How to better solve the financial education gap?
We had an administrator once who got into personal debt problems despite working with us for years, and prior to that with an insurance company. She had many £1000s of “red” built up on her numerous credit cards, constantly robbing one to feed another every other week. Eventually, after years of misery, she got back into the black and cut her cards up.
One problem was her utter panic when she came across percentages. Clueless she was. I’d try to help. “What’s 25% of a hundred” I’d ask. “You know I’m useless with numbers” she’d reply. “OK” I’d say, “what’s four times twenty-five?” “A hundred” she’d say instantly. “So, what’s 25% of a hundred?” Blank face.
“You know there’s four 25s in 100…. How many twelve-and-a-halves are there in 100 ?” Blank face again. “You’re just trying to confuse me” she’d say. Over all the years since I began as an IFA in January 1973, sadly I found her “financial dyslexia” regarding numbers and percentages to be all too common. And I see no evidence of it improving.
A wise man I once knew, when informed that at least 50% of savers hadn’t a clue how to invest properly, said that the problem was that 50% didn’t know what 50% was. And you see the results of this lack of understanding in the unlikeliest of places.
Not that long ago, being a lover of red wines AND bargains, I spied in my local Tesco a real bargain… a lovely Malbec at 50% off. So I reached for two. The wee woman by my side nudged me and said “here’s a better bargain, son…. Buy One, Get One Free”. And I replied “that’s just the same, 50% off each.” “No son” she replied with more than a hint of disdain.. “THAT’S 100% off.” Clearly fighting a battle I couldn’t win, I said I preferred Malbec and left.
You know what I find odd about numbers? Seems to me that dart players who would struggle with percentages, can instantly count their scores, even if it includes treble 19s, and just as quickly deduct it from 501. So if you’re interested in something you soon get the hang of numbers. We just have to get folks interested in comfortable retirements.
Every day I read statistics from here and overseas, especially the US, that hardly anybody reaches retirement feeling they made the best of their opportunities. Back in 1975 I recall a couple of surveys reporting how many folks felt they’d achieved financial independence in retirement, and secondly where, if any, they’d taken their advice.
4% admitted to receiving their key advice from Independent Financial Advisors and coincidentally only 4% reckoned they’d achieved the best result possible. You can tell this was long ago when others were far more trusted. Bank managers were No.1 spot for trust!?
When I was teenager I lived in a council estate, holiday was a few days camping if you were lucky, wore hand-me-down clothes, lived in draughty unheated houses and entertainment was a rope and a rubber tyre tied to a big tree. What I learned from my parents and grannies was that you spent less than you earned and kept a tenth put by safely in a jam jar called “For a Rainy Day.”
Luckily after leaving University I got myself a job as a trainee actuary in 1969 and started to learn about money and investing. I didn’t stay long there though. I failed the medical when they found I had a sense of humour. But it was a good grounding. So over all those 50 years, what’s the simplest thing I’ve learned to help clients to understand stuff like perspective, inflation and effective returns?
The Rule of 72 allied to Compound Interest! Why they don’t teach this in schools goodness knows. I see that still today, despite over 10 years of Bank rates being the lowest since the 17th Century, “savers” still pile hard earned taxed money into deposits and Cash ISAs earning the square root of not a lot. And more funds lie stagnant in Cash ISAs than “stockmarket” ones.
Rule of 72? Simply divide your net return into 72 to discover how long (ignoring inflation) it takes to double your money. 1% pa? That’s 72 years I’m afraid. Imagine though the reaction of those “savers” in deposit earing 0.1% pa? 720 years?? Holy moly. Simple stuff like this has been the best motivation for savers to learn more. Because once you compound such miserly returns against decent long term total returns from say Equity income Funds the message soon hits home.
Once folks understand that an 8% tax free return over the years doubles their money every 9 years rather than every 72 they’re not long in catching on. And that’s a nice way in to getting their attention on perspective and long term goals. Once a member of TEC I was introduced long ago to setting BHAGs… Big Hairy-Assed Goals. Much better fun than standing by, and watching savers stumbling into misery, later in their lives.
But finally let me say something about the desperate need for financial education. It ought to start in schools if parents don’t themselves feel up to it. Up here in Scotland, SIFET Charity (The Stewart Ivory Financial Education Trust) has since 2003 been giving guidance to senior school children about to leave for further education or work. In 2017 their Education Officers visited over 240 schools and gave “lessons” to over 20,000 kids.
Problem is those from 15 onwards could do with such help. The money just isn’t available, and if it’s left to successive UK Governments, who have difficulty running a piss-up in a brewery, widespread financial ignorance will simply keep being handed down from one generation to the next, ad infinitum.
So, why don’t we as IFAs do something about it and give more financial support to charities like SIFET? Or do we sit back and watch future generation blindly stumble into financial disasters and scams? Which costs us good guys ever more in compensation that would be avoided?
This article is the personal view of Alan Steel. Please check the appropriateness to your individual position with your adviser before taking or refraining from any action.