Working out your change from a shopping trip, comparing a floating mortgage rate with a fixed-rate, and picking a pension plan are just some of the everyday personal finance decisions most people have to make. If the thought of any of these has you in cold sweats, you’re not alone.
The UK is facing a financial literacy crisis, charity National Numeracy has warned, and it could be as damaging to the economy as Brits’ financial decision-making.
Few would describe themselves as a ‘numbers person’, but this lack of financial knowledge and confidence could mean people are making poor decisions with their money.
The wrong decisions could be increasingly costly as the UK looks to bring interest rates off their historic lows and back in line with the traditional vision of ‘normal’.
Around 17 million adults in the UK workforce have the numeracy skills of a child in primary school, research from National Numeracy shows. This means one in three adults in England and Northern Ireland are unable to work out the correct change for a shopping trip.
This lack of basic numeracy skills isn’t just costly, it also damages confidence, which can put people off from trying to tackle more complicated financial problems, like comparing the merits of different bank accounts, savings wrappers or pension funds.
As a result, Brits could be unnecessarily delaying reaching their financial goals by not understanding the best way to get there.
Poor financial literacy is also bad news for the economy, as a workforce that’s unable to complete basic numeracy equations weighs on productivity – a crucial cog in economic growth. Overall, the financial literacy crisis could be costing the UK economy £20 billion a year.
Financial education and personal finance
There’s no one silver bullet to solving Britain’s lack of financial literacy and confidence, although roots to the cause can be found in the absence of financial education in the school syllabus.
There are calls for the government and schools to work together to change how maths and personal finance are taught at schools.
Understanding basic concepts like inflation, compounding and risk can help Brits make the right decisions for them, and avoid the potential problems that can arise from getting into debt or being unable to keep up mortgage payments.
Responsibility of the financial industry
It’s also the responsibility of the financial industry to make fees and costs fair and transparent to consumers.
At Moneyfarm, transparency is the cornerstone of our business. We work hard to ensure that when you invest with us you always know what you are being charged and understand the risks involved.
To celebrate National Numeracy day, we’ve pulled together five family-friendly personal finance questions to test you and the children.
Although the financial markets can be complicated to navigate, we believe there are five essential themes Brits should understand:
- Inflation
- Interest rates
- Your financial situation
- Diversification
- Compounding
Take the quiz, and find out more about these essential themes, below:
Inflation
Inflation eats into the purchasing power of your money over time. If you are putting your money in a cash savings account, try and find a return that beats inflation to ensure you can buy the same amount of goods with your money in a year.
Interest rates
Whenever you borrow money, you expect to pay interest on your loan – whether it’s on your credit card, mortgage, or even student finance. This interest is essentially the cost of being able to spend now, instead of spending months saving up. For the lender, it acts as a reward for taking on two principal risks; time and default.
The Annual Percentage Rate of Charge (APR) is essentially the cost of borrowing and includes both the cost of borrowing and any other costs automatically included.
Your financial situation
Make sure you’ve paid off expensive debt and have saved up three months of you average outgoing in an easily accessible savings account before you invest. Your financial situation is personal to you and you may keep more in a savings account if you’d prefer. Remember, you may be missing out maximising your returns by being too risk averse.
Diversification
Instead of putting all your eggs in one basket, spread your money across different investments, asset classes and geographies to manage the risk in your portfolio. Through diversification, you hope to offset any losses with gains made elsewhere in your portfolio.
Compounding
Known as the eighth wonder in the world, compound interest is one of the most powerful forces when investing. Put simply, it’s when the returns you make on your investments are reinvested and then earn their own returns.
However, it works the other way with debt too. It’s said that those who understand compounding earns it, whilst those who don’t pay it.
If you’d like to brush up on your financial literacy skills, there are a few good resources:
- EconoME, Bank of England
- National Numeracy
