Why wait to get Financial Education to the people who need it

Over the last couple of weeks I have met with a couple of charities who help vulnerable people, these charities aim to help these people get back on their feet and give them a purpose and aim. Many of these people come from an environment where even the basics of budgeting are alien to them and we will be looking at how we can help them.

I have also made contact with charities and organisations that are already going out to schools to see whether there is a way we can work together. One comment to me was the difficulty of getting into schools and certainly this has has been a challenge, and one I am determined to overcome.

In the meantime I have started to put some thoughts together on what we would like to develop. What I would be really interested in, is not only people’s thoughts on what is here but also whether people are working in the Bristol and North Somerset area and would like to share their thoughts and see if there are ways we can work together. 

Introduction 

This blog outlines how we can help to provide financial education to primary schools, colleges and universities but also in helping vulnerable people who have not benefited from any form of financial education. The areas of education centre on three areas which are interdependent on each other, the area of most interest is investing because teaching about long term investing is crucial to changing a mind-set which focuses on short term fundamentals. But we understand that there are challenges within our education system which mean that without the basics we cannot get to the idea of talking about investing.

The aim of our program will focus on three areas:

1. Money Management
2.  Financial Planning
3. Behavioural Investing

We are aware that there are organisations offering this service, and that the Government are looking to change the National Curriculum to adopt financial education in schools. However, the changes proposed by the present government are not due to filter through until September 2014 (at the earliest). It could be that working with other organisations is a better route than developing our own programme and this is something we want to explore.

Consider:

1. 94% of people think that financial education for young people is important in the current environment
2. 69% of parents feel that their children will get into debt
3. 75% of parents do not feel that they can teach their children on money matters

And that society is changing, cash is being replaced with debit cards as the primary means of paying for items as well setting up regular payments through direct debits and standing orders. Managing finances can be a complex matter.

There is a need now:

1. To give guidance on handling money and making decisions about spending and saving money
2. To provide an understanding of the basic concepts of credit and debt
3. To ensure that young people are equipped to make informed financial decisions

Our program would be aimed at the target audience, starting at a basic level through to more complex discussions around investing.

Money Management Teaching

Primary School - Year 5 / 6 (Ages 9 – 11)

Basic understanding – themes budgeting, spending and saving   

•  Concept of budgeting – once you start earning (you earn money by working) you need to understand about budgeting, you should only spend what you have (there is difference between what you want and what you need) and you should understand that a credit card should only be used if it can be paid off each month
• Making choices (spending) - you must make choices about how to spend your money; you should shop around for the best deal, you should understand that if there is something you need but is not in the budget then choices have to be made
• Smart to save – you should come to understand that it is smart to save a percentage of what you earn; the earlier you save the more you’ll have in the long run. Putting your money in a bank account will protect it and earn interest (not much!)

Secondary School – Ages 11 – 13

Building blocks – themes summary of basics, ways of earning money, and setting goals

• Summary of basics – you should have a basic understanding of balancing incoming money and outgoings, you should have a basic understanding on making choices on how you spend money and you should come to understand that it is smart to save some of what you earn
• Career expectations – you should understand the basic concepts of earning money (i.e. job), as a teenager in school this may be helping parents, family, neighbours and friends but understanding what your choices are to earning money. You should understand that university is not your only option and university may build up long term debt, apprenticeships provide money and training so can provide career opportunities without debt (includes all types of roles including construction, accountancy, education etc)
• Financial planning (setting goals) – once you have understood the basics of budgeting, career expectations etc then you should start to understand the concept of financial planning. You should understand that financial planning is about the setting of goals, you have excess money each money and you want to use that to buy things you want, in simple terms there are three main goals:
• Short term savings – you should understand that short term savings are for those things you want to buy, could be a phone, camera, deposit for house etc
• Emergency cash – you should understand that emergency cash is needed for emergencies for example loss of job, illness etc (this is between 3 and 9 months of your living expenses), this emergency cash should not be used for non-emergencies (i.e. home improvements etc)
• Long-term investments – you should understand the importance of saving for the long-term. In most cases this will be planning for retirement, this may seem along time away but it is less painful at an early age

• You should understand that goal setting needs to be realistic, build each of these pots does not happen overnight, it is about setting measurable goals. It may be more important to build up emergency cash and then short term savings before you consider long-term investments. And finally you should understand the effect that each financial decision has on another. So for example, using debt to buy what you want may mean you can have it now but long-term it will be expensive.

 

Secondary School (14+), Colleges and Universities

Moving forward – themes summary of basics, and long-term investing  

• Summary of basics – you should have an understanding of balancing incoming money and outgoings, you should have an understanding on making choices on how you spend money and you should come to understand that it is smart to save some of what you earn. Effectively you should be at the stage of understanding how to set financial goals and make decisions
• Creating wealth – you should understand that creating wealth or savings is a long-term goal. You should understand what you are looking to achieve, and when you will want that money as this will determine the vehicle you use to save. You should have a basic understanding of what is available to you to invest in, for example an ISA, Pension, Shares etc. You don’t need to understand all the different types of options open to you but you should understand the basics
• Investing – once you have have understood the basics of saving you need to consider how you invest. So for example, an ISA is purely a vehicle, you need to choose where you invest the money within that vehicle – this will be a basic understanding of some of the main investment options i.e. shares, active funds, passive funds and investment trusts
• Investment thinking – once you have understood the basics of investment then you should understand the process of selecting your investment. You should understand that making decisions on last year’s performance is not necessarily the right approach; you should consider investing as a long term goal. You should understand the concept of value investing, and going against the grain 
•  DIY or advice – you should understand that you have choices, you can choose to make the investment yourself and how you do that, or you can seek advice from a financial planner. You should understand the costs of doing it yourself or seeking advice against the benefits of one over the other 

Post school investors

• Exploring the concept of successful investment – you should start to understand the challenges investors face, you should be able to spot the danger signs and you should understand that sustainable investing is not about chasing short term profit

Let me know what your thoughts are, and if you are involved with Financial Education in Bristol and North Somerset or have contacts I would love to hear from you. Please spread the word and keep this going.

Utopia State...it'll never happen here

In the last couple of weeks I have picked up on a couple of things which you may think is odd for someone so keen to promote financial planning. When I first started this certainly my aim was to promote financial planning and this remains my overriding theme. However, it is clear that without understanding financial management you can never get to the next step.

The problem we have is that so many people are struggling to manage their day to day finances that the concept of planning long term is far from their mind. My problem with pay day lenders is that I see them as predators who exploit the most venerable, effectively if you have a short term need then normally people would turn to an overdraft or the credit card first, but if these are maxed out then they turn to pay day loans. Recent research showed that people were turning to these to pay the mortgage.

I recently received a tweet that said “Utopia State...it'll never happen here” – and I was thinking about this and what I (and others) want to achieve. I believe that actually as a body we can make a difference, I agree it may not be perfect but it can make a big difference.

I wanted to share something I picked up from the US and have tweaked for the UK, and certainly if we are looking for a utopia state this would be a good starting point (and remember this doesn’t have to be done by teachers):

• Ages 3-5 A child should come to understand that you need money to buy things; you earn money by working; you may have to wait before you can buy what you want; there’s a difference between what you want and what you need.
• Ages 6-10 A child should come to understand that you must make choices about how to spend your money; you should shop around for the best deal; it is dangerous and costly to share too much information online; putting your money in a bank account will protect it and earn interest (not much!).
• Ages 11-13 A child should come to understand that it is smart to save 10% of what you earn; entering credit card or Social Security numbers online puts you at risk of identity theft; the earlier you save the more you’ll have in the long run; a credit card is a loan and you will owe more than you spent if you do not pay your bill in full each month.
• Ages 14-18 A teen should come to understand that university is expensive and you should choose a university and student loans based in part on your career expectations; you should avoid using credit cards for things you cannot afford in cash; you pay taxes on your income and should budget for take-home pay, not gross pay. Expanding on this a little university is not the only option, remember you can learn a trade while you work like plumbing, accountancy, financial planning etc
• Ages 18 and up A young adult should understand that you should use a credit card only if you can pay off the balance every month; you should have appropriate insurance; you should always diversify your investments and pay attention to the costs associated with various investment products.

These milestones are broad and simple by design. They are meant to promote awareness of basic personal finance issues that, perhaps, we take for granted but which generally are found lacking across the population both in the UK and US.

 

Kids who are raised with even cursory knowledge of things like interest expense and fees on financial products will, as adult consumers, know enough to investigate further when necessary. That’s a minimum goal of financial education—and it is the right approach. We can reach higher, too. But loftier financial education goals should not be at the expense of building a solid base. For now, what’s needed is a set of widely accepted guideposts that all interested parties can teach to. Maybe we’ll have it soon.

The next step for me - I mentioned I recently met someone who is in the House of Lords who is interested in this and so I want to follow this up, I am also going to contact some schools and see where this leads. I would also be interested in what others have done and where they have been successful.

Could we build a successful financial education system, I think we can but I think it will not happen overnight. Many of us grew up with financial education but this has been eroded over the past twenty years, it is now time to change that erosion into something positive.  

I keep saying to make a difference its like building a wall, each brick gets us closer to the goal. Please spread the message and follow me on twitter. 

Financial solutions - playing on people's naivety?

Over the Christmas period I received various emails, messages and letters offering me loans, and to quote some of the messages “to start the year afresh”. I also received several mailings about sorting out my finances (pensions and ISAs). When I saw some tweets around pay day loans it made me think about all these messages and why we get sucked into it all. 

In many cases we don’t read the small print or we don’t understand the consequences of what we are doing, I suppose we are naive. If I take out a loan I have to pay it back, for a pay day loan, if I am short by £400 one month then I am likely to be short the next month so fundamentally I need to review my finances and cut down on expenditure otherwise I will spiral into debt. This doesn’t happen to everyone but I suspect it happens to a lot of people.

And this then leads me onto mailings around sorting out my finances; I love the headlines around taking control and saving money. It is very tempting. If I can save 0.25% per annum over 20 years then my funds are going to benefit. But behind all of this is the assumption that we know what we are doing. One of my first blogs took the example of a car, I know I want a car but is that the best solution to deliver my goal. Likewise by going direct we are buying a product, this is on the assumption that we have done the financial planning upfront and concluded that this is the right product to deliver the solution. 

So what do I mean by this, most people assume a pension is the best way to save for retirement. On the way in there is 20% tax relief so £80 a month means the government pays £20 into the pension, the fund is tax efficient and at retirement 25% of the fund is returned tax-free. What is more is that if I go bankrupt or lose my job then the money is protected. But is this the right solution? For example if I want a tax-free income, I want to be able to pass the full fund on death to my beneficiaries and I want to take an income when I want to, is the pension the best solution? 

So financial planning will help us decide what is the best product to deliver the goals we have. There is also another point in all of this, when going direct not only does it assume that the person knows the product they want but also how they want to invest it. Remember the tag line is saving you money but if the person investing has no idea on how to invest then they will select funds “recommended” by the “provider” and in many cases will base decisions on past performance. 

To some extent what I am saying is that whether someone is plugging a loan offer, a credit card or pay day loan they are no different to someone peddling a cheap ISA or pension. They know that many people will not understand the offer and they play on that naivety. A warning to all these people it will turn round and bite them soon unless they educate. 

I am a great fan of do it yourself investing for the right person, I read something the other day that said even as a financial planner we should employ a financial planner to do our own planning. But what I want to do is just outline how someone who has received a mailing about doing it yourself should look at this and then consider whether the saving is worth it.

Why do it yourself?

 

I see five reasons why we might consider going alone:

• We have a need and know what we want, i.e. we are prepared to do our own financial planning and know how to deliver our goals
• We want online access and ability to trade 24 hours a day
• We have access to plenty of free “advice” through online media, papers, magazines, self-help books and good investment knowledge
• We don’t want to pay for “advice”, and are happy for the responsibility for decisions to rest with us
• We want to take advantage of “low charges” – no advice charges mean charges can be lower

Preparing to do it yourself

If I decide to put in a bathroom I don’t just buy a bathroom and put it in, I have to do some work first. Doing our own financial planning is really no different. Below are some pointers:

Set measurable goals

When I looked at seeking advice I mentioned setting measurable goals this still applies with going direct. Rather than saying you want to be comfortable in retirement, quantify what you mean and how you will achieve this.

Understand the effect of each financial decision

All financial decisions are interrelated, so a decision around a child’s education may effect when and how you meet your retirement goals. Often when we go it alone we don’t think about what we are doing and why we are doing it.

Review your financial situation periodically

Financial planning is a dynamic process; goals may change over the years due to changes in our lifestyle (i.e. an inheritance). It is important that the plans are revisited and reviewed as time goes by to reflect changes so we stay on track with our long-term goals.

Start planning as soon as you can

The decision to go it alone is not an easy one it can be stressful but the key is to have a mind-set focused on financial management, i.e. budgeting, because only then can you focus on saving and planning. To start early is important but also understanding where to invest is crucial to the process.

Like the process of reviewing finances, financial planning should form part of this process so that you can adapt and be prepared to meet life changes and handle emergencies. 

Be realistic in your expectations 

I remember when I started investing during the nighties you expected funds to return 10 – 15% p.a., and we all thought that things would never change. The last decade changed all of that, is a return of 7% p.a. realistic and are we prepared to have years where we lose money. There are events where we are not in control, for example inflation, stock markets and interest rates, and all of these impact on what we are doing.

So we have to be realistic and we have to understand that the situation will not change overnight, it is a lifelong process. 

Realise you are in charge

This applies to everything we do, once we make the decision to go it alone we need to understand what we are doing. When we take out a loan, what are the consequence of doing that? If we think we can save money on our pension by going alone then we need to understand that saving money means that we are in charge, we are in charge of the investments and we are in charge of the products we select.

I have read criticism of some companies who promoted certain funds and people invested because they believed that as these companies promoted the funds they must be worth investing in only to be disappointed by poor returns. These companies have done nothing wrong, these people need to understand they are in charge, they need to look at their whole financial decision making process and question everything before making any decisions. 

In summary I may sound as if I am against people going alone but actually I think there is a place and that this market will grow. What my concern is, is that those companies peddling these solutions are, whether intentionally or unintentionally, ignoring the fact that many people who are investing with them don’t realise they are in charge and the consequences of this. 

Financial education is not a quick fix, it is a change of mind-set and needs some bold changes. Because direct organisations are marketing machines it may not be a good marketing message to promote but ultimately if they take this on board they will make a big difference to a growing market. So the challenge as you read this is whether the saving is worth the responsibility and only the person making that decision can decide.

Follow me on Twitter so please spread the word and let’s change the world.