The best investment tip of all? Start when you’re young
This article is the latest part of the FT’s Financial Literacy and Inclusion Campaign
What’s the most valuable piece of investment advice you’ve ever received? Whether it was wisdom passed down by an older relative, something you learned from this newspaper, a Reddit thread or even a stock tip from a taxi driver, a school teacher seems an unlikely source.
But this could change in the future, as the drive to overhaul financial education in UK schools gains more support.
Ten years ago in September 2014, personal finance teaching was first introduced in the school curriculum in England. I regret to report it has been a bit of a wasted decade.
Almost two-thirds of young adults do not recall having any financial education in school, and depressingly, an estimated 23mn people in the UK lack the basic skills needed to manage their money effectively. It’s high time we connected the dots.
MPs were starting to do so before the general election, when a report from the cross-party education select committee recommended “enriching” maths lessons with financial knowledge — a huge opportunity to embed vital life skills if pupils must study maths to 18 — as well as relaying strong arguments for starting financial education at primary school.
“It’s vital we do not waste another 10 years,” says Sir Douglas Flint, the chairman of asset manager Abrdn, who has written an open letter to the education secretary, Bridget Phillipson, this week respectfully urging her to get on with it.
Teaching financial life skills consistently in schools ensures nobody misses out, whatever their family circumstances. When they turn 18, kids can start using buy now, pay later; apply for a credit card, overdrafts and car finance, not to mention borrow thousands in student loans.
“That’s why financial literacy is so important. The easiest money to make is money you don’t lose by doing something stupid,” says Douglas.
An OECD study this year found that teens in rich countries lack the skills needed to fully understand the sophisticated array of digital finance options available with a few swipes of a smartphone screen.
Learning these lessons the hard way has a cost. A new study funded by Abrdn indicates that even when adults are on similar salary levels, having low financial literacy can leave them worse off.
Take cash savings, a key measure of financial resilience. The poll of 3,000 UK adults found that people on low and middle incomes with poor financial literacy held on average £5,500 less in savings than those with high financial literacy — even though their level of income was broadly similar.
Those on salaries of £60,000 or more were similarly divided. In this bracket, 41 per cent with low financial literacy said they saved into a pension, compared to 66 per cent of those with high financial literacy.
Even though these respondents were on similar incomes, those with high financial literacy had amassed double the median amount in their pension pot (£175,000 versus £87,500 for the less money savvy).
Abrdn used the “Big 3” questions devised by the Global Financial Literacy Excellence Center in the US to assess how financially savvy respondents were. Correct answers show an understanding of compound interest; how inflation erodes cash savings over time and that an investment fund is more diversified than a single stock. Yet a fifth of UK adults (20 per cent) scored zero, and a further 24 per cent only got one question right.
The harder point to prove is whether rebooting personal finance education would lead to better outcomes. But as a trustee of the FT’s Financial Literacy and Inclusion Campaign, I’ve seen how well teenagers respond to our finance workshops about the adult world that awaits them.
As I and my fellow trustee Lucy Kellaway have previously written, it is not unusual for young teens to already be investing in unregulated cryptocurrencies, following “finfluencers” on social media, gambling or being persuaded to illegally act as a “money mule”.
Frankly, educating kids about the dangers of the digital world is something that many parents may struggle with — not to mention under-resourced schools. Flic has designed a whole school curriculum with free downloadable resources including videos and lesson plans to help.
The challenges of teaching young children about money in our increasingly cashless society are a powerful reason to start even younger in primary schools. “The language of money is a language for life,” says Leon Ward, chief executive of money charity MyBnk, who co-signed Douglas’s letter. “Just as learning to speak, read and write is essential for a child’s development, so too is learning how to manage money.”
But education doesn’t stop when you leave school. Establishing a solid foundation of financial knowledge at an early age better prepares adults for decisions that await them further into their financial journey, like understanding the importance of pensions.
Starting pension saving earlier is one reason why the financially savvy respondents in Abrdn’s survey could have double the amount in their pension pots, as they benefit from the magic of compounding.
“The sooner you realise exactly how much better off you can be if you start saving for retirement in your 20s, never mind your 30s or 40s, the better,” Douglas says.
With the days of gold-plated final salary pensions long behind us, he worries that few adults realise how much responsibility now falls on individuals to fill the yawning retirement savings gap.
If he was teaching the nation a lesson, he would start by changing the terminology. “It is utterly misleading to call a DC scheme a pension plan — it is simply a savings plan,” he says. “People have a notion that their ‘pension’ is going to look like the one that granddad’s got, but it’s not.”
He thinks “investment plan” would be a better name, putting the emphasis on what’s actually contained within (astonishingly, previous studies have found 20 per cent of Brits think pensions are cash savings vehicles).
A rebrand would also help counter the view that “pensions” are only for “pensioners”. People in their 20s who take heed of this lesson will need to invest far less in the course of their lifetimes to get the same result as those who start in their 30s or 40s.
Regardless of your income, being aware of the derisory bare minimum amounts many employers pay in compared with others, finding out if your employer offers a higher “match” on staff contributions and understanding the valuable tax benefits of pensions could make you much better off.
Claer Barrett is the FT’s consumer editor and the author of ‘What They Don’t Teach You About Money’. [email protected] Instagram @Claerb