Why children should have compulsory personal finance lessons

At MoneyWeek we have long lobbied for better basic financial education. Why? Because financial ignorance is one of the biggest life destroyers there is. Fail to understand how compound interest works on our credit card or how mortgage payments change as interest rates do and, unless your income is limitless, odds are you’ll suffer significantly.

That suffering might take the form of forgone consumption as your income disappears into an APR hole, is spirited away by commission hungry IFAs, and gobbled up in unnecessary taxes; or it could end with you bankrupt or repossessed. But whatever form it takes, most lives would be better off without it.

The difference between understanding how money works and not understanding how it works can add up to the difference between a good life and a mediocre life, or indeed that between a mediocre life and a pretty bad one. The New Yorker agrees. Financial illiteracy isn’t new, says James Surowiecki, but the consequences of it are more severe than they were.

We have asked people to take more responsibility for their financial lives (with personal pensions and by encouraging universal home ownership, for example) at a time when the financial market place has become “a dizzying emporium of choice” and the decisions within it “more numerous and complex than ever before.”

But we have failed to give people the tools to operate in this new market place. In the US, most people have no idea what compound interest is. And a recent study found that over 50% of people couldn’t answer two simple questions on interest rates and inflation.

Worse, huge numbers of people have absolutely no grip on their personal finances: another study found that 30% of people in the lowest quartile of financial literacy thought they had fixed-rate mortgages when they actually had variable mortgages.

In the UK I have a horrible feeling things could be even worse: according to Prudential, around half of our population can’t go much beyond basic addition and subtraction, let alone start figuring out percentages; 20% of the under-24s have £5,000 plus of debt; and a quarter of adults with pensions don’t realise it is invested in the stock market.

This kind of thing matters – yet another study showed that subprime borrowers in the lowest quartile of financial literacy are four times more likely to be foreclosed on than those in the top quartile. So what can be done about all this?

There are two choices. The first is to regulate the market so that all financial institutions treat people fairly. I’m going to ignore that as an option on the basis that it is verging on the impossible to do so: you might be able to introduce rules to ban outright exploitation, but you can’t regulate for fairness any more than you can for common sense.

The other is education, something we urgently need both here and in the US. We don’t need to educate everyone to CFA level or even to understand how the banking system works. All we need is for people to know enough to understand what they don’t know and hence how to look for proper help.

Surowiecki points to a German study that showed that the most ignorant tend not to recognise their ignorance and so make more mistakes. “By contrast, well informed people are more likely to ask others for help. If financial education taught people only how little they actually know, it would accomplish quite a lot.”
There is some movement in the financial education area in the UK. Various institutions have set up their own schemes to have a go at improving matters (Standard Life’s ‘Skills for Life’ programme and the like) and various administrations are constantly commissioning reports on the problem, recognising the need for change and setting up websites devoted to the subject.

However, most of this is useless: if people don’t know how ignorant they are, they won’t seek out information. We need to do more: we need to make solid mathematical and financial education absolutely compulsory in schools so we don’t see quite so many lives being destroyed by something as simple as the wrong mortgage taken out at the wrong time.

  • Nick

    It sounds like Personal Finance needs someone to do what Jamie Oliver did for improving school children and their parent’s knowledge about healthy eating.

    Are you up for it Merryn ?

  • Bapodra Investments

    I agree with this article. However I feel that people should self teach or have the desire to want to learn and know about personal finance. If they teach it at school but the students are not interested then they will not learn. Every school teaches Maths, English and Science. Yet every year students fail these exams and are not adequate in these important areas. So teaching Personal Finance in school’s is not the answer. It is changing the mindset of the ignorant which is required.

  • Steve

    Bapodra – Teaching the proper use of apostrophes to the ignorant might be the answer.

  • Bapodra Investments

    Steve – No teaching the proper use of apostrophes to the very ignorant people I was referring to would not help them in any way with personal finance. If you think it would then please explain. It may well help them improve the quality of their text messages or comments on facebook. Your comment is more about putting people down which kind of reflects the attitude of the ignorant nowadays.

  • Merryn

    Nick, A big part of the problem for the young is that their parents understand so little about personal finance and so have no way to teach them. People who have gone into schools to try and explain the basics say that the people who seem to get the most immediate use out of it are the teachers and the parents.. as you say, a Jamie Oliver is much needed…

  • Baxter Basics

    Bear in mind that the vast majority of teachers teaching today have the mathematical ability of a turnip. Combined with the terminal decline of western education, I can see the financial education syllabus of 2012:

    – (5 Marks) Empathise with Elgar for being dropped off the £20 note

    – (5 Marks) Estimate the cost of a brand-new David Beckham haircut

    – (1 Mark) What’s the difference between “free” and “three”? An extra mark will be awarded if you spell either word correctly.

    – (20 Marks) Roughly how many lottery tickets could be purchased by the next winner of “Big Brother”? That could make them, like totally rich, right?

    – (20 Marks) What sort of money can you make trading dodgy baccy? Is that a better investment return for your dole money than bottling any old bystander with your last cider empty and spending a free week in chokey?

    Total out of 50 Marks.

  • Nev

    Our kids are no more stupid than we were, no matter what the media tell us. They are hungry for real knowledge. Teach them at the right time and they are very interested – around 15, I think, when they are beginning to think about the world of work.

    Its not difficult, is it? Mortgages, compound interest, what a rate of interest really means. Christmas clubs versus post office savings.

    It could change lives

  • DemiGod

    This would be more important than just about any other subject at the moment. Yes, replace any other subject with finance lessons! It must include a full understanding of the fractional reserve system. Once kids see how silly our system based on fake money is, we will start to see change. People are so ill educated about policies and financial arrangements, they prefer to bury their heads in the sand when a envelope comes in that looks like a bill. This is not responsible adult behaviour. Our dumbed down education system that teaches touchy feely opinions has a lot to answer for; it has certainly given us the last two generations that got us into this shocking mess.

  • DemiGod

    An envelope – sorry!

  • Supermarine Blues

    Mine was a (relatively) literate and numerate generation.

    We got duped into buying into every dodgy endowment market and personal pension plan and every other big whizz-bang at the time, most promulgated by the goverment of the time.

    I agree; financial astuteness lessons is more important than most of the time-wasting classes in looking a bit fey or football-religion or whatever they do these days. But I’m just a tad concerned who’ll set the syllabus.

  • SImon

    My Children have all been to a grammar school on the south coast and at no stage has there been any basic financial or budgetary training. When I arranged a week of work experience for my youngest daughter at a local private client stockbroker, she came back enthused, wanting to rwead the paper and asking me whether I should be buying Premier Oil. The placing was also the envy of her friends. They are interested they just have to be engaged. The reason maths and science do not have more followers is that pupils fail to see the relevance to their daily lives. That is a failure of the curriculum and the teachers not a lack of interest. These subjects are disciplines and the rules have to be learnt but surely the curriculum can be tailored to include examples and applications that have a practical relevance. The same almost certainly would hold true for financial education.

  • IJ

    I couldn’t agree more. The economist Robert Shiller is a strong promoter of this idea and I seem to remember he has a chapter on it in his book on the subprime crisis where he proposes solutions for avoiding similar crises in the future. He calls it the “democratisation of finance”, I think. Worth looking up for anyone who’s interested.

  • Nathan

    I’m a tutor at York College (Construction) and during maths classes I spend time telling them them all about this. Including the myriad taxes out there and pitfalls of borrowing too much etc etc.

    They all come in the day after telling me “my dad was over the moon you told me that and I’ve since opened an ISA!”.

    They should be aware of it all before they get to college though that’s the thing. The school that opened up a bank within it’s walls run by the kids just to demonstrate the importance of saving is a great model to follow and I hope other schools adopt it.

  • mick

    the people who have not understood their own financial situation are the ones who have benefited from this current lunacy. It’s people like me who took Merryn’s advice in 2001, which was sound advice….. if the government hadn’t failed in monitoring and conniving in the financial situation,who have come unstuck! Property prices have doubled since then .. and I would now be receiving income of 5% on those doubled prices. Why can’t moneyweek accept they were 100% wrong .. a rhetorical question.

  • TC

    “It’s people like me who took Merryn’s advice in 2001, which was sound advice….. “

    What advice are you referring to?

  • Smithy

    here’s an idea. How about curbing the benefit culture in the UK? People would start to learn financial management pretty damn quickly if that happened…

  • JANE

    Great idea! I work in retail where most people have shopping accounts. I spend all day helping them to understand their accounts. Usually they have no idea what interest means, how to read their statements, how often they have to pay, why they are in arrears or why the have an admin charge. It seems to more to do with common sense than intelligence. One lady told me quite angrily “I don’t have time to look at my statements. I just don’t have the time – I’m studying for a degree!” Some people aren’t very bright – but some are totally irresponsible.

  • merryn

    A press release just out from ifs School of Finance confirms that things are just as bad here as in the US. One in 7 people do not know what kind of mortgage they have. Given that getting a mortgage is probably the biggest financial decision most of us will ever make that is just nuts. As the charity says: “The proliferation of new financial products unavailable in previous generations and a fundamentally changed economic world means financial education needs a more defined place in secondary school curriculums. At the moment there is no mandatory requirement to provide personal finance education in secondary schools.”

  • Julie

    Definitely a good idea. I worked in banking in 80s and 90s and was a mortgage arrears counsellor so saw a lot of people get into financial difficulties in the early 90s. As a consequence my husband and I gave our two daughters allowances from the age of 14 so they learnt how to manage money and when they did part time jobs from the age of 16 encouraged them to save in accounts we started for birthday money etc when they were small. When they were in University they were therefore used to budgeting and we stressed credit cards should be paid off immediately, they opened ISAs as soon as they started work and now in their mid 20s they have not got themselves into the financial difficulties many graduates seem to have.

  • Lavinia

    Great post! And I totally agree with comment number 1 and comment number 11. Children are interested in how finances work, if presented in the right context. I also feelt that alongside classes in financial eduation there should be classes in entrepreneurship, giving children more confidence to start their own business rather than simlpy just get a job. As Robert Kiyosaki states, the old rules of money no longer work.
    As for adults, they need to find time to learn educate themselves about financial eduation and not just what is compound interest, but also what is passive, residual and leverage income, in order to create these types of income in addition to their linear income.
    Ultimately, as a nation, we all have to become (more) financially savvy about how money works, how to make it work harder for us rather than us simply working hard for it, and how to make more of it – as in multiple income streams.

  • Mike

    Surely the whole point of the Financial Services Industry is to counter any financial education given and ensure that they profit at their customers expense.

    It may work, but it is a bit like saying teenagers get pregnant due to a lack of sex education. i.e not so much about education but more about a belief in controlling your own destiny, which many feel that they don’t / can’t/

  • Lavinia

    @Mike, that may be the point of the financial services industry but it should not be for our educators and parents. Education is the key, and as Robert Kiyosaki poignantly says ‘Without financial education, you money flows to those who profit from your financial ignorance’.