Gaps in financial education are leaving many teenagers unprepared for managing their money and becoming independent. The good news, says Keith Bonner, Managing Partner and Independent Financial Adviser at Pembroke Financial Services, is that they’re keen to learn and recognise how important getting to grips with personal finance is.
Personal finance is part of the national curriculum. 73% of students surveyed as part of The London Institute of Banking and Finance’s Young Persons’ Money Index 2021-22 said they receive some form of financial education in school.
Yet, for many it’s sporadic. Fewer than half said they’d had access to financial education in the last school term.
In many cases, personal finance is taught as part of other classes, which means it doesn’t always receive the attention it deserves.
Keith said: “Despite nearing a time when they’ll have to start making financial decisions for themselves, just 4% of 17- and 18-year-olds have a dedicated personal finance class.
“With 4 in 5 young people already feeling anxious about money, it’s not surprising that 72% want more financial education in schools, rising to 85% among 17- and 18-year-olds.
“Schools play an important role in preparing teenagers for life, but passing on essential money lessons to them at home is crucial too.”
If you have teenage children or grandchildren, here are eight areas to focus on.
1. How student loans work
Keith said: “Whether to go to university is one of the first big life decisions that teenagers will make. For many, it will mean taking out a student loan to cover tuition fees and living costs.
“More than a third of teenagers said they didn’t know how student loans work. Taking out a student loan can affect their income for decades to come, so it’s important they understand the implications.”
If a teenager will be heading to university in 2022, when they graduate, they will only need to make repayments when they exceed an income threshold, currently £27,295. They will then repay 9% of everything above this threshold until the loan is repaid or the loan is wiped after 30 years. As a result, many students will never repay the full loan.
For students that will be going to university on or after September 2023, the government has lowered the repayment threshold to £25,000 and increased the length of time over which a graduate repays their loan to 40 years.
2. How to create an effective budget
A budget is crucial for ensuring essential costs are covered and that other goals can be reached.
When asked what they wanted to learn more about, one of the responses students gave was understanding “essential versus discretionary” spending. A budget can be a useful way to learn this and create positive money habits.
Going through expenses with them, including household costs they will need to understand in the future, can help children understand how to prioritise spending.
Giving teenagers some financial responsibility, such as paying for a sports club or their mobile phone, can help them get to grips with budgeting early.
3. The importance of savings
If your child or grandchild will usually spend money as soon as they have it, a conversation about why saving is important and how to start can set them up for long-term success.
From saving for an item they want to a financial buffer they can fall back on, it’s a financial lesson that can lead to greater security now and in the future.
As well as why saving is important, it’s also worth looking at how interest can add up and the different types of savings accounts available.
4. How Income Tax and National Insurance is calculated and deducted
Keith added: “Teenagers may already be working or nearing the time when they’ll start looking for a job. While tax affairs can be complex, you can teach them the basics of Income Tax and National Insurance.
“6 in 10 students said they hadn’t received any information about tax as part of their financial education in school.”
PAYE means most young workers don’t need to calculate their tax liability, but it’s important to understand how it’ll affect their take-home pay.
5. Good debt vs bad debt
While you may think teenagers are too young to start thinking about debt, the reality is very different.
28% of teenagers said they’d borrowed money from parents, relatives, or friends. More worrying though is the 8% that said they’d used a pay-day lender, and the same proportion said they’d taken out a loan.
As a result, a conversation about when taking on debt is appropriate can help them make better financial decisions. In addition, explaining interest rates and credit scores can be beneficial.
6. How mortgages work
For young people still in education, buying a home can seem like a long way off. However, as house prices are rising, getting a head start and understanding the process now is useful.
How much is required for a house deposit is a good place to start as it’s one of the first hurdles aspiring homeowners need to overcome. Even if they’re not ready to buy a home yet, setting some money aside frequently for this milestone can mean they’re prepared.
7. Why paying into a pension early makes sense
The good news is that auto-enrolment means most employees will begin paying into a pension from the age of 22.
Keith commented: “To someone who has just entered the workforce, a pension can seem like something they can afford to put off for a few years. Going through the benefits of paying into a pension early, from employer contributions to the compounding effect of investing for the long term, can demonstrate why they shouldn’t opt out of their workplace pension.”
8. How to recognise financial scams
The survey found that a significant proportion of children have already been targeted by scammers.
29% of teenagers said they’d received a fraudulent email, call or text asking for their bank details. Scammers are also increasingly using social media platforms to target younger generations.
Highlighting the red flags they need to be aware of and the sensitive information they need to keep secure can reduce the risk of teenagers falling victim to fraud.
Creating financial security for your children and grandchildren
As well as passing on your knowledge and vital money lessons, you may want to take other steps to ensure the long-term financial security of your children or grandchildren.
This could include building a nest egg that will help them reach milestones in adulthood or setting aside an inheritance. If you want to discuss how you can help young adults and children financially and how it could affect your other plans, please contact us.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.
Workplace pensions are regulated by The Pension Regulator.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.