Should we teach financial literacy?

Discover why financial literacy is so important, and learn how teaching personal finance in schools could help to prepare students for the realities of adult life.

Many people agree that the extent of their personal finance education fell short, if it even existed at all. When we consider that money is the heart of our capitalist culture, this lack of education is strange. We need money to have a home, access utilities, travel, eat – it’s essential for survival. 

So why aren’t we taught basic money management skills? Although we won’t focus too heavily on the why not, we’ll discuss why everyone should learn financial literacy. You may be out of school or university now, but it’s never too late to take steps towards success and stability in life.

Keep reading to learn about the benefits of financial literacy, the age you should learn about it, and why schools should teach it to kids. Then, we’ll discuss the most important topics within financial literacy, from budgeting to pensions.

What is financial literacy?

The definition of financial literacy is the ability to understand financial information and use financial skills effectively, whether that’s budgeting, saving, investing or something else. It’s also about your awareness of your own relationship with money, and whether you have the tools to reach your financial goals and avoid financial hardship.

We interact with money from a fairly young age, depending slightly on our upbringing. While some children may help to support their families earlier, most people start making important financial decisions after they leave school, between 16-18 years old.

This is why it’s best to start learning about personal finances from a young age. That way, you have a basic understanding of the purpose and importance of money before you start making financial choices. We spoke to Martin Lewis, the founder of MoneySavingExpert.com and successful financial journalist, and he also emphasised this point. 

“The advantage children have is that they’re professionals at learning, that’s what they do for their job. Teaching children is easier than teaching adults. That’s why, in our education campaigns, we focus on children –  because the job of educating society is so much bigger. If you start with children and keep doing it over 30, 40 years, you’re going to work through [society] better.”

Why is financial literacy important?

In 2014, the Global Financial Literacy Excellence Centre (GFLEC) carried out the world’s largest measurement of financial literacy around the globe. This was the Global Financial Literacy Survey. They found that just 33% of adults worldwide are financially literate, which is just over a third of the global population. This number is even less for women, reaching just 30%. 

This is worrying because poor money management and a low understanding of financial matters could mean that more people end up living in poverty. This could be due to a lack of money saved up, large amounts of debt, no money to pay rent, or other financial issues.

Looking at financial literacy education in the UK, the numbers are also not looking great. According to the 2021-22 Young Person’s Money Index report from the London Institute of Banking and Finance (LIBF), just 8% of young people said they got most of their financial education at school. 

Nearly three-quarters of respondents said they mostly learned about financial management from family members, which suggests that educational institutions need to step up. In addition, young people want to be taught more about financial literacy at school – a whopping 82% of them.

So the desire to learn is out there, and we can see that it’s necessary. But what are the positive outcomes that could come from a more extensive financial education?

The benefits of financial literacy

• You’re less likely to go into debt
• Your financial decision-making skills will improve
• An earlier retirement is more likely
• You’re more able to build healthy spending and saving habits
• You’ll have an improved credit rating
• You’ll experience less anxiety around money matters
• You’ll feel more able to reach your financial and life goals

The limitations of financial literacy

While it’s clear that financial literacy is really important, it does have its limitations. Martin Lewis spoke to us about the limits of financial education, particularly with regard to the current cost of living crisis in the UK:

“The problem you’ve got when you look at financial education is there’s only so far you can go. We do need financial education for the top 70% of earners in society – we need to educate people more about how their money works and we need adult education classes out there.”

“The reason why I said the top 70% of earners in society is that for the bottom 30% of earners, most of the tools and education that we build right now in finance, are predicated on the fact that you have income, you have expenditure, and if you do it right, you can make sure that your expenditure is less than your income. I don’t believe that is any longer true for people at the bottom end. Expenditure is now bigger than income.”  

The sad truth is that no amount of financial education can completely eradicate poverty. Education must work alongside other actions such as new government legislation, fairer taxes and a living wage for all, in order for the lower 30% of earners to stand a chance. 

At what age should you start financial planning?

The best time to start financial planning is when you begin to earn your own money. This could be at age 16, working in your first retail job, or perhaps this is later on when you have your first annual paycheque. 

Alternatively, you might want to start financial planning as soon as you have to pay for things like rent and utilities for the first time. With this option, you might begin financial planning if you go to university, even if you don’t have a job. This is because many people become financially independent for the first time at university, at least to the extent that they have to organise their own spending. 

Although your first job or first try at financial independence may be a good time to begin planning, you should be taught about personal finances before then. In an ideal world, we’d start learning about the basics of money when we’re children, so it’s not as difficult to comprehend later.

Teaching personal finance in schools

Since 2014, in the UK, personal finance has been a part of the national curriculum. However, as we’ve seen in earlier statistics, students don’t feel that they’re being taught enough. Teaching financial literacy in schools is important to ensure that every student receives education on these important matters.

Martin Lewis told us, “There is financial literacy on the national curriculum, but it’s guidance rather than compulsory for many schools. It’s only on the curriculum for secondary schools in England. We have a charity called Young Money where we have a free financial education textbook in every school now, and that’s been incredibly successful, but we still have a problem that some schools don’t teach it, aren’t trained to teach it and won’t”.

If personal finance is only taught at home, it’s pretty safe to say that some children will miss out. What’s more, many parents don’t have the skills or knowledge themselves to pass on to their children. It’s much more responsible for schools to ensure that their students receive a comprehensive education on money management as a part of their regular curriculum.

If you know that your child isn’t receiving an adequate financial education at school, but you don’t feel confident helping them, why not brush up on your skills with our Finance for Everyone: Smart Tools for Decision-Making course by the University of Michigan?

10 important money management topics

In order to cover the topic of financial literacy properly, we need to break it down into chunks. Below we’ll discuss the most important aspects of personal finance that everyone should know or be taught. Keep in mind that we’re merely listing the important financial topics that you should know about – we’re not offering financial advice. 

1. Budgeting 

As we explore in our how to create a budget blog post, a budget is essentially a spending plan. By considering your income and expenses, you should be able to make a plan that enables you to only spend what you can afford. 

To learn more about budgeting, you can check out our Finance Fundamentals: Financial Planning and Budgeting course by The Open University, or take a look at our course on The Basic Framework of Budgeting by AUT.

2. Banking

Opening a bank account is an essential part of becoming financially independent. It’s important to do your research into which bank is right for you – this might involve checking interest rates, looking at the bank’s ethics, and seeing if they offer a savings account or a student bank account with an overdraft.

3. Saving

This is similar to budgeting in that it’s about managing your spending so that you don’t spend what you can afford. However, the outcome of saving is that you have money left over from your everyday living costs. Whether you’re saving for something specific or you just want to save up a pot of money for your future, it’s a great habit to get into.

In our Money matters open step, experts at the University of Reading have some advice on saving. They suggest that when you’re tempted to buy things, you should pause and ask yourself a few questions. Is this something I want or need? Can I afford it? Will buying this help me achieve my goals?

They also offered some saving tips that we’ve relayed below:

• Know what you’re saving for to prevent impulsive buying
• Use online banking to track and manage your spending
• Evaluate how much money you need for the day, the week, and the month
• Don’t always buy things – try borrowing or swapping instead
• Set boundaries to help when you’re out socialising, e.g. paying only for your own dinner 
• When you go out, take your spending money in cash, so you don’t go over-budget

4. Bills

When you live independently, bills are something you need to consider. Whether you’re making sure you can afford them, organising paying them on time, or opening and closing accounts, it’s good to have a basic understanding of common utility bills. 

Often, we teach ourselves how to deal with bills, but learning how to handle them when we’re young could help us avoid inevitable confusion. Why not try our Finance Fundamentals: Managing the Household Balance Sheet course by The Open University to learn more about managing household finances?

5. Loans and mortgages

If you think about which part of financial planning sounds the most confusing, you may well say “mortgages”. The combination of a lack of education and the constant narrative that young people won’t ever be able to buy a house can definitely contribute to the mystery of how a mortgage works.

Essentially, a mortgage is an agreement between you and a money lender to help you buy a house. If you don’t repay the money you’ve borrowed, plus interest, then the property can be taken off you. However, there’s much more to learn about mortgages and bank loans if you want to be financially literate.

Bank loans are particularly important if you own your own business or want to set one up. To learn some important terminology, check out our Demystifying the funding process open step by MINCA Ventures.

6. Taxes

Everyone has to pay taxes. Taxes are mandatory monetary contributions that people or businesses pay to governments to fund things like public property, free healthcare, and schools. Of course, the tax system varies significantly depending on where you live, but the general idea is the same. 

In some countries, individuals are expected to file their own taxes. While it’s useful for everyone to know about them, it’s doubly important for these people to understand taxation. This will avoid accidentally not paying taxes or overpaying. 

Curious about what your taxes get spent on? Check out our Understanding Public Financial Management: How Is Your Money Spent? Course by SOAS.

7. Credit rating

Your credit rating is a score that lenders use to decide whether you’re a trustworthy person to lend money to. Having a low credit rating can impact your ability to buy a house or take out a business loan. 

Learning about how to keep your credit score high when you’re young will help you avoid making mistakes before it’s too late. The main thing to remember is to pay back any loans on time.

8. Insurance

There are many kinds of insurance you can get. You may already be familiar with some kinds, such as travel insurance on a holiday, or insurance to protect your high-tech gadgets. If you’re from outside the UK, you might also have a lot of experience with health insurance.

But how can we define insurance? Basically, it’s a contract where individuals or businesses pay a small amount to an insurance company on a regular basis, with the agreement that the insurance company will cover the risk of financial loss. 

Insurance can be hugely important in alleviating anxiety about something bad happening to you and not having the financial means to deal with it. Equally, when people can’t afford insurance, they can feel tremendous stress. Learning about insurance early can help you to make the best decision for you.

9. Investing

Moving on to a more risky part of personal finance, investment is something that many people are interested in. The idea is to grow your money over time by investing in something that will increase in value. There are many different kinds of investment, but they normally have a varying degree of risk attached. 

That’s why it’s important that people have a thorough and realistic understanding of investing before they give away their money. Learn more about this in our Fundamentals of Personal Investing course by the University of Michigan.

10. Pensions

A pension is a type of financial fund into which money is added for your retirement, allowing you to draw payments from it once you stop working. If you want to be able to retire at a decent age, it’s essential that you think about contributing to your pension.

To learn all about the different types of pensions and how much money you need to retire, take a look at our How do pensions work? blog post.

Final thoughts

After reading this, how financially literate do you think you are? And do you agree that personal finance should be taught more comprehensively in schools? Most people have a lot to learn when it comes to money management, but taking the time to understand personal finances can help you to feel more confident and independent with big life decisions.

We’ve only scratched the surface in this article. If you’d like to learn more about finance in general, we’ve got an excellent selection of online finance courses from some of the world’s top universities and institutions with excellence in business and economics.