LIBF Financial Studies Unit 2 Topic 1 – Needs, wants and aspirations PART 3 – 1.

Learning objectives – rate yourself at the end of this sub-topic:

1) Explain what is meant by the ‘feedback effect’ and how expectations can affect the
outcome of events

2) Describe how personal values can affect financial decisions, e.g. ethics, attitude to
borrowing, religion

3) Recall how a budget works and explain its importance when considering the
affordability of financial products

External factors
TASK 1: Answer the following:
a) What is peer pressure? How are
you affected by it?
b) How might peer pressure affect
your financial planning?
c) Who are the main role models in
your life?
d) How might role models affect your
financial planning?
Our peers are our equals – that is, people in the same position as
us. For example, schoolmates are the peers of someone who is still
at school. From our peers, we form our perception of what is the
norm – in other words, the acceptable behaviour within our
particular group – and, often, we want to fit in, to be one of the
crowd.
This feeling wanting to fit in can be particularly important for
young people. They like to have the same things that their
friends have – the latest mobile phone, for instance. Satisfying
these, ‘wants’ can be expensive and may involve saving or
borrowing money.
- my parents
We may buy the things that they buy, use their phrases when we
speak, and so on.

The feedback effect

TASK 2: Describe how you or other people might react in the following situations:
a) Your driving test takes place This may lower the person’s self-esteem and create anxiety, stress
tomorrow and your friend has just and increased likelihood of depression. Lastly, this can affect their
 failed, telling you how tough it was!
b) The government reports that
there is going to be a shortage of
petrol in the coming weeks
c) Ryanair’s share price starts to fall
following a profit warning
performance on the test day.
Everyone will be lining up at the petrol station, I will only use my
petrol when I needed
Look at the graph then sell the share

TASK 3: Consider the following statements:

 John did not feel confident about passing his driving test: he was nervous and thought he would fail. He
saw the test as a real barrier: he had a negative attitude.
 Jez felt confident about passing the test and thought that he had done enough practice to make it easy.
His attitude was therefore positive and his thoughts focused on owning his own car.
Explain why Jez is more likely to pass – how does this illustrate the feedback effect?
Higher self-esteem as he had positive thoughts and his thoughts focused on owning his own car

The influence of personal values on financial decisions

Financial decisions are made within the context of a person’s particular value system and perceptions. For
example:
 Ethical investing
 Managing finance
 Religious beliefs

Affordability – budgeting for financial products

Buying a financial services product is not the same as buying something that is quickly consumed, such as a
holiday.
When someone purchases a financial product, they are entering into a relationship with the provider that has
implications for a specified time period – this may be short-term but it can also be medium- or long-term.
TASK 4: Answer the following:
a) What does a budget consist of?  Income
 Fixed expenses. Fixed expenses are those
expenses over which you have little control
or are unchangeable
 Flexible expenses
 Unplanned expenses
 Savings
b) What would you do if you identified a You must either increase revenue or decrease
deficit in your budget? spending. On a personal level, you can increase
revenue by getting a raise, finding a better job, or
working two jobs. You can also start a business on
the side, draw down investment income, or rent out
real estate.
 c) Why is it easier to plan to budget for paying
off a credit card compared to a mortgage?
d) Why is it important for young people to set
a budget before starting to drive?
e) Why is it advisable to consider the
affordability of a regular savings account?
Credit cards are cheaper to pay off
Setting and sticking to a budget will help you avoid
getting into debt and it will help you start paying off
your existing debt. If you're trying to build a credit
history living on a budget can help. Set monthly debt
payments into your necessary living expenses.
e.g. you got MOT, tax, insurance, petrol etc…
The potential to earn interest, it's easy to open and
access.
Because you have to put certain amount, each
month in the account, if not then your interest will
increase.

Spending priorities
TASK 5: Read the case study at the end of the chapter about Jo. Think of a time when you have had to make a
similar decision about what to spend your money on.
Write a summary of that experience:
- She can spend less on food as she can make food at home

Attitudes to risk
Different people see risk in different ways. Some are very cautious and always think of what might go wrong
before they act. They avoid risky situations and take precautions in situations that they cannot avoid. Such
people will never go on fairground rides, they may refuse to travel by air, they always take an umbrella when
they go out and they insure everything.
TASK 6: Answer the following:
a) What term is used to describe Risk adverse
someone who avoids risk?
b) What about someone who Risk tolerant
doesn’t mind risk?
c) What are the 4 categories of - physical risk
risk? Give example(s) for each. - emotional risk
- financial risk
- risk to reputation
d) Why is it important for a The key is determining what level of investment risk you feel
financial adviser to understand comfortable with before you invest
someone’s attitude to risk?
e) How do attitudes to risk When you get older your more likely to save money and not make any
change as we get older? financial risks as you will have kids to provide for and save for
 retirement
f) What are the implications of
this for financial planning?