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This article is the latest part of the FT’s Financial Literacy and Inclusion Campaign
Many thousands of UK families are launching one of their brood into undergraduate life. Some have sat on overstuffed suitcases in an effort to do the zips up. Others have debated the logistics of squeezing a drum kit into a Renault Clio. Parents have dispensed advice on adult sexual relationships to kids amid excruciating mutual embarrassment.
Chats about the other British taboo — money — may have been equally faltering. Families will already have answered the essential question of how university costs will be met, provisionally at least. Many freshers will remain as unfamiliar with day-to-day money management as they are with set texts they were supposed to read over the summer.
Financial illiteracy is among the many defects us older people reflexively discern in the young. Under-18s scored an average of 2.3 correct answers out of 10 in a UK quiz run by the Centre for Economics and Business Research and financial website Wealthify. Mean scores rose steadily with age.
Younger Americans also underperformed in a seven-question online financial test set by the US Financial Regulatory Authority.
I scored top marks in these quizzes. So I should, given my profession. But the exercise left me sceptical about the helpfulness of such assessments when applied to the young. The CEBR quiz rewarded me for knowing when the UK tax year started. Finra gave me a point for understanding the relationship between base rates and bond prices.
If my teenager expressed a fascination with the UK tax code or yield curves, I would know it was time to stage an intervention. I would encourage them to spend more time taking healthy exercise in the open air.
There is a difference between knowing financial facts (tax year dates, for example) and grasping key concepts (the erosion of investment growth by inflation, for instance). Financial literacy tests often mix the two.
Practical skills are a third important strand of financial literacy. When these are the focus, young people performed better than us oldies, according to researchers at Cambridge and University College London. The academics dug into an OECD survey to extract scores on four key tasks: pricing a bulk purchase by quantity; reading a graph; calculating small change; and applying a discount. Separate UCL research shows that better-off kids know more than poorer ones, possibly because many of them have bank accounts.
However, I doubt that even rich kids are particularly well prepared for semi-independence. Dropping our sprogs at university, I always watched wryly as indulgent parents unloaded multiple bags of ready meals to sustain Young Tarquin through the hard times ahead.
As flinty-hearted northerners, we abandoned our own kids to survive on their wits, student finance and fixed parental top-ups in their quest for bargains at the local Tesco.
Food is a good place to start ticking off a list of stuff parents should tell kids about money before dumping them at a seat of learning:
Cook for yourself. “You will spend less cash and you will socialise more,” says Vivi Friedgut, founder and CEO of student financial website Blackbullion. An undergrad who lives on Deliveroo meals in their room while doomscrolling on their phone may consign themselves to pointless debts and social isolation. Semi-communal cooking and eating are antidotes to both.
Budget termly expenditure lower than your funding. Happiness should be the result, as Mr Micawber averred. Parents can legitimately sit their kids down to write a line-by-line forecast as a quid pro quo for parental top-ups that average several thousand pounds a year. Start by referring to this week’s FT Schools special report Mastering Money, containing essential advice from the likes of Claer Barrett and Moira O’Neill.
“Everything comes down to the power of compounding,” says Aimée Allam of the FT’s Financial Literacy and Inclusion Campaign (Flic). It is hard to make sound judgments about interest costs, inflation or savings growth in ignorance of compounding. Surprisingly few people fully appreciate the snowball effect on capital of recurring percentage deductions or increments. Compounding matters a lot if low earnings after graduation leave your student debts to escalate.
Debt is a tool for achieving goals, not quick wish fulfilment. Borrowing thousands is scary if you mentally benchmark the amount against the cost of books or beer. It is a worthwhile means to an end if you reasonably hope to pay down the debts or to benefit from their eventual write-off. Avoid using buy now, pay later services to finance impulse purchases, meanwhile.
Expect parental financial support to taper as you get older. Adulthood involves a transition to independence. Generous parents can retard the process with unneeded handouts. Going without a few luxuries at uni helps teach kids from comfortable homes that money is harder to obtain than spend. Genuine want is a different thing. Most universities have hardship funds for which struggling students can apply.
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I would like to pretend I was a paragon of financial prudence during my own student days. This would be a big old lie. I am so ancient that the government covered most of the cost. Schooling in hard knocks had to wait until I entered the late-80s jobs market.
I did learn one painful non-financial lesson, however. Do not attempt to ride a stolen lecturer’s bicycle downhill with a lady friend perched on the handle bars after doing vodka shots. It is unlikely to end well for you, her, or the college flower bed that cushions your fall.
jonathanbuchananguthrie@gmail.com
