What does a young person who has been financially educated look like?
It’s an odd question, but an important one. It’s good to know where you are going. What outcome are you focused on?
The quality of knowing how to manage your money is known in some circles as “financial capability”.
The Financial Services Authority did a lot of work researching this, taking a baseline survey of how different age groups matched certain measures of financial capability. Not surprisingly, young people did not score highly. They are among the least financially capable groups in society.
Financial capability is usually divided into five areas:
- Making ends meet. That’s having more coming in than going out. Not getting into debt.
- Keeping track of finances. That’s knowing how, when and where the money came in. And likewise about where it went out.
- Planning ahead. This isn’t just about long-term saving and pensions and things. It’s being prepared to deal with non-regular spending – so called “lumpy” outgoings including presents, holidays, and big purchases. For many young people it will also be about planning for a future when they can make ends meet – which at present may be next to impossible for them.
- Choosing financial products. This is the focus of much so-called financial education – the kinds of things sponsored by banks or promoted by consumer organisations. It is a vital part of modern life. But focusing on it from the start ignores the needs of young people who have yet to gain confidence in the first three areas.
- Staying informed. The emphasis here tends to be on keeping up-to-date with financial products. It is also about market conditions, say in housing, or in tax or benefit changes. .
So where to start? A good way is to decide the priority area. Chances are that it will be one of the first three. So first decide which of these matters most:
Making ends meet
Keeping track of finances
Note that for most young people, the urgent need is not scrutiny of best buy tables and comparison of APRs. This is not only dull and tedious but largely irrelevant to the current lives of most young people. Much better to focus on young people’s own relationships with money, the influence of their peers, their understanding of the purpose of money and their aspirations for the future.
The final two areas represent key skills and understanding that young people will clearly need for the modern world. Young people of this generation must consciously plan for their retirement—a task that their parents and grandparents mostly left to employers or the state. They must also think about funding their education. But it is not helpful to push these areas onto young people before they have some confidence with the basics.