Scott Kingsley, Senior Wealth Advisor
Ironically, we teach children and young adults various subjects in school that they are unlikely to require in their everyday lives. Yet, we have topics they will come across daily that they need to learn after leaving the education system. To put this into perspective, when was the last time you used Pythagoras's theory or algebra as an adult?
Thankfully, we have seen a push towards placing financial literacy in the school curriculum in recent years. Of course, in many schools, it has previously been taught as part of other curriculum subjects, such as maths, but surely this is a stand-alone topic.
As a parent working in the financial services industry, it will come as no surprise to learn that my young son Peyton has an awareness of finance. While conscious not to overload him with technical information, he is aware of the broader concept of personal finance, something we will build on together going forward.
Finance is not a taboo subject in our household, quite the opposite; we encourage questions and an inquisitive nature from our son. Some of his questions even surprise me!
There are numerous long-term benefits of teaching personal finance in schools, much of which revolve around attitudes to finance and especially risk in later years. Many of the finance-related issues taught in schools will only become relevant many years down the line. However, this will allow individuals to make informed plans for the future.
Akin to learning to swim, it would not be sensible to throw your children into the deep end and let them fend for themselves regarding personal finance. The more practical approach is similar to swimming lessons, where slowly but surely, they learn about swimming and build up their confidence until they can finally swim independently. Indeed this perfectly reflects how personal finance should be taught. So when do you start teaching them? As early as possible.
As in any walk of life, where there is additional stress, there is a greater likelihood that you will make the wrong decision. Even a basic understanding of personal finance will reduce financial stress in later life, avoiding the knock-on effects that can impact individuals, friends and families. The more in-depth your knowledge of personal finances, such as loans, mortgages, etc., the more chance you will take a level-headed approach.
It can be scary, considering that regular household income is the key to your short, medium and long-term prospects. But, similarly to reducing financial stress, a greater understanding of finances, where to find help and how to use it can protect and improve your mental health. For example, can you imagine the financial stress of buying your first home and sorting out that mortgage without a fundamental understanding of what you are doing?
A recent US-based survey found that 50% of parents who have never invested don't intend to teach their children about investing. In contrast, parents with investing experience are likely to pass on their knowledge to their children. An impressive 54% taught their children before age 18, with a further 39% looking to do so when they are older. It makes sense; those who know investing are more likely to pass this on, with greater benefits often associated with their mistakes. We learn more from our mistakes in life than our successes!
There are five key components of personal financial literacy:
To think that many young adults may be switching from school to the workplace as young as 16 without any experience in budgeting is frightening. The idea of "learning as you go along" is fatally flawed, with many adults saddled with significant debts from their younger days. Learning to "cut your coat according to your cloth" is a perfect metaphor for living life within your means. Easier said than done, especially with the many temptations, but learning to budget early can be priceless.
Whether looking to save relatively small amounts regularly or transferring large amounts to a savings account when available, saving is a great habit to learn. In your mind, you very quickly learn to live within your adjusted income, confident in the knowledge that you will have funds available for the inevitable "rainy day". In addition, regular savings are often used as a deposit for first-time buyers looking to climb onto the property ladder.
When it comes to debt, it is vital to appreciate the risk factor and respect the many ways it can be used. So show respect to debt but do not be scared; controlled debt is different from spiralling debt. For example, most people would struggle to climb onto the property ladder without controlling their debts. Indeed, many would be forced into the endless financial realms of private rented accommodation, never to escape.
Investing is a subject in which many people have very different views, making it fascinating. However, learning the long-term benefits of investing early can give children and young adults solid foundations for the future. Learning to "make your money work" is a skill which can prove very lucrative in the longer term. It is also a case of being at ease with the markets, understanding the basics of investment, and taking advice but ultimately knowing it is down to you.
Similarly to managing debt, managing credit is a significant gift that can be passed on to children and young adults. This means appreciating the cost of debt, keeping your balance as low as possible and making your payments on time. Credit cards are the most common form of pre-arranged credit, and while very useful at times, they can be very dangerous if not managed correctly.
The emergence of Environmental, Social and Governance (ESG) is having a significant impact on businesses across the globe. When looking at financial literacy, this is especially relevant when it comes to integration with the local community. As an element of their social governance credentials, many financial services companies visit schools and colleges to teach children/young adults about personal finance. This allows them to grill the presenters, ask questions and encourages them to take an interest in personal finance. While much of the focus is on education, it is as much about encouraging children and young adults to think about their personal finances.
Many will be surprised to learn that a research note by the Confederation of British Industry (CBI) estimated that prioritising financial education could boost the UK economy by £6.8 billion annually. So, ironically, personal financial education in schools and colleges will pay for itself in years to come.
Let's move financial literacy back onto a personal level. It is somewhat bizarre that many of us work to support our family and eventually leave an inheritance for our children. The fact many of our children are left with significant wealth without the experience to manage it is a strange oversight. In many ways, could your financial legacy be helping your children learn from your mistakes and your positive experiences of the financial world - when you are alive?
While various elements of personal finance are taught in schools under the guise of different subjects, surely this subject requires its own part of the curriculum. The ability to manage budgets, debt and credit arrangements, and savings and investment could be priceless as we advance. Expecting a young adult to leave school or further education and immediately be able to take control of their finances is nonsensical.
Teaching your children your personal finance experiences should complement the school curriculum. But, as we touched on above, in many ways, your children will learn more from the mistakes you made as opposed to the successes. So, if this is your lasting legacy, is that such a bad thing?