Think back to when you first started having financial responsibilities – maybe you started a new job, needed to open a bank account, or maybe you received inheritance that needs to be put into a special bank account. Perhaps you wanted to rent an apartment or buy a house for the first time. How confident were you in this process- really?
Did you have anyone around to guide you, like a parent or friend who can help you make informed financial decisions, How did you know which savings account to go for, and what were your thoughts on interest rates? How did you acquire this knowledge? It could have been from the television, or more likely the internet these days, or maybe you needed to go away and read up on some information.
Lately, financial experts are expressing concerns that our young people across the world are not equipped for adult life because they don’t know or fully understand key financial topics that they need, like the above. Just because we’ve gotten older doesn’t mean all the gaps in our knowledge magically become filled. This becomes dangerous as we often pass on our incomplete knowledge to our kids without realising the damage this can cause them.
There are many aspects of an adult’s life that require core financial literacy skills. This includes learning about mortgages, rates, savings, salary, tax and so on. By understanding these core principles, young people are able to make better financial decisions from the get-go. Indeed it was Einstein that said if you can’t explain a complicated concept to a child then you clearly don’t understand the source material well enough! Unfortunately however young people are leaving education and simply don’t know how to open a bank account, how interest rates work, or what they should expect in terms of salary, national insurance, student loan repayments and tax.
With this gaping knowledge hole, poor financial decisions are made. Young people can fall victim to unreputable companies or advice from pushy sales people. They might even take out credit when it’s not needed and sign on to horrendous APR conditions because they simply don’t know how to manage their money. These issues can quickly spiral out of control; one poor decision leads to another, possibly lasting for decades of that person’s life with significant damage to their credit score and future credit prospects..
New survey data, commissioned for the Financial Times from Ipsos Mori, revealed that young people especially struggle when asked basic financial questions and just don’t have the core knowledge there to make reliable decisions. The survey highlighted a real gap in knowledge around areas like interest rates and inflation. When people were asked in a survey to compare the cost of borrowing on a credit card as well as through a bank overdraft with specific charges, not even half of the people asked got the right answer. There was no understanding of how rates worked and different types of credit. This was regardless of wealth, age, region or gender, highlighting a universal lack of literacy in this area. It appears that commonly these items are not covered in school or education, which means that many adults are not equipped when they go out into the real world and have to start making these tough decisions.
These really are key financial skills though, and one that we should encourage our education heads to get into the curriculum in schools around the world. This could start from a young age – younger children can learn through pocket money and adults can have discussions about money around the dining table with children to get them involved and understanding early on in life.
South Africa’s leading credit provider Wonga Online explains there are four key pillars of literacy to focus on – and if your child’s school doesn’t cover these, then the responsibility can start at home: The four main areas are debt, savings, investments and budgeting:
By having a strong, fundamental understanding of all four areas, you can be in a healthier financial position as you navigate through life. You will have the right balance of understanding to have strong financial routes as an individual and as a family unit.
It isn’t just the ability to make better financial decisions that will benefit people who learn financial literacy at school, though. Diane Maxwell, former lead of New Zealand’s state-backed financial capability drive, said: “Improving financial capability can be transformative for individuals and families…People report better sleep, feeling more in control, greater family cohesion, and are more likely to think long term. In that sense it has a powerful upward momentum to it.” Feeling in control of your life and experiencing less stress are both things which young people would really benefit from.
By starting off your adult life on the right foot, with a wide base of core skills completely understood at their fundamental level you are much better prepared throughout your life to make decisions – navigating through your first house sale through to your pension later on in life. Money people like to stay tight-lipped about money to perpetuate knowledge gaps to ‘keep ahead’ and exploit those who aren’t as informed – but this might be our downfall.
By discussing financial options, salaries and investment strategies openly and honestly more frequently these core literacy skills become an intrinsic part of the narrative of growing up, like learning to shave or driving a car.