Knee-cap Breakers, High APR and Danger Signs

According to this FT article, “while financial knowledge is essential, teaching the specifics of finance at school is not”. ‘Just in time’ is recommended instead. I am glad FT has chosen to do an article on this, because it is a subject that I have harped on for a while now.

Teaching finance in schools should not be designed to change behaviour. Rather, it is with the aim to equip the ‘one day adults’ with tools for them to make the right choices when applying for mortgages, car loans, negotiating wages, understanding interest rates and being able to tell when they are being ripped-off by those who have more understanding than they do. All these are things that almost everyone has to deal with once they are in charge of their own finances.

It is a form of literacy they may need to possess once they have to open an ISA account. To be able to grasp the rudimentary of investments, the kind of investment vehicles that are available, which funds they would like to choose and many more decisions. I remember the story of a couple, who through an online brokerage kept increasing their position using their margin account, in the hope that it will offset their losses from another investment. It’s become too easy to ruin your finances these days, it’s almost like handing a child a loaded gun. By the way, bankruptcy can have wider repercussions beyond just the money you owe – many jobs include a credit check, fail that and you’re automatically rejected.

It is a fallacy that to understand certain useful financial concepts require a higher than average intelligence. For instance, the public should at least know the existence of the discount rate formula (no need to memorise it), so that they can access it from the web and enter the amount before agreeing to a ridiculously high APR offered by unscrupulous agents. We are not allowed to drive cars without a licence, why then should we be allowed to access debt facilities with rates we have no understanding of? This is potentially life changing, and for a lot of people, life crippling. (Literally in some cases, if knee-cap breakers were sent in to do so).

An example of ‘just in time teaching’ according to the FT, would be to teach pension management when one is starting a job. So, the question is, without a formal education environment, where, when and how exactly is a young person who has just begun a job is supposed to learn? Will the onus be on the employer to provide pension education? All very well if you work for Barclays, but what if you are a mechanic working for a garage? Or working at the tills in Sainsbury’s?

What about those who will be in charge of their own finances when they leave home for university? When would they learn about credit cards, debit payments, loans then? As they are busy studying for A-Levels? Maybe in between the time they took the exam and when the results come out – but how many would actually be willing to come back to class and learn after they have just been through a major exam?

Even if the students forget all the actual details of finance that they have been taught, the awareness that there is a correct way of thinking and managing their finance is invaluable. Teaching how to spell might not have encouraged those who had no interest to read more books, but at least they understand the signs for “Danger” or “Exit”. Similarly, teaching finance might not encourage those who were none too conscientious to save early and save more, and not spend beyond their means, but at least they would not choose a payday loan with an APR of 3600%.

If we have no problem with children learning ‘Much ado about nothing’ and the facts on Queen Victoria’s reign, why then should we be bothered over a few hours of financial education? The syllabus might not be effective for the first few years, but improvements can be made. Driving lessons and driver licensing may not prevent all accidents but it’s certainly no coincidence that traffic deaths are much higher in countries with poor or non-existent driver education. Just because a few studies say that it is not effective today, does not mean that financial education should not be introduced in schools.

(Disclaimer: Writing this during lunch, I’ll edit any mistakes later)

Here is Sarah Silverman saying it better than I could:

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