Financial literacy remains conspicuously absent from the core curriculum in most schools, a gap that experts argue is setting young people up for failure. According to Vicky Parry, Editor of MoneyMagpie and a respected financial expert, equipping children with a solid grasp of money management, bill handling, and financial planning is crucial for giving them a head start in adult life.
These are not just lessons for the classroom; they are vital skills that many adults struggle with due to a lack of early education. Parry has outlined five fundamental financial literacy lessons that are essential for everyone, from teenagers to adults, providing a roadmap to a more secure and prosperous life.
Understanding Good Debt vs. Bad Debt
Debt is often viewed with fear and stigma, but the reality is that avoiding it entirely is nearly impossible for those without substantial family wealth. With wages frequently struggling to keep pace with the rising cost of living, large purchases or a rental deposit often require some form of borrowing.
The key, Parry explains, is learning to manage debt effectively by identifying and avoiding bad debt. High-interest credit cards, store cards, 'buy now, pay later' schemes, and payday loans are forms of bad debt that can trap borrowers in a cycle of paying exorbitant interest without ever reducing the principal amount.
Conversely, some debt can be beneficial. Using a credit card for regular expenses like groceries or fuel, while keeping the utilisation to around 20% of the limit and paying the balance in full every month, demonstrates responsible borrowing. This positive behaviour actively helps to build a strong credit score, which is essential for future financial products like mortgages.
The Critical Need to Budget for Taxes
Many assume that Pay As You Earn (PAYE) jobs automate tax concerns, but errors can and do occur. Changing jobs mid-financial year, for instance, can sometimes result in being placed on an emergency tax code, leading to temporary overpayment.
HMRC is known for its strict approach to reclaiming owed taxes, applying significant interest on overdue payments. Parry advises individuals to meticulously check their payslips each month to ensure the correct tax is being deducted. Prompt action can resolve issues quickly, rather than discovering a problem during HMRC's annual reconciliation.
For the self-employed or those with a side hustle, tax planning becomes paramount. It is recommended to set aside at least 30-40% of every payment received into a dedicated savings account to cover the eventual tax bill, preventing any nasty surprises if business income surges.
Demystifying Investing for the Masses
The world of investing is often perceived as a complex arena for the wealthy, but Parry insists this is a misconception. Thanks to modern tools, investing is more accessible than ever.
Stocks and Shares ISAs have made investing straightforward, and even children can benefit from a Junior ISA, with an annual allowance of up to £9,000, which becomes accessible when they turn 18. User-friendly apps like Moneybox allow anyone to start investing with small, regular contributions without needing deep market knowledge.
The golden rule of investing is to play the long game. While day trading exists, most people will benefit far more from a 'set and forget' strategy, allowing compound interest to work its magic over years. Consistently investing even a small amount like £10 per month can accumulate into a substantial sum over time.
Exploring the Spectrum of Saving Options
Most people are familiar with current and basic savings accounts, but a broader understanding of saving vehicles is crucial. Parry highlights the importance of diversifying savings across different banking groups to mitigate the risk of digital outages.
She outlines three primary saving strategies:
- Easy-access savings accounts offer low interest rates but provide liquidity for unexpected expenses or shortfalls.
- Cash ISAs are ideal for building a tax-free emergency fund.
- Fixed-term savings accounts require locking away funds but offer significantly better interest rates, making them perfect for long-term financial goals.
Grasping the Fundamentals of Pensions
Pensions are perhaps one of the most misunderstood aspects of personal finance. A critical lesson is that the State Pension is unlikely to be sufficient for a comfortable retirement and its future is not guaranteed.
Private pensions are therefore essential. The government's auto-enrolment scheme has been a positive step, dramatically increasing pension participation. The power of compound interest is the cornerstone of pension growth, where reinvested earnings generate their own earnings over time.
Starting pension contributions in your 20s, as opposed to your 30s, can make a monumental difference due to the extended period of growth. While it can be tempting to opt out of a workplace pension to see a slightly higher monthly salary, this means forfeiting 'free money' in the form of mandatory employer contributions, which are at least 3%. This short-term gain severely disadvantages long-term financial security.
