My gran always used to say, if you get a penny, spend half and save half.
Her wise words have influenced my financial behaviour ever since. These days it’s more “give the taxman a third, the mortgage lender a third and save whatever’s left after paying the other bills” but the principle still holds.
Some people would have chosen to ignore gran and spend with reckless abandon. Others don’t have such wise role models, and although the national curriculum now includes personal finance teaching at all ages within Personal, Social, Health and Economic education (PSHE), this is a non-statutory subject. The charity Young Money estimates that only around 40% of secondary schools are teaching children about finances.
With the UK’s savings ratio near its all-time low at 3.9%, and 26% of households unable to make ends meet for more than one month if they lost their main source of income, could this lack of financial education be to blame? And if so, who is best placed to provide it?
Education – wasted on the young?
Academic research on the effectiveness of financial education has so far proved inconclusive. Where provided at school, it’s been shown to improve financial knowledge, but there is no clear evidence it changes behaviours. Studies have almost all used different definitions of financial capability and different measures of the effects of education on it, which makes comparisons hard.
Research by Edward Horwitz in 2015, focusing on workplace education, suggests that such programmes can improve financial capability but may not have the effect originally intended. For example, some attempts to use education to improve contribution rates into pension saving resulted instead in members prioritising paying off unsecured debt. While not an undesirable outcome, this suggests the pension trustees looking to increase engagement should be sure to design the learning programme carefully.
What we do know is that addressing poor financial wellbeing – the tendency to worry about money – can improve worker productivity by reducing the time employees spend during working hours dealing with financial issues.
But Horwitz’s study found it was hard to persuade firms to take part in education programmes, given their past negative experiences. Concerns about bias and vested interests emphasised the need for education to be delivered by an impartial party. Help from any firm standing to gain from behaviour change was viewed with suspicion.
Also unknown is whether education has a long-term impact on individual behaviour. In a fairly new field of study, a lack of longitudinal data was noted across all academic studies. Until data becomes available, committing money into financial education seems an expensive risk.
Meanwhile, there’s a lot that the finance industry can do to help customers. Today we serve up complex products, cloaked in jargon and caveated with small print, and often try to engage people at times when the message is not relevant to them. Perhaps we can learn from other consumer firms. Every major retailer from Amazon to Next and Sainsbury has its own credit or store card, which they offer when relevant (at the checkout at the point of purchase), with a decision made near-instantly. The product is simple, and usually comes with a teaser discount for first time use.
My gran’s generation, who bore the brunt of ‘real austerity’ during and after World War II, has more or less died out. In their place, many of today’s grandparents can afford to indulge their grandkids and are less likely to instil in them values of thrift and saving.
The jury may still be out on the value of financial education, but I’d like to see a counterpoint to the messages touted by social media and advertisers urging us to borrow and spend, not save. In the absence of an intergenerational handing down of financial savvy, and with schools’ provision patchy at best, employers are the most obvious candidate to provide unbiased support at the time it’s needed.
But my instinct tells me that, unless they can be sure their education programmes improve productivity, firms will create a better outcome by allocating that budget directly into members’ investments.
This article first appeared in Mallowstreet January 2018