Yes, I just mean financial vocabulary, but “lexicon” sounds so much better (cue “The Lexicon of Love” earworm).
This month I have been discussing financial education with 13 to 19-year-olds, each and every one of them lamenting the fact that they are not taught the basics in school and felt like there was nowhere they could ask without embarrassment. They felt that they are just expected to know the basic vocabulary as it was so ‘every day’, yet they have never been explicitly taught it; instead relying on Google searches and joining the dots.
Financial literacy is key to demystifying the world of money and will go a long way to helping your child take control of their financial future.
Together we compiled a list of words and concepts that they (okay, okay, I may have had a little influence here) felt would have been most beneficial for them to understand and wanted to know how they worked; the ones they ‘sort of know’ but not quite:
- Income
- Gross income
- Tax
- National insurance
- Disposable income
- Net income
- Need
- Want
- Debit card
- Credit card
- Interest
- Compound interest
- Mortgages
I have summarised the key points that arose from the discussion at the end of this article to help start the conversation. Use them often, in different contexts. Make them everyday words as early as possible; it’s so much easier and more real that way.
There was one concept that they had not heard of; in my view it is the most important of them all, Opportunity Cost. I believe this is the absolute heart of all financial conversations; young people need to understand it, we need to convince them that longer-term opportunity gain outweighs short-term opportunity cost.
The most powerful tool I have found for this is visualisation. This can work from a very young age; here is an example with a four-year-old in a household that provides opportunities to earn money for household tasks (read about it HERE to why won’t they take saving seriously): –
You are standing in the doorway of a shop. You only have enough money to go to the pocket money section, you can look at all the aisles but can only purchase from the pocket money section. Are you okay with that? If they say yes, then we let it go (remember last month’s words, we learn and process through experience, not being told). If they say no, then we help them determine whether the opportunity cost of choosing a paid household task over playing feels better or worse than the feeling in the shop.
This can be applied to almost anything, keeping in mind that, for them, status, image and fitting in are integral to their wellbeing. We have to be mindful not to dismiss them as frivolous and immature when calculating opportunity cost. Remember, we need to hear them before they can hear us.
Summary of discussions – the bits they took away
Income: Yes, it means your wages, but it also means all the other money you have coming in. Their ears perked up when I explained that it can help you get a new ‘phone contract to consider all your income. They weren’t so excited when I explained it’s also what the tax man needs to know to calculate your tax bill.
Gross income: It’s gross because it’s really upsetting when you realise that it’s not all yours – well, that’s how I remember what it means! I did try and explain that it is still theirs, in that the deductions will ensure they get medical treatment and financial support if ever they are in dire straits. It wasn’t quite washing with the healthy 15-year-olds who still lived at home; however the seed is planted, that’s all we need for now
Tax: Not just relevant for people earning, tax is on most things we buy and use and even children’s savings if they exceed the personal tax allowance. Collected through road tax, council tax, wages and tax on purchases. There really is no way to make this one interesting or witty to discuss. However, the kids really engaged in finding out how the money was spent, and one spent the hour calculating and totting up the VAT on everything in the room.
National Insurance: Everybody pays it, everybody will use it one day through the NHS, pensions and certain benefits. Good to know so that we look at our gross income deductions with less contempt.
Disposable income: Officially the definition is the same as net income. However, it was very useful to discuss it in more general terms to understand what it really means and how it is the difference between getting in and staying out of debt. First year university students were genuinely surprised that their student loan, which looked huge as one lump sum, equated to approximately £6 per day to spend once all their expenditure including travel, rent and phone bill was accounted for. This was a very powerful lesson in budgeting and allowed them to make some informed decisions, for example, you know you’re going out on Friday – you cannot afford the meal and drinks if you spend your £6 per day on a coffee and a sandwich every day.
Net income: This is yours! Spend it wisely, lots of people will be vying for you to spend it with them. You only get to spend it once (and remember it is not all disposable if you have rent and bills to pay).
Need: I must say I was super impressed with the prowess and eloquence a 15-year-old can bring forward when presenting a case for ‘needing’ the latest iPhone every year. Also provided an insight into what is important to our young people and what we are up against when we are trying to convince them they’ll be a lot cooler as a 40-year-old with the deposit for a home than a 15-year-old who spent all their money on the latest gadget!
Want: You need a laptop; you want a MacBook – need I say more? Actually yes, a little bit – the line becomes blurred when the ‘need’ to fit in and the ‘need’ associated with status is more pertinent than ever before in our history. Yes, there is work to be done on self-esteem and non-judgmental true friendship; however, if we don’t hear them on how important this is to them, then they can’t hear us about anything.
Debit card: Your money, check if you go into overdraft; online banking is a wonderful tool for monitoring your spending
Credit card: Not your money, you will have to pay it back and you will have to pay to borrow it for longer than a set period of time. They sort of know they have to pay it back, just not tenfold if they are not careful. Save it for emergencies, real ones, e.g., you’re in Madrid, you can’t get home; not those trousers that are in the sale and will all disappear (100% saving is always the best discount).
Credit rating: Put simply, it is a lender’s way to work out if they can trust you to pay them back or whether you will make them money. It impacts your ability to get a ‘phone contract, rent a home, buy a home, get a loan, insure your car, etc. Lenders will base their decision on your money history, which is why it is so important to build it now. Get bills in your name, pay them on time, use your credit card very wisely and it’s a great start.
Interest: You put your money into a bank. The bank uses that money to make more money, so they pay you ‘interest’ for putting your money in their bank.
Compound interest: The interest you earnt above is now yours. As interest is a percentage, you will earn even more now that you have more. 3% of £1.15 is more than 3% of £1 and you didn’t have to do a thing!
Mortgages: “HOW MUCH DO I PAY BACK????” was the general gist of that conversation.