Kids will get cash boost from lessons

Plans to introduce personal finance to the curriculum in 2011 have been applauded by finance experts

Ed Balls' announcement on Thursday that personal finance lessons will become compulsory for kids from 2011 should raise a cheer in homes across the country. The Secretary of State for Children, Schools and Families said personal finance will be taught as part of the PSHE (Personal, Social and Health Education) programme in secondary schools, currently optional. "All young people should learn about financial education," Balls said.

The issue has vexed the financial services industry for years. The fact that millions of Brits make important borrowing or investment decisions with little or no understanding about what they are buying leaves many making expensive mistakes. "It is never too early to start educating children on money matters, and if more people had been given the lowdown on what to look out for when taking out a credit card, loan or mortgage, then perhaps they wouldn't be in the financial mess they are in now," says Andrew Hagger of Moneynet.co.uk.

"I think there's been a crying need for financial education in the school curriculum," says Ed Bowsher of lovemoney.com. "Knowledge of a few financial basics can make such a difference to someone's life. I left university at 21 with a fancy degree but I didn't understand that, thanks to compound growth, pension contributions made in your early twenties are far more valuable than when you're 45.

"When the costs of such ignorance are so high, I think the need for education is obvious." But starting the financial education in secondary school, which is what Ed Balls has proposed, could even be too late, warns Rob Hudson, director of broker Chartwell Direct.

"Financial education should start early and long before children reach secondary school," he says. "Basic principles such as budgeting, saving and debt should be explained and the curriculum should include practical examples. Later aspects of the curriculum at secondary school level must equip students with a knowledge of financial products and taxation, as well as the main methods of saving for the future.

"The primary goal should be for school leavers to have confidence in researching and taking advice on a range of financial matters, whether it's opening a bank account, taking out a loan or mortgage or contributing to a pension. A secondary objective must be for young people to see the importance to their future welfare and security of making adequate financial provision."

Penney Frohling, a partner at consulting firm AT Kearney, says it's essential that the new personal finance lessons teach children about the "time value" of money. "The key lesson for people to learn very early in life is the time value of money in other words, the more you save early on, the more you have later on," she says. "A pound saved in your twenties is worth twice that of a pound saved in your thirties in terms of retirement savings."

She challenges the Government to ensure that the new curriculum actually works by giving kids some financial know-how, rather than continuing to leave them in the dark about money issues. "The key is to ensure that the Government doesn't turn financial education for kids into some bureaucratic compliance-type exercise that won't fire the imagination of young people and that will put an unnecessary burden on educators. Sadly, the track record here isn't good," points out Frohling.

One person who welcomed the news that personal finance lessons will be added to the curriculum is Matt Morris of LifeSearch, a broker specialising in protection insurance. Last month, he set up a petition at petitions. number10.gov.uk/PFeducation/ urging the Government to initiate personal finance lessons in schools.

"It seems a no-brainer that personal finance lessons such as how to manage debt, how mortgages and pensions work, the need for financial protection, how to save and invest your money should be taught at an early age," says Morris. "In reality, the way we learn is usually through bitter experience.

"It doesn't have to be this way. Few of my friends understand financial products. Changing the approach to personal finance education will benefit the consumer and the economy as a whole," believes Morris.

The lack of financial education in schools has left generations of adults practically financially ignorant, a fact brought into focus by research from HSBC Insurance published last week which revealed that more than half of people in the UK have never accessed financial education. On top of that, more than a third have never taken any professional financial advice.

Efforts are being made to help people improve their financial knowledge. The Government has already spent millions through the Financial Services Authority on a financial-capability campaign and plans to offer free financial advice to adults across the country, although the campaign is only in a pilot stage in the North-east at the moment.

And education charities such as as pfeg (Personal Finance Education Group www.pfeg.org) and the National Skills Academy for Financial Services (NSAFS) also do good work in increasing people's money know-how. The NSAFS, for instance, attended college enrolment and freshers' events in September to help students understand and manage their money.

The Open University got in on the act a couple of years ago with a degree in personal finance aimed at ordinary folk and, later this month, is launching a new foundation degree aimed at people working in financial services.

But for many adults, their biggest financial headache is saving for retirement, with many not understanding the best way to approach pension planning, says Ian Martin of HSBC Insurance. "A limited knowledge of financial education makes it very difficult for people to take control of their retirement planning and save for the long term. Without adequate preparation and planning, people may well be faced with a shortfall in their savings pot and the prospect of a troubled retirement."

He suggests that anyone struggling with how to make a financial decision should talk to an expert, such as an independent financial adviser. For Moneynet's Andrew Hagger, the lack of financial education in schools has left many adults with a more pressing money problem.

"If you are educated to understand how much interest you have to pay back when you borrow money on a credit card with a high interest rate, then people may think twice about doing it," he points out.

"Not understanding how to make the best use of credit or loans can put people at a real financial disadvantage. It's why many run up unauthorised borrowing on their current account. As well as incurring expensive charges, they also get a black mark on their credit record which then really hurt if they need to borrow again or get a mortgage. People need to be taught to appreciate the value of money and to understand some of the jargon and pitfalls that they face."

To help, National Savings & Investments has launched some free money guides which are available through WH Smith. Topics include Kids and Money, Retirement, Later Life and Bereavement.