MoneyMagpie Editor and financial expert Vicky Parry reveals which financial life lessons they should teach in school
Financial literacy isn’t part of mainstream curriculums – but it should be.
Setting children up with a clear understanding of how money works, how to manage bills, and the importance of financial planning, will help them get a headstart in life. Managing money is an important life skill that many adults struggle with because nobody tells them how to do it well.
These five financial literacy lessons are for everyone, teenagers to adults, so even if you didn’t learn it at school, you can use the information now for a richer life.
Some debt is good debt
Debt is a word that has a lot of stigma attached to it. While it’s important to try not to gather any debt at all, in real life that’s impossible unless you have family money. Wages barely keep up with the cost of living, so when we need to make large purchases or raise a rental deposit, that can be tricky to find from our cashflow.
Debt can be managed well if you can spot bad debt options to avoid. High-interest credit cards and store cards, and ‘buy now, pay later’ schemes, as well as high interest payday loans, are all bad debt that should be avoided. The interest rates are so high you can spend years paying only interest and never the purchase price.
Some debt on a credit card is actually a good thing, as long as it is paid off in full every month. Use one for your groceries, fuel, or daily commute to make use of around 20% of your credit limit, then pay it off in full, on time, every month. This helps build your credit score, as you appear to be a responsible borrower.
Always budget for taxes
Even if you work a PAYE job, things can go wrong with payroll. Or, you might move jobs in the middle of the financial year and be over-taxed for a month or two if you’re on an emergency or second job tax code.
HMRC is strict when it comes to reclaiming debt, and puts huge interest on overdue repayments. Always check your payslip and tax each month, and make sure you know what you should be paying. This means you can act fast if something doesn’t seem right, instead of finding out the following tax year when HMRC reconciles accounts.
When you’re self-employed or you want to start a side hustle, taxes should be at the front of your mind. Set aside at least 30% of every bit of income, ideally 40%. This sounds like a huge chunk, but if your business takes off in the same tax year, you could end up with a much higher tax bill than you anticipated at first. Keep a savings account just for your taxes.
Investing is for everyone
When people hear ‘investing’ they often think of Wolf of Wall Street and men in sharp suits shouting “buy! Buy! Sell!”. In reality, investing is easier than ever, and most people don’t need a wealth fund manager to handle their money.
Investing is straightforward thanks to Stocks and Shares ISAs. Children can have a Junior ISA, with an allowance of up to £9,000 paid in each year, that they can only access when they turn 18.
Apps like Moneybox make it really easy to invest. You don’t even need to have lots of spare cash or understand the stock market. Just decide how much you’re willing to invest (small amounts each month are better than large one-off lump sums) and how much risk you want to take. Investing platforms often have ready-made portfolios based on how much risk you want to take, so all you need to do is choose which one you want.
Even investing just £10 a month can make a huge difference over time. And that’s the second lesson of investing: it’s the long game. While you can make fast money if you really understand daily trades, most people will benefit from ‘set and forget’ investing platforms left to grow over a few years.
There are different ways to save cash
Most people know there are current accounts that you spend from, and savings account you put cash into.
But there are lots of different ways to save, and it’s important to have savings across different banking groups. This is even more important with today’s digital-first approach, because if an outage takes a bank offline, you need an alternative to access your cash.
Easy access savings have low interest rates and are best for the dip-into fund, when you don’t have quite enough at the end of the month, or for an unexpected bill. Cash ISAs are ideal for building your emergency fund, and are tax-free. But to get better rates, you need to lock your cash away for a fixed term. So, that’s a third way to save your cash: lock away your long-term funds.
How pensions work
Pensions are often misunderstood, and not taught in school in any detail. Many don’t realise that the State Pension isn’t enough to live on, and it might not even exist by the time you reach retirement. Private pensions are vital for your retirement. The Government has tried to increase pension uptake by introducing auto-enrolment, which has significantly boosted the number of people who have a pension.
Compound interest is vital to understand when it comes to pensions. That is when interest earned is reinvested in your fund, building it over time.
Someone who starts paying into their pension when they are in their 30s will have to contribute more each month to build their pot to a decent retirement fund than someone who starts paying in their 20s. That’s because compound interest will have more time to reinvest and grow.
It’s tempting to opt out of workplace pensions, especially when you first start earning a proper salary. Seeing the deduction taken from your pay can be hard. But opting out also means you’re losing free money. Employers must also make a minimum of 3% contributions to your workplace pension, which is in addition to your salary and contributions. Opting out for a short-term gain puts long-term investments at a disadvantage.
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