Topic 1

Needs, wants and aspirations

Learning outcomes

After studying this topic, students will be able to:

◆ identify the key features of needs, wants and aspirations;

◆ identify how needs, wants and aspirations can be satisfied through informed
financial decision-making;

◆ identify how personal values affect an individual’s thoughts, feelings,

behaviour and decision-making.

Introduction
In Unit 1 Topic 2, we looked at the differences between needs, wants and aspirations
and at how these change at different stages of someone’s life cycle. This topic looks
at these ideas in a little more detail and considers how people’s needs, wants and
aspirations help them to make their financial decisions. People’s values, beliefs and
attitudes affect the way they behave and the choices they make, including the
financial ones.

1.1 Needs, wants and aspirations

Needs are essential, ‘must-have’ items that everyone must have to survive, such as
water, food and shelter. Needs are quite limited; people need enough clothes to keep
them warm and dry, or to protect them from the sun in a hot climate.

Wants are optional, ‘nice-to-have’ items that are desirable but not essential, for
example jewellery or going to the cinema. They are items and experiences that
people wish they could have, over
and above their needs; they
cannot fulfil their wants until their
needs have been met. There is no
limit to what someone can want: a
few clothes would cover their
basic needs but they probably
want to have a good choice of
fashionable clothes.

Tickets for a festival are a want, rather

than a need.

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 It is important to distinguish between needs and wants. Essential items such as water,
basic food and clothing are needs for everyone. More expensive food and fashion
clothing are not necessary and so they are wants. People need to be aware that they
are making a decision to buy a want if they buy more food or clothes than they
actually require, or choose more expensive products when cheaper items are
available – everyone needs to eat but some people choose to buy luxury items such
as truffles and prime steak. If a person’s budget changed, they would make different
decisions about what to buy under the heading of ‘food’.

So needs and wants are related to the price of products and to people’s ability to
buy them. Products such as new shoes or holidays might be seen as needs by many
people in a developed country, whereas these items would be real luxuries and seen
as wants by people in a less developed country. In such a country, protection for feet
is a need but good shoes are a want. As people become better off, items that used
to be wants become needs: they can afford to buy them and become used to having
them.

Changing wants and needs 1

Seyni came from a poor family
in the West African country of
Niger. Growing up, he didn’t
have a proper pair of shoes, but
wore flip-flops; for him, shoes
were a ‘want’. He was lucky
enough to go to school and
eventually he got a good job. He
needed proper shoes to wear to
work and was earning enough
money to own several pairs;
shoes became a need. Later,
things went wrong in his life, he
lost his job and returned to
poverty; shoes have become a
want again. How needs are
satisfied varies with culture and
spending power.

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 Changing wants and needs 2
Lloyd and Laura have two children,
and until recently they were both
earning above-average salaries.
The family spent money on a
range of products, including
electronic goods, meals out and
foreign holidays. Then Laura was
made redundant and the family
income is now reduced drastically.
Spending has had to be cut and
every member of the family has to
think carefully about what goods
and services they can do without –
that is, they have to abandon
some of their wants in order to be
able to finance their needs.

Aspirations are hopes for the future. They are the items or experiences that people
wish to have in the medium-term or long-term future – for example, going on an
exotic holiday, sharing a flat with friends or getting a good job. Aspirations can be
realistic (such as buying a nice car), or unrealistic (such as buying a luxury yacht).
The emphasis in Unit 2 is on medium-term and long-term finance. When people plan
long-term finance, aspirations are a key consideration.

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 1.2 How needs, wants and aspirations change over
the life cycle
Needs do not change much over the life cycle but a person’s values – the things they
consider important to them – might change as they grow older and have different
experiences. As their values change, their wants and aspirations might change, too.
In turn, these changes affect how people manage their money. The typical life events
of the personal life cycle (Table 2.2 in Topic 2 of Unit 1) can now be extended, as
shown in Table 1.1, with the addition of examples of needs, wants and aspirations
at each stage.

Table 1.1 Needs, wants and aspirations over the personal life cycle

Life cycle Typical Needs Wants Aspirations

stage events

Birth and Birth Warmth Love –

infanthood Learns to walk Safety Attention
(0–2 yrs Learns to talk Food
old) Shelter

Childhood Nursery and Warmth Love Bigger and better

– preschool preschool Safety Attention toys
(2–5 yrs Makes friends Food Toys
old) Learns through Shelter Treats
play
Develops
communication
skills

Childhood Starts school Warmth Love Fame

– school Makes longer- Safety Attention Particular careers
(5–12 yrs term friends Food Toys Independence
old) Learns skills Shelter Treats
such as reading Fashionable
and writing clothes
Music

Teenager Puberty and Warmth Love Fame

(13–19 yrs adolescence Safety Attention Fortune
old) School tests and Food Social Love
exams Shelter interaction Independence
Goes to college Fashionable Self-expression
or sixth form clothes
Learns to drive Music
Develops closer Transport
relationships (bicycle; scooter;
with peers and motorbike; car)
adults outside Material wants,
the family such as the
Starts a part- latest mobile
time job phone and
electronic goods

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 Young Goes to Remain the same, Own Holidays
adult university but may have to possessions, eg Cars
(18–25 yrs Moves away be provided from furniture, car Own home
old) from home the young An income to Own business
Qualifies person’s own pay essential
Starts a full-time (limited) income bills and for
job entertainment,
etc
Love

Mature Career Children’s needs Bigger home Health and

adult promotions may take priority More space happiness
(26–40 yrs Career changes Material goods Children
old) Marriage or civil Linked to Career
partnership children’s promotions
Children futures, Security
Buys property especially
Takes on a education
mortgage

Middle age Career Don’t change, but Comfort Material luxuries,

to late promotions may need others Security eg cruise, luxury
middle age Career changes to help to provide New car
(41–60 yrs Children leave them – especially experiences, Quiet life
old/55–65 home health needs such as travel, Security
yrs old) Pays off new sports and
mortgage hobbies
Early retirement Voluntary or
Retirement charity work

Old age/ Part-time job Care Safety May be

retirement Leisure interests Help Security aspirations for
(65 and hobbies Support children, or
onwards) grandchildren, to
settle, marry and
do well

As people move from childhood into adulthood and then grow older, their needs and
wants change according to:

◆ their lifestyle;

◆ the prevailing culture of the society in which they live;

◆ the size of their family; and

◆ their ability to afford products.

Their aspirations probably become more realistic as they learn more about life.

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 Wants, needs and aspirations over a lifetime

Birth When Elliott was born, he had certain basic instinctive needs, the
satisfaction of which depended on his parents’ ability to pay for them.
They had enough money to give him food and clothing and they lived
in a small flat so he didn’t have his own bedroom but he was not aware
of this. As he grew, his needs were similar but he started to develop
wants, particularly toys and treats.

Age 5 Elliott started school and began to be influenced by his peers; he

aspired to own some toys that were too expensive for his parents to
afford. But they were able to open a savings account for him and he
started to be interested in making this grow.

Age 10 He aspired to become an airline pilot; his parents were able to buy him
model aeroplanes and, when his father got a promotion at work, the
family flew to Spain for a holiday.

Age 11 Elliott moved to secondary school and did well over the years. He had
a few more needs but his list of wants grew tremendously and included
the latest music and the equipment to play it. His job aspiration
remained the same but he had other aspirations, too, including having
a good-looking girlfriend and playing football for his school.

Age 16 He got a job at weekends and in the school holidays; his aspiration was
to learn to drive as soon as he reached 17 and he was able to save up
enough to achieve this.

Age 17 When he got his driving licence, he wanted to buy a car; but he also
aspired to go to university to study engineering and he decided that
saving for his studies was a priority, so he confined himself to
borrowing his father’s car for taking his girlfriend out.

Age 18 Elliott’s needs at university were similar to before but now he had to
buy textbooks. His wants expanded into going out in the evening. His
aspiration remained the same – to become an airline pilot.

Age 21 When he got his degree, he managed to get a place at a pilot training
college. There was no grant for this and so he had to take out a bank
loan. He saw this expenditure as necessary as it would secure him the
qualification he wanted.

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 Age 26 Elliott was a qualified pilot and newly married. He and his wife, Barbara,
limited the money they spent on their basic needs so they could save
up for their wants and achieve their aspirations, which were to buy their
own home and to have a family.

Age 30 Elliott had two children, a house bought with a mortgage, furniture and
a car. His children’s needs now took priority and his wants were to have
a bigger house and to provide for his children’s education. He aspired
to getting promotion at work and to saving some money for his middle
years; he also paid into an occupational pension to provide for his
retirement.

Age 50 Their children were at university and he and Barbara were able to satisfy
their want for some time together and they began to travel.

Age 60 Elliott retired and his main aspiration was to have a comfortable old
age; his pension turned out to be good and he was able to pay for his
and his wife’s needs and wants.

Age 70 Both Elliott and Barbara are beginning to become frailer. As the years
pass, they will need care and they are trying to save for this. His main
aspirations are for his children to do well in their lives.

Elliott and Barbara

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 1.3 Satisfying needs, wants and aspirations
In order to satisfy their needs, wants and aspirations, people have to be able to
finance them – in other words, they must have enough money to afford them. Unit
1 has already covered current accounts, short-term savings and borrowing, and the
insurance of everyday items. Unit 2 covers financial capability in the medium term
and over the longer term. Topics 2 and 3 will cover the following main types of
financial product that people use to satisfy their medium-term and longer-term
needs, wants and aspirations.

◆ Medium-term and longer-term savings – people need financial products that

allow them to save over a longer period – that is, more than three years. They do
this so they can put money away to cover future needs and wants and to allow
them to fulfil their aspirations. For example, a young person aiming to open a
business in five years’ time needs to save money for the capital (that is, funds to
pay for premises, equipment and any other costs needed to set up the business).
Banks and certain other providers offer longer-term savings accounts where
customers can build up the lump sum they need.

◆ Investments – an investment is a longer-term form of saving; people invest to

save for a longer-term want or aspiration. It is different from a long-term savings
product because it is more risky but it can bring in a higher return. A parent might
save money in an investment scheme while their children are young so they can
help them with their education later.

◆ Pensions – many people save money in a pension scheme throughout their

working lives to finance their retirement.

◆ Longer-term borrowing – when people borrow money to finance a large

purchase, they need to pay it back over a long period, otherwise they cannot
afford it. The best example of such a loan is a mortgage, which is a loan secured
on the value of the property being purchased. Hire purchase is a type of secured
consumer credit to finance items such as cars and furniture, which also involves
the borrower repaying over a number of years.

◆ Insurance – insurance companies and banks provide insurance policies that cover
long-term risks. For example, people who buy their own home can insure the property
and its contents against loss from a range of risks. Life assurance allows people to
protect their loved ones in case they die, and some products also enable people to
save money for a later stage of their lives.

Financial products are not like, say, a car – people

do not get pleasure simply from having them.
They buy financial products because such
products enable them to satisfy their needs,
wants and aspirations. A decision to satisfy a need
or want and therefore to buy a financial product
is based on both internal and external factors.

People need to be sure they understand the financial

products they are buying and that the products are
suitable for their needs.

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1.4 Internal factors that influence needs, wants and
aspirations
Internal factors are those that are come from within people themselves. The key
internal factor that affects someone’s choices is their own personal set of values,
beliefs and attitudes. These may change with circumstances and as the person passes
through the stages of the life cycle, but they will probably not change significantly,
as beliefs and values tend to be fairly stable. Values, beliefs and attitudes affect the
way people manage their money.

Sometimes, our perception of a situation is influenced by our own experiences. These

will also be affected by our own values and attitudes. Our values, for example, may
tell us that a risk to the well-being of people is more important than a risk to
property, and this could affect how much of a priority we give to buying insurance
products. In particular, many people perceive a higher risk in something they are
particularly anxious about than in something they don’t much worry about.

1.4.1 Values
Values are general feelings or beliefs about desirable behaviour and goals. They
involve the concepts of ‘good’ and ‘bad’ and of how people think things ought to
be. Values fulfil two important functions with regard to buying financial products:

◆ They help people to distinguish between what they consider to be needs and what
they consider to be wants, and to form their aspirations.

◆ They help people to plan their finances and to decide between different
alternatives.

Values help people to decide their general approach to financial matters. For
example, some young people live in the present and take each day as it comes. They
do not know what they want to do when they leave school and they spend all their
money every week on going out, phone top-ups, clothes, etc. Others believe in
planning for the future. They may want to go to university or to start a business.
They know that this will be expensive and they save most of their money towards
this longer-term goal.

1.4.2 Beliefs
Beliefs are more specific and detailed than values. They are less about the way that
people think things ought to be and more about the way they think they are. Beliefs
can be religious but can also include beliefs in, for example, free speech, enterprise
or fairness.

Beliefs can be described as ‘absolute’ beliefs, for example: ‘It’s acceptable to charge
a reasonable amount of interest on a loan but it’s not acceptable to charge too
much’. Alternatively beliefs may be ‘causal’ – in other words, they explain how one
event causes or makes another event happen. For example: ‘If interest rates rise,
people will borrow less’.

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 Beliefs can influence the way people see financial services and the firms that provide
them. Banks have had a poor reputation since the financial crisis that began in 2007,
and some people may not trust them any more. They might believe that banks will
crash again and this would make them wary of saving their money in a bank account.

1.4.3 Attitudes
Attitudes refer to how, at a given time and place, people think and feel about another
person, an event or an issue. Attitudes are usually limited to socially significant
issues or events and are usually quite general rather than specific.

Attitudes can be changed by circumstances, events, experience or advice. A person’s

attitude towards a football club may change according to whether it is winning or
losing; someone’s attitude to children may change when they have their own. Other
attitudes may be deeply embedded and therefore resistant to change. Sometimes a
person may have no attitude towards something and this is a neutral attitude.

A financial example is people’s attitude to saving for their old age. When they are
young, they probably do not find it important: they are more interested in what they
are going to spend now and perhaps in saving up for a car or their own home. They
feel that their retirement is so far away that it is not worth worrying about it now. As
they get older, however, they begin to realise that they have not saved much and
their attitude becomes more positive; because retirement is nearer, it seems more
important to them.

Attitudes to risk are also important. Risk is the likelihood that a particular event will
happen or that people might gain or lose from buying a particular financial product.
Different people have different attitudes to risk (see section 1.6.5).

1.4.4 Perceptions
People’s perceptions represent their understanding of the world around them – not
just their physical surroundings but also their social environment. They gather
perceptions from a whole range of different inputs, some of which may be sensory
(sight, sound, smell, touch and taste) and others that are non-sensory. Their
perceptions affect the way they feel about the products with which they are
surrounded, the financial products that could help them to buy these products, and
the banks and other financial institutions that provide these financial services.

1.4.5 Preferences
People have certain preferences for particular products, and these often depend on
their personal values, beliefs and attitudes. The fact that different people prefer
different kinds of goods and services and different features within each product
means that businesses must provide a good range of products to suit all tastes. For
instance, cars are produced in different sizes, designs and engine sizes, and with a
variety of features.

Financial services products also come with many different features. For example,
savings accounts pay different interest rates according to the amount saved, the

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period of notice of withdrawal the customer agrees to give, and the amount of risk
involved. Again, different loans come with different repayment conditions attached.

One way in which customers can express a

preference about financial products is the
distribution channel they choose to use – that is,
whether they access their accounts at the branch,
by phone or online. People who are not
technologically minded prefer to make deposits
and withdrawals at the bank branch; they are
happy using cheques and they like the personal
contact with members of the bank staff. Many
older people come into this category. But younger
people have mobile phones and are computer-
literate, so, often, they prefer to manage their
accounts by telephone or mobile banking, or
online, via their computer. They can carry out a lot
Some people prefer to manage their
of their banking business in the comfort of their financial products online, or by
own home, it saves them time and they have speaking to an adviser over the
access to a lot of information about their accounts. phone.

1.5 External factors that influence needs, wants and

aspirations
External factors are those that are not within your control, but are imposed from
outside. Major factors include:

◆ marketing and advertising;

◆ peer pressure; and

◆ trends, fashions and role models.

1.5.1 Marketing
Marketing can be defined as follows:

‘The activities associated with buying and selling a product or service. It includes
advertising, selling and delivering products to people. Marketing is everything a
company does to acquire customers and maintain a relationship with them.’
(Investopedia, 2015)

Marketing can influence people in subtle ways. For example, two newspapers can
report the same event from completely different standpoints – the reporting is
tailored to the profile of their target readership, and that in turn reinforces their
readers’ perceptions. Even the fact that an event is reported in the press or on
television can distort our understanding of its frequency. For example, if a case of a
dissatisfied bank customer is reported, people may form the impression that all
customers are dissatisfied with all banks.

Marketing can be subdivided into promotion and public relations (PR).

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 Promotion
Promotion refers to paid-for marketing activities, including advertising. It includes
all activities that aim to:

◆ communicate with people;

◆ inform them of goods and services; and

◆ persuade them to buy.

Advertising is a part of promotion. It is used to inform and persuade: it informs

customers that a product is available and tries to persuade them to buy that product.
Advertising can carry both explicit and implicit messages. The overt ‘buy me’
message is accompanied by lifestyle or fashion messages that can be very strong.

Advertisements are carried by the media – television and radio (broadcast media),
newspapers and magazines (print media), online (electronic and social media),
cinema, hoardings, posters and billboards (other media). Banks, building societies
and insurers use advertising media extensively.

Businesses may also undertake other activities that come under the heading of
promotion, such as carrying out product trials, offering ‘money-off’ coupons or ‘buy
one, get one free’ offers, running customer competitions, sponsoring teams or
events and offering special credit terms. A bank may offer cash-back to customers
who choose its credit card.

All of the above activities add to the costs of a business and are directly related to the
product being marketed. For example, a bank that is offering a new type of personal
current account will spend money on developing an advertising campaign for that
particular brand; if the bank offers new customers a free initial balance of £20, the
cost to the bank is directly related to the number of new accounts that are opened.

People should be careful when choosing a financial product as there is always a lot of
‘small print’ – that is, terms and conditions that determine the amount of interest
received on a savings account and the amount of interest and fees charged on a loan.
Sometimes a bonus or a discount may be available only in certain circumstances and
customers should be aware of this before choosing the product so they are not misled.

Public relations (PR)

Public relations are a specific part of promotion that is known as ‘below the line’
expenditure. It is advertising that is not paid for directly but which keeps a business’s
product in the public eye.

PR is the part of promotion in which the entire message is implicit. For example,
photos might appear alongside a magazine feature, showing a celebrity carrying a
sports bag with a bank’s logo written on it; this approach can have a much greater
impact than an actual advert for that bank. Businesses may have an agreement with
a celebrity to use their products or their marketing merchandise when they are at
public events. Another approach a business can take is to feature a celebrity in its
magazine or on its website. Prospective customers identify with the celebrity, and
the business becomes associated with their positive feelings towards that individual.

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 Product placement and sponsorship
These are also aspects of PR. Product placement involves a product appearing on a
TV show or in a film – for example, the main character might be shown drinking a
particular brand of soft drink. Sponsorship involves a business paying for a sporting
or entertainment event or venue: it can advertise at the event and in the promotional
materials, and the business name may even be included in the name of the event or
the venue. For example, Barclays sponsors the football Premier League. Events can
spread a message more widely than paid-for advertising. PR activities cost money,
but they contribute to the general reputation of a business and are not directly
related to the brands that the business sells.

1.5.2 Peer pressure

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 of 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 The desire to own the same or better products
than our peers can be a powerful influence on
phone, for instance. Satisfying these
our financial priorities.
‘wants’ can be expensive and may involve
saving or borrowing money.

1.5.3 Trends and role models

Many people are influenced by trends and fashions and these can sum up the mood
of the times. For example, if people are worried about the future because the
economy is not performing well and there are few jobs, they may want to be more
careful with the way they spend their money than they would when the outlook is
good. Fashions also influence what people buy – for instance, some people like to
have the latest smartphone. Current trends and fashions tell us something about the
attitudes and values that people hold and can influence the decisions and choices
that they make.

Trends are also found in the area of financial services and they affect:

◆ the way in which people pay for goods and services – for example, plastic cards
or cash;

◆ people’s attitudes to saving; and

◆ how people view using credit.

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 A good example is people’s attitudes to borrowing money. Many years ago, it was
considered to be ‘low class’ to buy goods on credit because it showed that people
could not afford to pay otherwise. Later, the trend reversed, especially after the
invention of the credit card. It became desirable to fund a ‘high-class’ lifestyle on
credit; people would ‘show off’ the number of credit cards they had in their wallet
because it meant that they were considered to be a good risk. Since the financial
crisis that began in 2007, the trend has been to limit borrowing; people who borrow
more than they can afford to repay are now considered to be ‘financially unaware’.

Social networking sites, such as Facebook and Twitter, are major influences on
attitudes. They reveal what other people – especially peers – are doing and what is,
or is not, fashionable, and they do it in a much faster way than ever before. It is easy
to be influenced by such information.

Role models can be found in all areas of

life: at school, at work and in the media. A
role model is someone whom we look up to
and try to be like. We may buy the things
that they buy, use their phrases when we
speak, and so on. Businesses can create
demand by showing famous role models
using their products.

Family members are very important role

models, especially parents, older siblings and sometimes aunts and uncles. It is often
said that example is the best teacher and people are heavily influenced by the culture
of their childhood home, especially the values, views and aspirations of their parents.
Teenagers often rebel against the home culture but often revert to it in adulthood.

1.5.4 Culture
People are heavily influenced by the culture of the society in which they live. Culture
is about norms – about behaviour and attitudes across social groups. It indicates
what society considers to be acceptable and what is unacceptable. Children pick up
the culture of their society as they grow up and they tend to conform with their peer
group, that is, with people of their own age. Modern societies have a culture of
consumerism: there is a wide range of goods and services for people to buy, and
their existence encourages people to need, want or aspire to own or use them. This
behaviour is strengthened by advertising and by seeing other people buying and
using goods and services. Financial services providers are very interested in culture
because it influences financial behaviour and indicates to them what financial
products will be successful.

In the UK, there is a strong culture of home ownership – in other words, people like
to own the home they live in. Providers make mortgage loans available to people so
that they can buy their own homes and pay back over a long period, often 20–25
years. Fifty years ago, many people would have been afraid to do this, seeing a large
amount of debt as a burden they were not prepared to shoulder. But paying back a
mortgage is now normal among groups of people who are in work and can afford it;
many young people aspire to buy their own home one day.

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So, people in the UK are likely to need to save for a deposit and then to take out a
mortgage and pay the money back over a long period. They take the risk that they
might not be able to keep up the payments and that their home might be
repossessed. But when they have paid off the mortgage, the property belongs to
them and they do not have to make any more payments; nobody can ask them to
leave their home in their retirement years.

Providers have encouraged this trend by making mortgages easier to access, but
there has been a certain amount of change since the financial crisis. Before the crisis,
a large number of people got into debt that they could not repay; now, providers are
more cautious about assessing potential borrowers’ ability to repay before they
decide to lend. As a result, the culture of home ownership is changing slightly,
although it remains strong.

Home ownership is not the culture in all countries. In Germany, for example, renting
a home is more the norm than buying; Figure 1.1 shows that in 2012 just 43% of
homes were owned by the people who lived in them. People do not have to save for
a deposit, but just need to pay a few months’ rent in advance. They have to pay the
rent all through their lives, even in retirement. They could be asked to leave the
property if they do not pay the rent or if the lease runs out and the landlord wants
the property back.

Figure 1.1 Levels of home ownership in Europe

%
100
90
80
70
60
50
40
30
20
10
0
Belgium

Denmark

France

Germany

Greece

Hungary

Ireland

Italy

Netherlands

Portugal

Spain

Sweden

UK

Source: MoneyWeek (2012)

Home ownership is just one example of culture but there are many others. Culture
is important because it influences what people consume and what financial services
products they buy. This theme of culture will be studied in more detail in DipFS
Unit 3.

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 1.6 The effects of personal values on individual
behaviour and decisions
1.6.1 The feedback effect and expectations
People’s feelings affect how they behave. The link between thoughts, feelings and
behaviour is clear, and can be traced back to attitudes and so to our personal values.
This is called the feedback effect and it is linked to expectations – to what people
expect to happen. Expectations can be self-fulfilling; the feedback effect refers to
the fact that people’s own attitudes mean that they affect the outcomes of events.

For example, someone who is confident about taking an examination and who has
a positive attitude towards it might be more likely to pay attention to what they have
to do and to pass. On the other hand, someone who is not confident, who is nervous
and believes they will fail might be building negative barriers and thoughts and might
therefore be more likely to fail.

We can see financial examples of the feedback effect in what are called ‘expectations-
led’ events. Examples include the following:

◆ If people expect a share price to fall, they will start to sell the shares – if enough
people sell them, the price will fall.

◆ If interest rates are expected to rise, people will save more money and borrow
less – banks therefore have to pay out more interest and gain less from lending,
and they may therefore raise interest rates in order to maintain the level of their
income.

◆ If people expect increased unemployment, they may save more for the future and
reduce or delay spending. As a result, businesses need to produce fewer goods
and services to meet demand, they then need fewer workers and so
unemployment does rise.

1.6.2 The influence of personal values on financial decisions

Financial decisions are made within the context of a person’s particular value system
and perceptions. Here is a brief look at some examples of how values can affect an
individual’s thoughts, feelings, behaviour and decision-making. These concepts will
be looked at in more detail later in Unit 2.

◆ Ethical investing – ‘ethical investing’ involves someone choosing to save in a

way that means the money will be used for what that individual considers to be
good purposes. Ethics are a set of ideas about what people believe is right – the
moral code that they aim to live by – so one person’s opinion about what is ethical
will differ from that of someone else. Topic 8 deals with ethical investment in
some detail.

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◆ Managing finance – a person’s financial choices are affected not only by what
they borrow, spend or invest, but also by how well they feel they can manage the
costs and consequences. Many people are prepared to get into debt (and most
people who, for example, want to buy their own home have no choice), provided
that they can afford to make the repayments on this debt. This means forward
planning and budgeting. In terms of investment, it is a person’s attitude to risk
and reward that is the key factor influencing choice.

◆ Religious beliefs – Islamic law (Sharia law) prohibits the payment of interest on
a debt and so Muslims are not allowed to borrow money via a Western-type
mortgage or loan. All the major banks now provide Sharia-compliant financial
products and we will be looking at these in more detail in Topic 3.

1.6.3 Affordability – implications and responsibilities

Affordability is a very important concept
in helping people to choose financial
products. In Unit 1 Topic 9 you studied
budgeting and forecasting and saw how
they help people to decide what they can
afford. We will be looking at budgets in
more detail in Unit 2 Topics 5, 6 and 7.

Buying a financial services product is not

With some products, people need to be sure
they can afford the financial commitment over
the medium or long term.
the same as buying something that is
quickly consumed, such as food or 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 term or long term. The customer
must be aware of these implications
because they bring with them
responsibilities and the customer must
be able to afford to meet their
obligations.

The best example of the importance of affordability is borrowing money. Whether a

person has a credit card that they have agreed to pay off by the end of the month, a
personal loan that they must repay over several years or a mortgage that they pay
off over 25 years, they must be reasonably certain that they will be able to make the
agreed payments. This means that they should not take on an amount of debt that
is unaffordable when compared with their income and other expenses.

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 In the case of short-term borrowing, a person can know with a good deal of certainty
whether or not they can afford to pay the money back. However, in the case of a
medium-term or long-term loan, they cannot be so certain because their
circumstances might change – for example, they might lose their job or become ill
and unable to work.

Buying an insurance policy also involves considering affordability. Some individual

insurance policies, such as home or travel insurance, are not very expensive; others,
such as motor insurance for young people, are much more costly. Since motor
insurance is compulsory, there is no point in someone buying a car and then finding
that they cannot afford to insure it. Another issue here is whether a person is buying
too many insurance policies and having to pay a large amount in premiums each
month. Although car insurance cannot be avoided, other policies, such as payment
protection insurance, are not essential and people have to decide whether they can
afford them or not.

Affordability has to be considered in relation to saving too. As well as working out

whether they can afford to save anything, and if so, how much, people have to
consider the type of account to use. A regular savings account usually offers a higher
rate of interest but a set amount might have to be deposited each month; if the saver
does not keep this up, they lose the higher amount of interest.

1.6.4 Setting priorities

Since nobody can afford to buy everything they need, want or aspire to have, they
need to choose between alternatives. This means they must decide on their priorities,
as Jo in the following case study indicates.

1.6.5 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.

People at the other end of the risk scale find it exciting to take risks. They do not
think of what might go wrong and take the view that, if a bad thing does happen,
they will deal with it at the time. They might engage in hazardous activities such as
cave diving or bungee jumping and they do not insure anything.

Most people probably fall between these two extremes: they have some degree of
risk tolerance but, at the same time, they try to limit the risk they are exposed to.
They do traditional sports and use all forms of transport but follow health and safety
rules. They insure the most important items they possess but are not over-insured.

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 Jo’s spending priorities
Jo is studying for her A levels and has a
weekend job, which pays her £30 a week.
With this week’s earnings, she has a number
of things she wants to buy.

◆ Go out with a friend to see a new film (£5).

◆ Buy a necklace she knows her mum really

wants for her birthday on Friday (£20).

◆ Replace her make-up bag, which is old and

worn (£8).

◆ Buy a sandwich and a packet of crisps for

lunch every day (£10 for the week).

The total cost of all these items is £43 but Jo

only has £30. She could borrow the rest of the money but it doesn’t seem ethical
to borrow money from her mother so she can buy her own birthday present! In
any case, she will have to pay the money back and this might prove difficult.

So Jo must make a list of priorities and put things in order of importance and
urgency. Her value judgements tell her that she must buy her mum’s birthday
present and that she must go to the cinema as she can’t let her friend down.
This will leave her with £5 so she can’t buy the make-up bag and will have to
put off buying it for a while. She could use the £5 to buy the ingredients to make
her own sandwiches.

Jo has made several decisions. She has sorted through her wish list, decided
which items are most important to her and made them her priorities. She has
then managed her money around the rest of the items. Jo could have decided to
buy a cheaper present for her mum, but she didn’t want to do that and she
solved the problem another way. Of course, if she had anticipated her mum’s
birthday (it is an event that she knew was coming), then she could have saved
up for it.

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 Key ideas in this topic
◆ Needs, wants and aspirations.

◆ How needs, wants and aspirations change over a lifetime.

◆ Satisfying needs, wants and aspirations.

◆ Internal factors that influence needs, wants and aspirations.

◆ External factors that influence needs, wants and aspirations.

◆ The effects of personal values on individual behaviour and decisions.

References
Investopedia (2015) Marketing [online]. Available at:
http://www.investopedia.com/terms/m/marketing.asp [Accessed: 6 January 2015].

MoneyWeek (2012) MoneyWeek map: where is home ownership the highest? [online]. Available
at: http://moneyweek.com/moneyweek-map-european-home-ownership-57924/ [Accessed:
6 January 2015].

20 © ifs University College 2015