DB123) Adverse event Lucy Bieri DB123, ECA