The Importance Of Financial Education

A couple of weeks ago, I attended the latest Personal Finance Society (PFS) Regional Conference, and as the Professional Qualifications Officer for Kent, I presented some slides to other financial professionals on the initiative by the PFS for members to provide pro bono financial education sessions within local secondary schools.

The content is in the form of a board game and looks to provide students with tips on understanding investment risk and financial budgeting, but for me the most important objective is helping young people to avoid financial scams. It reminded me of an article that I’d read on the BBC website a couple of days earlier about London Capital & Finance which went into administration after taking £236 million from investors.

Their marketing campaign targeted first-time investors with promises of fixed interest returns of 8% from secure ISA’s and would spread investment risk over hundreds of companies. The reality was that 25% of the investments made were paid as commission to the marketing agent, and then funds were lent to a total of 12 companies – four of which had never filed accounts and nine were less than three years old!

The financial crisis of 2008 showed that even well-known and reputable financial firms are not immune from the perils of administration, but in the current low interest rate environment, a guaranteed investment offering a return of four times the best Cash ISA rate on the market would be treated with scepticism by the majority of experienced investors.

The government have introduced incentives such as Junior ISA’s and automatic enrolment to encourage younger people to start saving earlier in life, but it is important that we educate them on managing money responsibly. For those children fortunate enough to have parents and/or grandparents funding Junior ISA contributions, they will take over sole responsibility for the management of the account on their 18thbirthday. What’s to stop them investing in the scheme they saw on social media promising double digit returns, and looks so much more interesting than their existing investment?

I’ve done a number of surgeries to talk to people about the pension benefits offered by their employer, and some of the people I speak to are just out of school or university. For the majority this is probably the first conversation they have ever had about pension provision, and while there are those who are lucky enough to have parents who they can turn to for help, I’ve met young people who struggle to understand how deductions from payroll such as Income Tax and National Insurance operate.

Matt wrote a blog a couple of months ago about our intention to host workshops to provide the tools the next generation needs to be successful financially, and while the goal of any investment is to make some money, it is probably more important to teach the lesson of how not to lose it all.

The Next Generation

I have been speaking with my clients a lot over the past few months about ‘the next generation’ in anticipation of our first ever next gen workshop later this year.

The conversations have been fascinating and have highlighted a huge knowledge gap when it comes to personal finance.

The financial world is more complex and faster paced than ever before and yet we seem to be giving young people less and less education to help them prepare for their financial journey through life.

The majority of young people now are entering the ‘real world’ without any knowledge of pensions, mortgages, credit card or interest rates. Knowledge that many of our clients will take for granted.

Although personal finance is supposedly on the national curriculum to be taught at schools, it is thought that only 40% or so of schools are actually delivering these lessons. I might also be to forward as to suggest that teachers might not be the best placed people to be delivering personal finance lessons (an assertion that teachers themselves agree with).

Although sometimes the media can create a self fulfilling prophesy, it has been well reported how a lack of financial education in schools is creating a real challenge for young people as they emerge into a somewhat harsher financial environment than previous generations.

It is well known that the young of today will face higher property prices, a lack of ‘gold plated’ final salary pensions and perhaps lower investment market growth to boot.

Although these issues present challenges, they are here to stay. Moaning about them will do nothing to prevent them and so we must take action to try and overcome these hurdles.

In my view, the first step is education. That is why we will be doing more over the coming years to educate the next generation. Our mission starts in earnest later this year when we host our very first ‘next generation’ workshop.

Our aim is to instil some of the basic financial knowledge that has helped our clients be so successful financially.

Although it is just a scratch on the surface, we have to start somewhere. Watch this space for more news later this year.