Personal Finance

Personal Finance Core Part 1.2

Students learn about: • Earning an income • Types of income • From work, investments, business ventures and social welfare programs.

Students learn to: • Earning an income • Identify the different types of income

Earning an income – types of income • Income – definition – the money earned from working and the returns on investments. • Types of income • From work • Most people make a living by working for an employer. • An employer is a person or organisation who employs workers under a contract of employment. • An employee is a person under the control or direction of another, according to a contract of employment and in return for a wage or salary.

Earning an income – types of income • Types of income – from work • Wages – income received for work done based on the hours worked each week. • A person usually works eight hours a day as part of a normal day’s work. • Overtime – the amount of time worked in excess of the standard working hours. • Penalty rate – a rate of pay that is applied based on when the work is performed rather than how many hours are worked. A penalty rate often applies to weekend work. • People employed in unskilled or semiskilled jobs, often called blue collar workers receive wages. They include factory workers, shop assistants and office cleaners.

Earning an income – types of income • Types of income – from work • Salary – income received each year for a job usually irrespective of the number of hours worked. • People who receive a salary are employed in skilled jobs, they are known as white-collar workers. They include managers, teachers, administrators. • Some jobs offer flexi time, a system that allows workers to start or finish at times that suit themselves. • Flexi time might be built into the daily work hours so that people work a nine-day fortnight and have a rostered day off (RDO) over a two week period.

Earning an income – types of income • Types of income – investments • Return on invested money is considered income. • Interest – income received from investments. • When a person saves money in a bank account the bank pays interest to the account holder in return for the use of the money in the account. • Banks use invested savings to: • 1. Lend the money to other people. • 2. Purchase shares. • Dividends – a payment made to a shareholder of a company as a cash reward for investing in that company through the purchase of its shares. It is usually derived from the company’s net profit. • Shares can be bought in a public company on the Australian share market or Australian stock exchange. • A percentage of profit is returned to share holders as a dividend.

Earning an income – types of income • Types of income – investments • Rent – Income received for the use of a property. • Usually for a house, townhouse, flat, apartment or factory building. • Royalties – Income from the sale of a piece of work such as a song, a book or an invention. • Prize money • Professional sports people like golf and tennis players earn money in this way. • Gambling or game shows can earn prize money. • Only considered income if the person receiving is a professional gambler or game show contestant and earns this type of money regularly.

Earning an income – types of income • Types of income – business ventures • Fees – income from providing a professional service such as legal advice or public speaking. • Fees are received by professionals like accountants, doctors, dentists and solicitors. These people often follow a schedule of fees set by a professional association. • Commission – a percentage of the selling price paid to those who act as a go between, between buyers and sellers. • People who receive include car salespeople and real estate agents. • Businesses employ people on a low base salary and allow the employees to ‘top up’ their income by earning a commission from the sales they make. • Profits – income from selling goods or services less the cost of selling the goods or services; that is the excess of revenue over expenses of running a business. • Applies to those self employed, that own their own business.

Earning an income – types of income • Types of income – Social Security • Social Security – payments made by the Australian federal government to ensure all Australian have a livable income or enough money to pay for the basic necessities of life. • Payments include: • Income support • Austudy & Abstudy • Disability & Aged pensions. • Youth & New Start Allowances.

Lingo List - Types of income

Activity – Earning an income • The Brown family consists of John and Elizabeth who own a butcher’s shop. • Their children, Jason, a university student, has a casual job at a hardware store, • Tayla works at the Post Office and plays on the share market for a hobby, and • Evan (15) still goes to school. • Grandma Phyllis (78) lives nearby and is doing very well for her age. Look at each of these family members. • Identify the major sources of income for each family member. • Choose one family member. Write a description of their type of income and why it is appropriate for this family member. Investigate social security payments this family may be eligible for at:http://www.humanservices.gov.au/ • Write a paragraph about your conclusions. • Make suggestions about additional sources of income that this family may be able to achieve. Source - Curriculum support education – NSW Government

TPS -Types of income activity • Thinkabout which of the following incomes would you prefer? • $4o,ooo salary per annum (p.a) • 10 per cent commission on expected sales of $500 000 p.a • Base salary of $20,000 p.a plus 5 per cent commission on expected sales of $500,000 p.a Discuss your reasoning with the person next to you Shareyour answers with the rest of the class when asked.

Students learn about: • Spending and saving income • Expenditure • Spending patterns and factors which influence the need for saving. • Income, age, location, wealth

Students learn to: • Spending and saving income • Identify fixed and variable expenditure. • Discuss the reasons for saving. • Investigate the relationship between responsible spending and saving patterns at various life stages.

Spending and saving income • Expenditure – what we spend our income on can be classified into: • Fixed expenditure – • Recurring expenses like food, rent, phone, electricity, car registration, insurance. • Expenses occur on a regular basis – weekly, monthly or yearly. • Variable expenditure – • Expenses that occur irregularly. • For example buying movie tickets or a new CD. • The higher our income the more money we have for variable expenditure.

Spending and saving income • To save means to put some money aside and spend it later rather than spend it now. • Children put savings in: • A moneybox or …… • Discuss the reasons for saving:- • Let money grow. • To afford to purchase a good or service like a car or house. • For retirement. • For a rainy day.

Spending and saving income • Spending patterns and factors which influence the need for saving. • Income • Disposable income – how much we earn after tax. • Age • With age comes more responsibilities such as raising a family or caring for elderly relatives and greater financial commitments such as a mortgage. • Location • Costs vary depending on where we live or choose to shop. • Wealth • The assets we accumulated or inherited. • How risk adverse we are, that is, how willing we are to take a chance that we may lose the money.

Spending and saving income – Activity - money diary • Create a money diary of your income and spending for a week. • Separate your income from various sources such as employment, allowances and gifts. • Separate your spending into fixed and variable, including food, entertainment, gifts, transport, telephone and money owed to others. • Compare the difference between income and expenditure and identify the purpose of any saved income. Source - Curriculum support education – NSW Government

Spending and saving activity • Spending and saving patterns vary across different life stages.

Spending and Saving income – Survey activity • Design a survey to gather information about the spending and saving patterns of individuals. In the survey include questions such as: • What is most of your money spent on? • Are these expenses fixed or variable? • Is the spending on needs or wants? • What proportion of your income is saved each month? • What are you saving for? • Are your savings for long term or short term goals? • The survey is to be conducted by each student with one representative of three age groups: • 15-20 years of age • 30-40 years of age • 60-70 years of age. • In groups of about 3-4 students tabulate results and comment on the following: • The different reasons for savings for different people • The changing nature of spending and saving according to age • The factors other than age, which would have impacted on the saving and spending patterns of the people interviewed. Source - Curriculum support education – NSW Government

Students learn about: • Borrowing money • Reasons for borrowing • Getting a loan • Types of loans, lending institutions, ability to repay, credit rating.

Students learn to: • Borrowing money • Discuss the reasons for and against borrowing money. • Evaluate the borrowing options for making a substantial purchase. • Identify specific situations in which individuals should or should not borrow money. • Compare the advantages and disadvantages of different types of loans and lenders. • Identify factors affecting an individual’s credit rating.

Borrowing money • Reasons for borrowing

Borrowing moneyFour important steps to take when deciding whether to borrow money • Understand you are going into debt. The principal and interest need to be repaid. What security is required? • What is the total amount of the loan (include the principal, interest and additional costs). Find out the annual percentage rate of interest and whether it is fixed or variable. • Work out your repayment amount. • Understand the consequences if you cannot make the repayments. Activity • You have decided to buy your first car. You will borrow the money to pay for the car from a bank. • Choose a car? How much does it cost? • How much do you need to borrow? • What is your security for the loan? • What is the principal, interest and additional costs? • What are your monthly repayments? • When will the car be paid off? • What are the consequences if you cannot make the repayment?

Borrowing options for making a substantial purchase Source Commerce dot com Concepts and skills. Second edition. Kleeman, Adnum, Farr, Hamper, Hartley, Lane, O’Connor page 46

Borrowing money - Different loan options • Activity • Find two examples of each of the following financial institutions: • Australian bank • Overseas/foreign bank • Merchant bank • Credit union • Building society • Finance company • Insurance company • What types of loans does each offer? • Compare the advantages and disadvantages of each type of loan. Source Commerce dot com Concepts and skills. Second edition. Kleeman, Adnum, Farr, Hamper, Hartley, Lane, O’Connor page 47

Borrowing money activity • John and Elizabeth Brown want to borrow $60,000 to upgrade their shop. They have 3 children Evan, Jason & Tayla. • The business has a net worth of $200,000 at present. • Their house is currently valued at $650,000 and they still owe $220,000 on it. • They also want to take Evan on an overseas holiday to Hawaii before he is too old to travel with his parents. • Jason needs money for a car to get to University, • Tayla needs money to buy her first home and • Evan wants to borrow for the hire of an expensive suit for the Year 10 Formal this year. • Make a table with 5 columns. • Column 1: person (s) • Column 2: amount needed and purchase • Column 3: reasons for borrowing • Column 4: reasons against borrowing • Column 5: recommended form of credit and reasons for choice • Use the Internet to find out the features of the major types of credit before completing the following table. • (Consider: store credit, bankcards, credit cards, personal loan, finance company, line of credit, bank overdraft, mortgage and issues such as: cost, term, credit rating, risk, security, credit limit, deposit, contract) • Discuss the advantages and disadvantages of borrowing for each of the family members. • Create a table to show the different types of loans (personal, business, home loan-honeymoon and long term) and the corresponding interest rates charged by 5 different lenders. Examples: • www.national.com.auwww.anz.comwww.wizard.com.auwww.agc.com.auwww.aussiehomeloans.com.au Source - Curriculum support education – NSW Government

http://www.ratecity.com.au/sem/personal-loans/low-int/rateascgclid=CNXS1Z6z7qsCFeJKpgodPizqAA&mch=rcsem&cmp=ds_gl_personalloans&pkw=personal+loanshttp://www.ratecity.com.au/sem/personal-loans/low-int/rateascgclid=CNXS1Z6z7qsCFeJKpgodPizqAA&mch=rcsem&cmp=ds_gl_personalloans&pkw=personal+loans • http://www.ratecity.com.au/personal-loans

Borrowing money – Activity - specific situations • Assume the following people have come to you for a loan. Choose which person you are most likely to lend money to and the person you are least likely to lend money to: • Sam Safi currently has two credit contracts. He has always paid his instalments on time. Sam has recently lost his job and wants to borrow money to help him through this difficult time. • Alice Dingo has been working for 12 years since leaving school. She has never had a loan as she has always paid for everything with cash. Alice wants to borrow money for a new car. • Joe Cribb was declared bankrupt three years ago after getting into debt to the value of $380,000. He has been working full time for the last two years and wants to borrow money to go on an overseas holiday. • Danny Grimes defaulted on two loans 10 years ago. He has just finished paying off another loan. He is working two casual jobs. Danny wants to borrow money to pay for a part-time course. http://www.ratecity.com.au/sem/personal-loans/low-int/rate-asc?gclid=CIjksdaw7qsCFUFNpgodFWVUJg&mch=rcsem&cmp=ds_gl_personalloans&pkw=personal+loans+comparison Justify your reasoning.

Borrowing money – Credit rating • Identify factors affecting an individual’s credit rating. • A stable job – More likely to get a loan if have held the same job for a number of years. • An employment history – Difficult to get a job if you have never had a job or have been unemployed for a long period. • An address history – Less likely to get a loan if frequently move house. • Income details – Need to show you earn enough to repay the loan. • Previous credit history – The financial institution is more likely to lend you money if you have paid off a previous loan in full and on time. • A listing of your assets – Bank accounts, houses, motor vehicles and life insurance. These can be used as security if you are unable to repay the loan. • A listing of your liabilities – Existing loans and other financial commitments such as rent. You need to show you have enough money left over to meet repayments.

Credit rating activity • The Brown family plan to go on a holiday to Hawaii for two weeks, costing $10 000 for the three of them. • Given the Brown family will need to get credit for this holiday, investigate the issue of credit rating for themvia www.mycreditfile.com.au • Use the websites above to answer the following questions about credit rating • Outline the factors that affect your personal credit rating. • Identify the processes involved when a lender assesses whether to extend your credit. www.tio.com.au (telecommunications industry ombudsman) www.aca.gov.au (Australian government communication authority) • How can entering into a mobile phone plan affect your credit rating? • Compare the costs of prepaid phone cards as against signing a mobile phone contract. Source - Curriculum support education – NSW Government

Students learn about: • Managing finances • Features of responsible financial management. • Budgeting • Saving • Monitoring and record-keeping • Avoiding over commitments • Insurance

Students learn to: • Managing finances • Use a spreadsheet to prepare a hypothetical household budget which includes the following categories: • Income and borrowing • Fixed and variable expenditure. • Saving. • Monitor and modify the hypothetical budget. • Identify different types of insurance policies and discuss their importance. • Health, car, home, life, income protection.

Managing finances • Considerations to manage your finances • Determines whether to save, spend, invest or borrow. • Consider whether you are: • Fully informed about what different financial institutions offer. • Fully informed about your rights and responsibilities. • Wise to take out insurance to cover yourself against loss. • Able to prepare a budget to help manage your finances.

Managing finances • Features of responsible financial management: • Budgeting • Saving • Monitoring and record keeping • Avoiding over commitments Activities • Develop a sentence to describe each of the features mentioned. • Go to website http://www.moneysmart.gov.au/managing-my-money/saving. Watch Video: Amy talks about saving for a holiday. • Complete my savings plan worksheet. • Read borrowing basics worksheet. Use the worksheet to develop a fact sheet titled ‘Avoid over commitments’

Insurance • Insurance is a risk management plan that takes into account the probability of something happening and the likely compensation required in such an event. • Insurance involves the consumer paying a premium to an insurance provider. • A premium is an amount of money paid for an insurance policy, determined by the insurance provider, which reflects the likelihood of an event and financially covers the possibility of a negative occurrence. • If something goes wrong, the consumer makes a claim and the insurance provider will pay the claimant compensation for the situation. • Compensation is an amount of money deemed sufficient to make up for a loss. • When an insurer pays compensation to a claimant they lose money, so an insurer must manage the money they receive via premiums against the risk of a consumer making a claim. The more claims paid out by an insurance company, the higher the premium they will charge to cover the outgoing money. • The premium you pay represents a degree of coverage, which limits the amount received in compensation. • Underinsurance is the name given to inadequate financial coverage when the consumer cannot claim enough money to compensate for a situation. Source Swirk.com – 9 Commerce Personal Finance • Activity • Define the terms: • Insurance • Premium • Claim • Compensation • Underinsurance

Types of Insurance • Car insurance • Compulsory third party car insurance covers personal injury suffered during an accident to ensure financial compensation for accident victims. • Comprehensive (full) car insurance covers: • Damage to your vehicle; • Any damage that your vehicle might cause in an accident, including personal injury; and • Theft of the vehicle. • The insurance provider determines the premium based on the perceived risk, which usually takes into account: • The age of the driver • Experience of the driver, • The type of vehicle and • Conditions of the vehicle. • Any evidence that drivers of a particular demographic are more likely to make a claim means that certain groups pay a higher premium. Source Swirk.com – 9 Commerce Personal Finance

Types of insurance • Home and contents insurance • This protects a consumer against damage to their property: • Damage caused by an accident, natural disaster or vandalism, and • Theft of possessions in the house (contents). • An insurer may take into account when assessing the probability and cost of a claim: • The location and type of property, • Presence of security and • The value of the contents in assessing the probability. • The amount a consumer will pay as a premium will reflect the insurer's perception of the risk. Source Swirk.com – 9 Commerce Personal Finance

Types of insurance • Health insurance • Health insurance ensures that in the event that the consumer needs medical attention, the insurance provider will compensate the consumer for the expense incurred. • There are different types of health insurance: • Some cover only basic preventative treatment, such as dental checks • Others include hospital stays and medical operations. • Consumers pay a premium based on: • The insurer's perception of risk, • The likelihood of the consumer making a claim. • If you are in poor health, or have a pre-existing condition, you can expect to pay more to take out an insurance policy. • Source Swirk.com – 9 Commerce Personal Finance

Types of insurance • Life insurance • For people who are concerned with the welfare of the people they leave behind when they die: • Spouse or • Children. • In the event of the consumer's death, the insurer pays compensation to the consumer's nominated dependents. • The amount of compensation will depend on the premium paid by the consumer and may relate to the circumstances of death. Source Swirk.com – 9 Commerce Personal Finance

Types of insurance • Income Protection • A form of welfare to cover a loss or drop in income. • Income loss may occur through circumstances like: • Redundancy or • Illness, • This insurance ensures the claimant continues to receive income. • The amount the consumer pays as a premium determines the conditions of a claim including: • The amount of compensation, • The length of time covered and • In which situations the claimant is entitled to money. • It is wise to buy this type of insurance if you make regular debt repayments so you can still meet them if you suffer income loss. Source Swirk.com – 9 Commerce Personal Finance

Types of insurance • Travel insurance • Travel insurance is a special type of insurance that covers a number of situations you may encounter out of your usual environment, including: • Transport problems, such as delayed or cancelled flights, • Medical emergencies or • Theft. • The amount you pay as a premium affects the level of coverage and the amount you receive as compensation in the event of a claim. Source Swirk.com – 9 Commerce Personal Finance

Types of insurance • Public liability • This covers the general public in the event that something happens to them when they are on your property. • For example the electrician you hired trips over the cat sleeping on your front steps.

Activity Find an insurance company that provides each type of insurance. Outline which insurance products you would consider and why. Where to buy insurance • There are a number of insurance providers that deal with specific types of insurance, for example dedicated car insurers or health insurance companies. • There are also general insurance companies that provide policies for a number of situations. • Many unions provide income protection insurance and sometimes a consumer can purchase insurance for an item at the point of sale. Source Swirk.com – 9 Commerce Personal Finance • Activity - Select one type of insurance need and research the costs and benefits offered by the policies of three insurance companies. • Sample sites: • www.aami.com.au, www.nrma.com.au, www.gio.com.au, • www.qbe.com.au, www.justcarinsurance.com.au Source Commerce dot com Concepts and skills. Second edition. Kleeman, Adnum, Farr, Hamper, Hartley, Lane, O’Connor page 53

Students learn about: • Managing finances • Consequences of poor financial management. • Financial • Legal • Social • Sources of financial advice. • The financial services industry: the range of organisations and the services offered. • The responsibilities of lenders and financial advisers and their legal obligations. • The laws that regulate and monitor the financial services industry.

Students learn to: • Managing finances • Identify the consequences of the misuse of credit. • Identify and critically analyse a range of strategies to solve a variety of financial problems. • Discuss the factors which may contribute to financial mismanagement in particular communities. • Research and report on the scope of the financial services industry. • Access and evaluate financial advice provided by a range of organisations. • Discuss the responsibilities of lenders and advisers when providing relevant information and advice for individuals and community groups. • Investigate the key changes in consumer laws that protect individuals.

Consequences of poor financial management Activity Describe what a hardship variation is and when it can be applied. • Financial and Legal • If you are in debt and are unable to make your repayments it can have serious consequences. • Creditors have a right to recover money they lend. Legally they must initiate a debt recovery process by serving a default notice. • The default notice outlines the debtor's failure to adhere to the terms and conditions of the loan and gives the debtor 30 days to resolve the debt. • After receiving a default notice a debtor can pursue an application for hardship variation. • A hardship variation (section 66 of the Consumer Credit Code 1996) involves forcing a creditor to make changes to the conditions in the loan agreement: • Reducing the installment amount or • Postponing repayments for a specified period. These options extend the term of the loan so the debtor repays the loan when they are able. • Hardship variation is a temporary solution. Debtors must prove to the creditor: • They have 'reasonable cause', such as illness or unemployment, to pursue this method and • They intend to resolve the debt within a reasonable period. • Debtors cannot pursue this option if: • The loan amount is above the variable threshold set by the Uniform Consumer Credit Code or • The creditor has already commenced formal legal proceedings. Source Swirk.com – 9 Commerce Personal Finance

Consequences of poor financial management • Financial and Legal continued • If your loan agreement involved a mortgage, that is, the use of an asset as security, then the creditor can apply to have the asset repossessed. • Repossession is reclamation of an asset to recover a debt. A creditor must make a Statement of Claim for Repossession, giving the debtor 30 days to resolve the debt. • Creditors cannot: • Initiate repossession if the debtor has 25% or less to repay on the principal. • Cannot access the asset if it is on private property unless they have a court order to enter the property. They must then notify the debtor of the goods' value, any additional expenses with regard to the act of repossession and their rights in relation to recovering the repossessed item. • Debtors can apply to postpone repossession (section 86 of the Consumer Credit Code 1996) if they believe that they will soon be able to meet repayments. • If you are employed and receive a regular income, creditors can seek a legal order to garnish your income, which involves the automatic deduction of repayments from your earnings. The courts decide if this is fair based on your other financial commitments. Source Swirk.com – 9 Commerce Personal Finance Activity - Define repossession and garnish

Consequences of poor financial management • Financial and Legal and Social • Bankruptcy is a form of legal protection that shields a debtor from actions by a creditor. • Debtors can opt to resolve their financial difficulty in this manner or • Creditors may force bankruptcy on a debtor to prevent financial operation. • Bankruptcy means the debtor does not need to meet their repayment obligations, but • This status prevents them from borrowing money, usually for three years. • It remains on record with a credit-reporting agency for seven years, which limits future applications for credit. • The bankrupt cannot serve as director of a company. • Courts monitor their income, restricting their standard of living. • The stigma may affect business credibility for the bankrupt's future ventures. • Any action against a debtor affect their credit rating when they apply for credit in the future. Activity Define bankruptcy. What are the implications of being declared bankrupt? Source Swirk.com – 9 Commerce Personal Finance

Personal Finance