James Daley: Why are the British bad with money?
Saturday 16 February 2008
It never fails to surprise me how bad a grip most of my friends have on their finances. Many have made it into their thirties without starting a pension – or any other proper savings base, for that matter – and most still struggle to make ends meet each month, without the help of their credit cards or bank overdraft.
The statistics suggest that this is now something of a national phenomenon. Last year, the savings ratio hit a 50-year low at the same time levels of indebtedness broke all-time records. And to make things worse, everyone's living a lot longer.
By the time we reach the age of 65, we're now expected to live another 17 to 20 years, depending on our sex. Yet most people are not putting nearly enough money into their pension to finance such a long retirement, meaning millions of people are going to need to work much longer or live a much more humble existence in their old age than they might have hoped.
It is, of course, no great surprise that Britain's levels of financial literacy are so poor. Until very recently, there was almost no financial education in school, and given the rather poor reputation of the financial advice industry, few adults bothered to seek the professional guidance they needed – unless they were either in crisis, or had come into a large sum of money.
The long-term solution to this problem clearly lies in the classroom. If children leave school armed with an understanding of the basics of budgeting, the importance of saving and the consequences of being overly indebted, the savings and debt ratios are unlikely to ever descend back to the desperate levels that they've reached today. But what of the millions of adults for whom school is long gone?
The Government's answer to this question has been to commission a study, examining the possibility of creating a generic financial advice network – paid for by the financial services industry, but run independently and offered free to consumers. Most likely, this service would manifest itself in the form of a telephone line, which people could call free of charge whenever they had a financial query, but which would not be able to go as far as giving specific product recommendations.
Otto Thoresen, the man who has been carrying out the feasibility study for the Treasury, believes that such a project could well be a success, pointing out that there is a genuine gap in the advice market for those on lower incomes.
Financial advisers either get paid by commission or fees, but for more simple financial planning matters – such as helping someone with their budgeting, or advising them to switch their debt on to a cheaper credit card – there's no commission to be had, and the clients have no money to pay the fees.
The problem is, I'm not convinced that the people who fall into this trap would bother using a financial advice line either, even if the Government made one available for free.
By the time people make it into their thirties and forties, their financial habits are often deeply ingrained. If they are not already proactive about dealing with their finances, it's unlikely they will change their habits just because there is more free information available. There needs to be a catalyst to get them to act.
You need to engage people in the workplace – perhaps forcing employers to lay on financial seminars. But if people's instinct is to bury their head in the sand about their finances, they won't help themselves until someone else forces them to face up to the reality.
While I fully support Thoresen and the Government's objectives, I'm still not convinced this project will deliver. If they're serious about increasing financial literacy amongst adults, much more radical policies are called for than those being proposed.
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