Formal Financial Education: a response

Twitter: @Sophie Robson2

Financial education has been much in the news this week, in anticipation of Thomas Docherty MP's private members' bill to include financial literacy in the national curriculum. Many organisations believe that personal finance should be taught to young people, to enable them to make the best financial decisions for them - Pfeg, in particular, and MyBnk, have done much to bring this issue into the national consciousness. As the author of a report on young people and financial services, I believe that it is crucial that young people are offered some education in finance.

But this view is not without its detractors. Others believe that financial education is ineffective: after all, they argue, learning about finance at school is surely dull, and it is very difficult to measure any impact. Two articles in particular - Matthew Lynn's in MoneyWeek and Sophie McBain's in the New Statesman - stand out. Both make strong and eloquent arguments against the inclusion of financial education at school. 



Lynn (article is unfortunately subscriber only) believes financial products should be more user friendly and easily understood from the outset. It is a dysfunctional and uncompetitive financial market, he argues, that causes the misselling of financial products and complicated products He feels that this is something that could be better remedied by improvements to the banking industry, not by teaching young people to understand the complex products and terms that they might encounter.

McBain, meanwhile, actually cites my report which found that 66% of young people aged 18-25 received no financial education at all at school or university. She feels that it is the financial professionals, especially the financial advisers, and not the general population who should be getting more financial education. She cites a communications professional, Christopher Jones-Warner, who estimates that only about 22% of his financial services clients are actively planning for retirement. If these people aren't savvy about financial planning, the argument goes, what hope is there for the rest of us? 

Both are right of course - financial products do need to be simpler to understand - you have only to look at the confusion surrounding pensions to see that how damaging this can be. And of course financial advisors, and anyone working in the financial services industry for that matter, should be competent and responsible when managing their own finances. 


But it seems to me that both of them significantly overestimate the amount young people do know about financial services. A number of those quoted in the report felt confused about its jargon: many were uncertain about simple concepts such as APR and compound interest. More alarmingly, of those who were contributing to a pension scheme (another hot topic this week), more than 40% had no idea what type they were paying into. And as for student loans, several even admitted that they had not known that interest was payable on it. In other words, many young people lack basic knowledge, and the evidence above shows how it is already affecting them. 

It is certainly true, as Matthew Lynn writes, that in order to get a good deal on a mobile phone, it is not necessary to understand about the inner workings of a mobile phone, any more than learning about bricklaying and cement mixing will help you get a good deal on a  mortgage. But those who advocate financial literacy teaching in schools are not expecting their students to become experts: they are simply hoping to give young people access to information that might protect young people from hardship in the future. After all, loansharks are still rife in many impoverished areas, and student loans are going to continue to plague young people long after graduation, and saving for a deposit on a first home is likely to play on young (and not so young) minds until banks begin lending more freely again. 

I look forward to seeing Docherty's members' bill on Friday. It is unlikely to be perfect: after all, how it can be squeezed into an already packed curriculum is already contentious, and purely theoretical, classroom based learning won't be sufficient to capture schoolchildren's imaginations. But it is certainly a step in the right direction.   

Modern Young Finance: weekly round-up

A weekly round up of all the developments in the world of young people and financial services. @SophieRobson2

OVERVIEW

Young people and finance have hit the headlines this week in the build up to the holiday season, because of the expenses attached to present buying and party going: apparently, many young people are struggling to afford even the basics of living. Renting and its associated expenses have almost dominated, as younger people continue to find themselves shut off the property ladder.





EMPLOYMENT AND EDUCATION

A poll of almost 400 NEETS (young people not in education, employment or training) by advice service Future You, found that many of them, not surprisingly are struggling to make ends meet. 63% say they cannot afford the dentist, 67% find it hard to pay for food, while 70% are having trouble paying their bills. Moreover, 82% found meeting the cost of travel difficult. And as for Christmas, 47% felt they wouldn't be able to pay for Christmas dinner, while 92% couldn't afford to buy gifts.

They were less than cheery about their future chances of employment as well: 60% didn't feel confident about their prospects of employment in 2013.

As for education, figures this week from the admissions body UCAS found that there has been a record fall in the number of people taking up places at UK universities this year. Nearly 54,000 fewer people than last year started courses this autumn than in 2011. Reasons for this are thought to be down to the rise in tuition fees to a maximum of £9,000 per year in England. However, there was some good news. Apparently, this 'correction' has led to more applicants being accepted at their first choice institution, and those from disadvantaged areas are increasingly winning places at the top universities.




SAVINGS AND INVESTMENTS

Housing woes continue this week for young people. Yet another survey, this time by the IPPR think-tank has shown a significant gap between young people's aspirations of owning a home, and the harsh reality they find themselves in. According to the survey, 51% of young people aged between 18 and 30 no longer believe that they will be able to afford to buy a house in the next 10 years, even though 88% wish they could. The survey also found that being shut out of the property market was affecting young people in other ways too, now that 3 million people aged between 20 and 34 are still living with their parents. 26% felt that their housing situation prevented them from being able to achieve important life goals, such as starting a family. 17% feel that their housing issues have a negative impact on their relationships. It seems that not only is the lack of affordable mortgages preventing young people from building financial assets, it is also preventing them from moving forward in life.

Another piece of research found that over the last five years, parents have provided over 228,000 first time buyers with more than £1.31bn in deposits, with parents giving or loaning, on average, £13,000 - up from £10,000 five years ago. And as if that wasn't bad enough, another survey has found that servicing an interest-only mortgage on an average property in the UK is £1,080 per year cheaper than renting. If only...

Savings accounts have also suffered a blow, as it was found that 351 savings accounts have disappeared from the market entirely this year - with 191 being withdrawn in November alone. This has been put down to the Funding for Lending scheme, which was introduced to help reduce the costs to banks and building societies of providing loans to people looking to get on the housing ladder, since the interest rate is no longer sustainable on some of these accounts. However, I wonder if, in the long run, this might make savings accounts more simple: after all, too much choice can often be a bad thing.

Meanwhile, the Huffington Post (US) is encouraging younger people to make riskier investments, contrary to what their parents might tell them. It seems they should take the amount of time they have until retirement into account, as well as the possible returns on riskier, higher yield investments.



FINANCIAL LITERACY

There was concrete proof this week that a lack of financial literacy can have serious implications both on personal finances and on a national scale. A survey for moneysavingexpert.com by the Centre for Economics and Business Research found that financial illiteracy costs the UK up to £3.4bn a year.

It claimed that better financial literacy could reduce the risks of unemployment by 10% and help reduce the unemployment subsidy by taxpayers by £600m, as well as helping reduce the levels of personal indebtedness in the UK and helping people to plan more effectively for their retirement. A separate study by Skills for Life found that one in four adults has the mathematical skills of a nine year old, struggling with even basic sums.





PENSIONS

About a million low paid workers - mainly women - are set to miss out on vital employer pension contributions after the government again raised the threshold for the minimum income at which autoenrolment applies, this time to £9,440 per year. Women - and young people - are most likely to be affected by this change, as they are more likely to take on low-paid or part-time jobs.

More encouragingly though, a Standard Life survey revealed that 54% of young British employees are keen to know more about autoenrolment. Those aged up to 35 are significantly more keen to learn about it than their older counterparts - just under a third of 35 and overs say they are interesting in finding out more - perhaps, the survey writers feel, because they felt they had already "missed the boat", while those aged under  30 felt they "had all the time in the world".

Modern Young Finance: weekly round-up

A weekly round up of all the developments in the world of young people and financial services. @SophieRobson2


OVERVIEW

The Chancellor's Autumn Statement this week was greeted with mixed responses. Although slight increases in personal tax allowance (which will rise to £9,440) and increases to the ISA contribution limit (to £11,520) and for businesses, a 1% cut in corporation tax were welcomed, these changes were thought to be too small to really have an impact on people's working lives, especially those of young people, who are increasingly being squeezed by a lack of employment opportunities and steadily rising rental costs, amongst other things.

SAVINGS AND INVESTMENTS

It was also reported this week that even second time buyers are turning to the Bank of Mum and Dad for help in upgrading their homes, as upgrading to a house with a second bedroom can set buyers back an average of £91,000. So even if you do manage to buy that first home, your troubles are far from over.

The Autumn Statement brought some relief for first-time buyers: although there was no mention of a return to the stamp duty holiday, the Chancellor did promise to continue with the Funding for Lending scheme, which enables banks and building societies to borrow from the government in order to accept more mortgage applications from first-time buyers who might not have built up substantial deposits. However, the deposits that most mortgage lenders require are still too high for most first-time buyers, so it is unlikely that this will have much impact in the short to medium term.

The government will also increase the amount of bankable annual gains from investments by 1%, and is also set to expand the number of investments which might be included on a list of stocks and shares lsas - which could be good news for young people who already have investments - as they are the group most likely to be investing in higher risk categories, and stand to benefit the most over the longer term.

FINANCIAL EDUCATION

Some welcome news from the world of financial education, albeit from the United States, as a recent report suggests that young people (aged between 16 and 29) may actually be one of the most financially literate age groups, because of the importance that they place on getting a decent report on their savings accounts. Recent research found that 25% of people in this age group put saving as their top personal finance priority, compared with 9% in the over 65s category.

Nebraska's board of education proposals for standards in social studies has put new emphasis on personal finance, as a result of the struggles many young people have faced as a result of the recession. 

Over in Malaysia, a new financial literacy programme, "My Finance Coach" has been launched by Allianz. This initiative was founded in Germany in 2010 and  aims to improve the money management skills of young people, by training volunteers to be My Finance Coaches and getting them to run classes on money and finance for people aged between 11 and 18.

PAYMENTS

Last week, we discussed several new payments platforms designed specifically for children. This week, a similar system has been set up in the US, called Virtualpiggy.com. This website allows parents to control the money their children can spend online, while allowing children to manage money to buy things online. Crucially for the parents, it doesn't actually hold any money, which means that no personal information is needed for registering, but instead it operates as more of a management system, so that children can see how much they have saved and how much more they need to save. In turn, parents can keep track of how much money is in the account and decide on the items that their children can buy. A number of merchandisers have already signed up to the scheme, including Claire's, a jewellery store.

EMPLOYMENT

A poll by law firm Irwin Mitchell found that more than half of businesses want to see the default retirement age reinstated to free up employment opportunities for able younger employees. The default retirement age was scrapped in April 2011 in an attempt to eliminate age discrimination and increase tax receipts. Many of the firms surveyed were finding that many younger employees were leaving to join rival firms because of the bottle neck that was being created in their current firms by older workers staying on past the traditional age of retirement.

DEBT

The growing problem of debt amongst young people was again brought to our attention by the story of Toby Thorn, 23, who took his life when he ran into debt as a result of student and credit card debt. This is compounded by increasing rental costs - by some estimates, these have risen by 20% in some parts of London, while wages for under 30 year olds have fallen by between 6% and 10% over the last decade.

Payday loans once again made the headlines this week - for the wrong reasons - as it emerged (in research by Insolvency firm R3) that nearly one in ten people were considering taking out a payday loan to help meet the costs of Christmas. Step Change Debt Charity also reported that the number of people seeking help with debt from payday loans has soared by 300% in the past 2 years. It might be worth taking a closer look at how this problem develops once the new interest rate caps are put into place...

There was some good news this week though for those who pay out regularly on train fares. The government agreed to cap fare increases at 1% above the rate of inflation rather than 3%, which should help to ease the burden on regular commuters.

Kidtrepreneurs: making business work for children

When 11 year old Jack and 9 year old Lucy had some time on their hands during the last school holidays, they decided to use it wisely. Spurred on by their idea to create an app, they eventually came up with Mooey and his Mates, an interactive iphone app based around Lucy's cuddly toys. Their father, a graphic designer, then put it into action, and the app went live.

But they have since taken the idea further. They decided to promote their app at a local trade fair, but knew that they would need more than just an app to sell it, so they came up with the idea of making Mooey merchandise, including mugs, aprons and iphone covers to develop the brand. Not only that but they learnt some invaluable lessons on business and enterprise, learning about upselling and cross selling, for instance. They have also been able to conduct some vital market research on their friends, a few of whom have even downloaded the app.



And though remarkable, Jack and Lucy are far from the only young people in the world of business. Over in Acton, Texas, there is even a young people's entrepreneur fair, Acton Children's Business Fair, where children as young as 6 (and as old as 14) try and impress an elected panel of local business people, who judge the youngsters on their pitch, their product, and the marketability of their idea.

Several initiatives in the UK are also in place. On the Money, an initiative with Education Scotland, for example, has run a series of talks with notable entrepreneurs, including Sir Tom Hunter, Scotland's richest man, and former owner of Sports Division, and Nicola Morgan, author of 'Charlie Fly and the Nice Dream' who proves that a knowledge of business and money management is crucial to professional success in any walk of life. She actually describes herself as an entrepreneur - for to be entrepreneurial, she says, you have to be able to use your own ideas for a practical purpose.



There is also MyBnk, a social enterprise based in London, which runs workshops for young people aged between 11 and 25, which teaches the building blocks of money management and business with practical lessons. For instance, earlier this year, it launched a 'bank', where school children run a bank using their classmates' savings as deposits, which they can then lend out to community projects, in order to learn more about how the financial system works. Since it was founded in 2005, it has worked with about 50,000 young people. This once again shows that these skills are very useful for teaching children about business, but absolutely vital in gaining independence and financial well-being.

This highlights the growing importance the government and other organisations are placing on teaching children and young people about enterprise. The economy has changed, and good A-levels and solid university degree are no longer sufficient if a young person wants to make themselves stand out from the crowd. Increasingly, entrepreneurial flair is becoming important, not least for the characteristics you have to possess to be successful. 





   

Modern young finance: weekly round-up

A weekly round up of all the developments in the world of young people and financial services. @SophieRobson2






SAVING

The Share Foundation, with the backing of the Department for Education, has this week launched a new Junior ISA (JISA) for all children in the UK who have been in care for at least a year in a bid to combat any disadvantages they might face when they enter the 'real world'. Each JISA will initially be credited with £200, and after this, private donations from members of the public will be sought. The Share Foundation will take care of the running of the accounts, and will offer financial education to JISA holders at the age of 18 to make sure this money is used efficiently.

Also, in savings, it is worth mentioning a report published earlier this month by the IPPR think-tank, "Young people and savings: a route to improved financial resilience". The report, which is based on the findings of a series of workshops and interviews with people aged between 16-29, looks at the financial resilience of young people today, their attitudes to saving and their future aspirations for financial security. It shows how many of the difficulties young people face today are compounded by their lack of savings - not only is this preventing them from getting onto the housing ladder, it also means that many of them have no buffer against financial hardship.

FINANCIAL EDUCATION

There have been some international initiatives this week, as schools in Australia have been trialling a new financial education resource called MoneySmart teaching. This has been developed by the Australian Securities and Investment Commission, and is part of a $10 million scheme to educate young Australians about effective money management. It teaches young people how become savvy consumers, by explaining some of the financial jargon and showing them where to go for assistance - and is designed to complement the Australian Curriculum rather than add to an already overcrowded syllabus.

Over in Malaysia, Umno Youth (Umno is Malaysia's largest political party) has called for more effective financial education for young people - after it emerged that 32% of the bankruptcy cases since 2005 have involved young people. Umno wants the laws on discharge from insolvency to be less stringent, to help young people who might otherwise be prevented from buying a house or doing business because of this.

PAYMENTS

Two new payments platforms targeted specifically at young people were launched this month: Roosterbank and PKTMNY. Ostensibly, both aim to help young people manage their money, although in practice, they rely greatly on parental input. Roosterbank uses virtual credit, which is transferred from the account of the child's parent (both parent and child set up an account). The child's balance is displayed whenever they are they are on the site, and they can either spend this - via Amazon, with which Roosterbank has an affiliate programme - or they can leave it in their account, or donate it. The parental supervision part comes in at the online checkout, when a parent has to approve a purchase before the transaction goes through.

PKTMNY, on the other hand, uses real money, and offers a debit card (a prepaid Visa), so it has the feel of a fully-functioning account. Parents can transfer money into the account - and there is the option to do this by standing order. Apart from this though, the young person then has the option to supplement income by setting tasks, including washing cars or helping with household chores.  

It remains to be seem whether either of these will have much traction with young people (or their parents), beyond their novelty value.

EMPLOYMENT AND EDUCATION

Barclays, Pret a Manger and Procter & Gamble are at the forefront of tackling youth unemployment, with each taking on hundreds of apprentices. At Barclays, these apprentices receive the same salary as other entry level employees and get help towards basic financial services qualifications - and, crucially, no previous experience is necessary. Pret offers constant mentoring from the branch manager, training in public speaking and private counselling, while P&G's schemes offer professional training in finance and R&D roles, as well as manufacturing. 

This is a positive step away from the mentality that apprentices are to be used as cheap labour, and gives some young people who might ordinarily be excluded from the job market the opportunity to develop their skills and experience.

DEBT

There was welcome news for indebted young people and families this week after a last-minute change to the Financial Services Bill gave the incoming Financial Conduct Authority (FCA) powers to cap the interest rates charged by payday lenders. Payday loan companies, such as Wonga, currently charge as much as 4,214% APR on their loans, and this is worrying, given the increasing amounts of debt carried by young people. It remains to be seen though how much these interest rates will be capped by.

INVESTMENTS

Again, an international feel here, as Standard Chartered in Brunei has reported an increase in young people enquiring about investment products - especially those who are in the 20 - 30 year old age bracket - who make up about 20% of the customer base. There seem to be several reasons for this: many of these are looking ahead to retirement and trying to ensure an adequate level of income once they stop working. Secondly, savings rates are low, and they are aware that to beat inflation, they have to be prepared to actively invest, and not just leave their money to languish in low interest cash savings. They also recognise that by starting now, they will see the biggest gains on their investment in years to come. A salutary lesson for the young people in the UK perhaps...

Young people and mortgages have come under the spotlight lately, as it was revealed that for the first time in recent history, fewer properties are owner-occupied than rented, a sign that ordinary people are being priced out of the market. Research this week by the Council of Mortgage Lenders also found that 66% of first-time buyers have had to rely on their parents to fund the deposit on their mortgage, as banks remain reluctant to lend to those without substantial savings.

PENSIONS

A study this week, commissioned by Blackrock, found that a third of young Britons expect to retire on a pension of £30,000 a year, despite just 12% of them actively saving into a pension fund, and just 4% of these actively investing. In order to do this, a pension pot of £600,000 would need to be accumulated. The problem seems to be that, although many in this age group do save, putting away an average of 18% of their salary, they tend to focus more on short-term goals, such as saving for a holiday or new car.

And there was further bad news for the future of investing this week, when it emerged that the number of companies offering Save as You Earn (SAYE) has fallen to just 510 nationally. The scheme, which allows employees to buy discounted shares in the company they work for has suffered as a result of the HMRC's cutting of investment rates in a three year SAYE scheme from 4.23% five years ago, to 0% today - in effect, making holders of these shares lose money in real terms because of inflation.

But, finally, a bit of encouraging news to take us through to next week. According to a survey by the Department for Work and Pensions (DWP), nearly 70% of workers eligible for auto-enrolment plan to stay in the scheme rather than opt out - which is a step forward for many who had put off pension contributions due to inertia. However, the same report did find that many found the system too complex: 59% of those surveyed claimed not to know enough about pensions to make an informed choice about where to put their money.

A quick overview of the financial literacy landscape

Financial literacy and the lack thereof is a major concern in the UK. Financial products are now more complicated than they used to be, and can be bewildering to all but the most sophisticated investors. Sadly, at the same time, many young people are not engaging with the world of personal finance, compounding the problem. It is important that they are taught sound money management lessons from early on in life. So, let's take a look at some organisations which are helping young people and their families to do just that, and some of the initiatives they are using to achieve their goals.

The Money Advice Service is perhaps the best known organisation aimed at helping people of all ages to understand money and learn money management. It advertises across a variety of media, including TV, radio and online, as well as on billboards. MAS also does much research into the impact financial literacy initiatives are having on those who come into contact with them, concluding that the most important issue surrounding money matters is behavioral: in other words, people are influenced by those around them and by emotional factors, so they need to be taught to learn the habits of sensible financial planning - from early on, and through a variety of influences. This is underpinned by the fact that more than two thirds of parents do not feel well-qualified to advise their children on anything money related.

Another organisation in this sector is pfeg, (the Personal Finance Education Group). Pfeg's mission is to help school children (and their teachers) understand personal finance, and works with schools to offer a rigorous and dedicated curriculum for young people aged between 3 and 16. Looking at areas including effective money management and becoming a critical consumer, it offers consistency by using four areas as a bench mark to help young people understand personal finance. Pfeg goes further than this though, and works with a number of schools which are now personal finance 'Centres of Excellence': in these schools, pupils of all ages receive some financial education, and teachers, including a 'champion' at each school, are trained to teach this material effectively. Pfeg is also working with a number of universities to ensure that trainee teachers are financially literate.



If pfeg concentrates on classroom-based learning, then MyBnk, a social enterprise, does the opposite. This company runs money management workshops for young people aged between 11 and 25, and was conceived after its founder, Lily Lapenna, spent time working on a micro-finance project in Bangladesh and was inspired by the financial savviness of the women who were involved with the project (they had set up small businesses using loans, and were repaying these, on top of supporting families, often on their own). MyBnk uses practical lessons to teach about personal finance, recently setting up a scheme where school children run a bank using their classmates' savings as deposits (with special dispensation from the FSA). They can then use this money to provide interest-free loans for those in their local community, so they get into the habit of saving, and also learn important lessons about the mechanics of the financial services industry. It has also launched Unidosh, aimed at those going to university.

The ifs School of Finance is also involved heavily in this area, and was the first body to offer qualifications specifically in personal finance to those aged between 14 and 19, so roughly GCSE, AS-level and A2 levels, as well as, latterly, degrees in the area. This program seems to work as a powerful motivator for young people, especially those who are less interested in academic subjects: it gives them the chance to gain a qualification in something that will be of practical value throughout their lives. The ifs also runs a virtual stock exchange for Year 12 pupils, which has proved extremely popular as a useful and practical introduction to the world of finance and investments, as well as teaching about how to manage risk.



Several of the large banks run programmes aimed at helping young people understand their finances and Lloyds Banking Group's Money for Life programme is one of the more established. Aimed at young people, one of its objectives is to enable them to learn by teaching other people important lessons in managing their money, which was highlighted in its recent Money for Life competition. Here, a £500 grant was offered to those who could most successfully improve the money management skills of those around around, while, at the same time improving their own - amongst the most memorable entrants included a group who organised a buffet party for 40 people for £40, as well as running a series of sessions for those in their local community on healthy eating on a budget.

So, much work is being done in this area, as the above examples illustrate. But more needs to be done, and more collaboration between organisations is vital if we are to begin to undo some of the bad financial habits that have become entrenched in the UK in recent decades.