I’m taking a short break from writing about my placement year experience, thankfully meaning the sandwich puns will stop for now. Instead I wanted to write about my views on the younger generation’s knowledge (or lack of) when it comes to finance.
Now for those that have continued reading after seeing the word ‘finance’ I thank you. I think it’s an area that we would all benefit from knowing more about. Unlike English, Maths and Science, it’s not something that’s taught in schools and is really left down to parents to pass on their knowledge. I feel lucky enough to have grown up being educated mostly by my Dad, who has worked in the financial markets for 28 years.
I took an interest in finance from quite an early age and was always very good at saving money. My first big investment was in learning to drive, I saved for a couple of years so that on my 17th birthday I was out on the road, with a full licence a few months later. This was so important for me because of the independence it brings. I think it helped me learn about the value of money and also the cost of living. I didn’t just need money for driving lessons but for ongoing costs like insurance and petrol. This helped motivate me to get my first job.
Since I was 16 I’ve been investing into funds or buying shares in companies, and have built up a small diverse portfolio. This has hopefully put me in a good position to get myself on the property ladder in a few years’ time although I still worry that I won’t be able to afford it any time soon. For people that don’t start saving until they are in their 20’s it could be an even bigger fear.
The difference that starting early makes is significant, mainly due to compound interest*. The easiest way to show this is using an example: If you started investing £50 per month at the age of 20 with a 3% growth rate, by 60 your portfolio would be worth £46,418.73 – this is broken down into £24,000 of your own money and the rest (£22,418.73) is earned from compounded interest. However, if you didn’t start saving until you were 25, your portfolio would be worth £37,170.88 – broken down into £21,000 invested and £16,170.88 interest.
Starting 5 years earlier, investing only £3,000 more, generates an extra £6247.85 in Interest. I think when it’s shown like that, it seems crazy not to start as early as you can.
I really believe that schools should dedicate some time to teach children about money to prepare them for later in life. It would give them a chance to hear different opinions instead of just their parent’s, this would enable them to make more informed and less biased choices.
I read a great book recently – Rich Dad Poor Dad by Robert T.Kiyosaki. One point that the book makes is people are taught how to work for money, but not taught how to make money work for them. The term compound interest I mentioned earlier is an example of how money can work for you. By buying assets* you can create a source of income that doesn’t require working.
Instead of buying a brand new car, invest into a stock that pays dividends*. The car, could have decreased in value by around 50-60% after 3 years. A £10,000 car might only be worth £4,000 after 3 years, costing you on average £2,000 a year in depreciation. What is even more shocking (especially with a car) is most of the depreciation* occurs within the first year, The AA say it’s around 40%. Comparing this, to a stock, you could earn say 2% a year through dividends and potentially benefit from a growth in value. Eventually you could then use this extra income to be able to afford the luxury items you want. I would recommend this book to anyone that wants to get a better understanding of finance and money.
Independent financial advisers (IFA’s) are one way that people can get advice on what to do with their savings. The problem, especially for the younger generation, is IFA’s can be expensive and without having a substantial sum to invest, financial advisers don’t tend to be interested in your business. This is where the recent rise of Robo-advice* is such an interesting opportunity (well worth reading some articles by Altus Consulting). Robo-advice provides people with online, automated financial advice through the use of algorithms, all sounds a bit complicated but really, it’s just technology that assesses your attributes (like attitude to risk) and recommends an investment product that suits your needs. This could fill the gap in the market by creating a source of financial advice that is cheaper to provide and therefore cheaper to consume. This is something that the younger generation in particular could benefit from.
Intelliflo’s Personal Finance Portal (PFP) is a new tool offered to financial advisers, which in turn, can be offered to people like you and I. One of the most interesting features is being released in summer 2016. The new simplified advice feature (a form of robo-advice) will enable IFA’s to offer low cost automated advice benefiting those that have less to invest. In a recent survey conducted by Intelliflo, it was found that 44% of IFA’s would not accept clients with less than £50,000 available to invest. PFP could therefore enable advisers to offer their services, cost effectively, to a larger customer base. These new innovations in Robo-advice could be a great way to receive affordable financial advice, so people like you and I can decide on products that suit our individual needs, to invest our savings into.
I think the lack of financial knowledge that people have is a problem, going forward there needs to be more opportunities for people to learn about finance, easily and free. Dedicating even 1 hour a month to each year groups school’s curriculum would really benefit the up and coming generation and prepare them for their future.
Signing off for now,
*Compound interest – ‘interest on interest’ the easiest way to explain this term is with an example – investing £1000 with a 10% interest rate means after year 1 you would have £1100, compound interest starts taking place next year when you receive 10% not only on the initial £1000, but also on the additional £100 earnt the previous year, Meaning at the end of year 2 you have £1210, end of year 3 you would have £1331 and so on.
*Asset – an item owned that is expected to provide future benefit to the owner
*Appreciation – the increase in value over time or to recognise the full worth of something
*Depreciation – the decrease in value over time
*Dividend – a sum of money paid by a company to its shareholders out of its profits
*Robo Advice – A robo-adviser is an online wealth management service that provides automated, algorithm-based portfolio management. Financial advice without the use of human financial planners.