Investment Life and Pensions Moneyfacts: The chains that bind our youth
This article was originally commissioned for Investment Life & Pensions Moneyfacts Magazine. Tom Murray reflects on the growing need to ensure that young people are financially competent.
"Good habits formed at youth make all the difference.” This famous quotation from Aristotle has stood the test of time. Few will query its application to living a good life and proper financial planning is clearly an important component of a good life. So how are we doing in terms of ensuring that our young people are financially competent and enabled to enhance their life and cleverly use their assets throughout it?
A recent paper prepared by Young Money, formerly the Personal Finance Education Group (PFEG), is highly illuminating about the financial position of the younger generation and, inter alia, how successful we are being in ensuring they understand personal finance and its implications. It also demonstrates how well we are doing in inculcating the type of good habits that would enrich the generation to come.
Not too well, it would seem. Even the title of the paper – “The ticking time bomb of Generation Debt” – is a damning indictment of our failure to educate either formally or by example, the generation to come.
The report was based on interviews with a small number of teachers from around the UK in order to get an insight into trends across the country regarding the situation with youth debt. Throughout the country, significant concern was raised about young people’s lack of awareness and financial understanding. This coincides with the warning from debt management charity StepChange that in the first six months of 2017, 64% of its clients were aged under 40.
Trapped before getting out
There is a huge problem with young people starting out into the real world with little or no information on how to survive financially. The fact that their parents may also be loaded with debt and unable to show them how to manage money is a key factor in why leaving this particular life skill to the home is not necessarily a good idea. The level of household in the UK is extremely high and many parents would find it difficult to lecture their children on managing finances when they are failing to manage their own well. Many would themselves lack the knowledge and expertise to communicate the message effectively.
Therefore, schools and others need to play a major role in ensuring that our future generations understand money and the basic concepts of personal finance. But in this area, we clearly have a lot more to do.
Social pressures to consume
Young people today, including students, spend significant amounts of time on the Internet. Social media advertisements are constantly pushing them to spend, whether directly via ads or more indirectly by example, i.e. giving them access to the lives of the rich and famous, leading to an increased me-too syndrome. The push for instant gratification is very difficult for youngsters to resist.
The prevalence of Facebook postings and twitter feeds from the icons of modern society display a lifestyle and approach to spending which can only be dreamed of by the youngsters following it. Yet it does push the idea of consumerism and instant gratification as a key idea to be followed and as a result it is difficult for the teenagers to see the difference in the way that these stars can afford a lifestyle that is way beyond the average person.
This desire is being exploited by the willingness of businesses to allow credit to students, who are too financially illiterate to be able to understand what they are getting themselves into. As has been consistently pointed out by the Government, there is no magic money tree, yet when students are being offered store cards with extortionate interest rates, their lack of understanding of how finance works makes it difficult for them to comprehend the dangers. It merely feeds into the ‘now’ culture prevalent among teenagers, and so they load up on debt without considering the long-term consequences.
Similarly, complex mobile phone tariffs and download charges that are not immediately visible ensure that teenagers end up with debt levels without realising it and are soon in a position where they are unable to cope. The ability to purchase via the phone at the touch of a button ensures that spending is easy and doesn’t require much consideration – act in haste, repent at leisure.
Society encourages debt?
At the same time, the young are receiving decidedly mixed messages from the establishment on the subject of debt. It is encouraged by society in some areas but without differentiation between good and bad debt. Students are being told that a third-level education is well worth having and will more than pay for the cost and effort incurred. Hence student loans are a good thing to have. Simultaneously, across all media, home ownership is held up as an ideal and is portrayed as the ultimate goal of all aspiring people. The endless adverts for mortgages seem to promise ultimate happiness and the borrowing as incidental.
Without a doubt, borrowing in these cases is the correct choice for most people, and will deliver benefits across their lifetime that far outweigh the costs of the debt. But without an understanding of the difference between good debt and bad debt, this background noise just feeds into the narrative that all borrowing is fine and that eventually it will all work out for the best. Sadly, in the case of pure consumerism, this isn’t true. The debt overhang resulting from excessive borrowing early in their working career or even during their student years severely impacts the life of the young, hobbling them and limiting their choices before they even have a chance to start out on their adult life.
Far too many young people are in over their heads with debt and struggling to get by whilst watching their more financially savvy friends start to experience life by saving and spending whilst they are stuck in the trap created by debt repayments. The ubiquity of payday loan advertisements tempts too many into what may seem to be an easy solution but inevitably just worsens the situation. Addiction to debt at an early stage is hugely detrimental to the life of these younger people and prohibits them from raising their eyes to look at the long-term. These will undoubtedly be among the first to opt-out of auto enrolment, as the possibility of long-term savings can never be on the horizon when debt and interest repayments are swallowing large amounts of their weekly wage.
Education, education, education…
So, what has happened to all the government’s plans to provide personal financial education in all schools to equip the next generation for the much more complex financial world in which they live. After the landmark report from the All Party Parliamentary Group report on Financial Education and the Curriculum in 2011, statutory financial education was introduced into the secondary national curriculum in England in 2014.
Despite this, a report by the same committee has found, two years after the programme was introduced, that only 17% of teachers had received any training or advice on teaching personal financial education, despite the fact that 58% of them would like more training in this area.
Personal finance is a complex area, made more complex by the fact that most people think the fact they manage their own finances automatically means that they understand them. How many members of the public really understand the benefits of income protection, critical illness and how to work out the balance between investment and protection in managing one’s wealth? Very few and this is as true of teachers as it is of any other citizen and the teaching community have not no more immune to the problems of personal indebtedness than any other sector. To combat this, we need to place far more emphasis on ensuring a high level of training of teachers in personal finance if we are going to ensure that a sufficiently high emphasis is put on the subject in the classroom.
The trick, therefore, is for us as a society to find better ways to introduce secondary school kids to the concepts of personal finance at an early stage and to ensure that they have a full understanding of the types of debt available, along with all the other issues associated with personal living such as savings & investments and how the taxation system can support them. Promoting an alternative to consumption now by encouraging investment for the long-term should form a core part of the curriculum that should be not just information but guidance on the level currently given to those retiring. After all, guidance at the saving stage will give the students far more options when they come to receive guidance at the moment of retirement.
Moving it back to an earlier stage by introducing the topic in primary schools, as recommended in a review of the situation by the APPG, would also be a huge step forward, as even primary school children are becoming far more active in the financial product space than would have been the case just a decade ago. The use by parents of debit cards for pocket money and the ability of younger children to purchase via mobile phones has moved the kids away from the physical concept of money and into a more virtual approach that breaks the physical link between empty pockets and the ability to spend.
The easiest place to inculcate the type of good habits in managing personal finance is in the classroom. It is one of the most important topics that everyone should be aware of and possibly personal finance should even be considered as a compulsory examination subject, as only then would students realise its importance, and would we be truly able to measure the effectiveness of the teaching. The understanding of money matters and how they impact one’s life is possibly the most significant life skill that could be bequeathed to our children and, given the increasing levels of consumer debt particularly among the young, it is not a skill that is being absorbed by the majority of the nation.
Investing in the future
There is always a lot of sanctimonious talk about investing in the youth of today, in terms of up skilling young people and ensuring they have the skills and education to earn. Perhaps that investment would be better protected, if we invested some more in teaching them how to manage their income to give themselves the most secure future possible, irrespective of their earnings.
The ability to clearly define one’s financial goals at early stage and the knowledge of the many paths available to achieve them would be one of the greatest gifts we could bequeath future generations; if we give it to them, they would be forever in our debt, which is the only one we would want for them.