Why children should have compulsory personal finance lessons
The financial market place has become a 'dizzying emporium' of choice; confusing and more complex than ever before. Huge numbers of people have absolutely no grip on their personal finances. It's time we taught them.
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.