Chapter 1

Embracing Financial Literacy

IN THIS CHAPTER

Defining what financial literacy includes and means

Looking at what your parents and others taught you about money

Questioning reliability and objectivity

Overcoming real and imagined barriers to financial success

In its 2024 Financial Lives survey, the Financial Conduct Authority (the U.K. regulator) found that 6.5 million people (12 percent of U.K. adults) have low financial capability. The majority of these people reported feelings of stress and overwhelm when having to deal with financial services firms, and many delayed making money decisions because of it. People who don't understand finance are less likely to have pensions and other savings pots, and to hold less in them when they do. Being financially illiterate is a huge disadvantage in life.

I know from my many years of work as a personal financial counsellor and teacher and now as a writer that many people do indeed have significant gaps in their personal financial knowledge. Although we have greater access today to more information than in prior generations, the financial world has grown more complicated, and there are more choices, than ever before.

Unfortunately, most of us don't know how to manage our personal finances because we were never taught how to do so. Our parents may have avoided discussing money in front of us, and the subject is not always covered in much detail at school. Even if it is, young learners may not be able to absorb and retain the information given because it does not yet feel relevant to their lives.

Some people are fortunate enough to learn the financial keys to success at home, from knowledgeable friends, and from the best expert-written books like this one. Others either never discover important personal finance concepts, or they learn them the hard way - by making lots of costly mistakes. People who lack knowledge make more mistakes and, the more financial errors you commit, the more money passes through your hands and out of your life. In addition to the financial costs, you experience the emotional toll of not feeling in control of your finances. Increased stress and anxiety go hand in hand with not mastering your money.

This chapter examines what topics fall under the heading of "financial literacy" and where people learn about finances, and helps you decide whether your current level of knowledge is holding you back. You can find out how to improve your financial literacy and take responsibility for your finances, putting you in charge and reducing your anxiety about money. After all, you have more important things to worry about, like what's for dinner.

Understanding Everything Financial Literacy Includes

What exactly does being literate in personal finance mean? The following are three subjects to become acquainted with:

• Managing your everyday transactions: I cover accounting for money that passes through your hands and your current accounts in the short term.
• Investing for the long term: I discuss the best ways to invest money for better returns and longer-term purposes.
• Protecting your money: I provide an overview on the generally less popular but highly important topic of protecting your income and assets with insurance.

In addition to these major topic areas, the field of personal finance includes plenty of jargon and terminology, the mastery of which will boost your confidence and your decision-making skills. I provide definitions along the way and include a handy glossary at the end of this book.

Starting with the basics: Budgeting and transaction accounts

If you're like most people, as you earn money, much of it too quickly passes through your hands or, more specifically, into and out of your current accounts. As you surely know, a hefty chunk of money you earn is siphoned off to pay tax. What's left is used to cover your monthly living expenses, such as housing, food, utilities, clothing, and hopefully for some entertainment and recreation. Chapter 2 delves into the different kinds of transaction accounts and how to use them.

Managing your monthly living expenses (including tax) and budget and establishing and working towards financial goals takes time and effort. Parts 1 and 2 help you accomplish those important tasks.

Making your money work for you: Investing

When you are spending less than you earn and are able to save new money each month, you will have the pleasant but challenging problem of deciding where and when to invest your savings. Or maybe you already have additional money you want to invest and make it work harder for you.

The world of investments is complicated and filled with pitfalls. That contributes to some people leaving their excess money sitting in their low-interest current accounts by default. While you could do worse (by losing money in poor investments), you can certainly do better - and you probably need to do better in order to accomplish your financial goals. Part 3 covers all things investing and helps you master that important task.

Protecting your income and assets: Insurance

When you're earning money and have some assets (a car, a house, and so forth), insurance protects against the loss of that income and your assets. If others rely on your employment income, you likely need some life insurance. Even without dependants, you probably rely on your own income and should have adequate income protection.

Assets like a car and a home also require sufficient protection using insurance policies. See Part 4 for the important details on insurance.

Talking Money at Home

I was fortunate - my parents taught me a lot of things that have been invaluable throughout my life, and among those things were sound principles for earning, spending, and saving money. My parents had to know how to do these things because they were raising a family of three children on (usually) one modest income. They knew the importance of making the most of what you have and of passing that vital skill on to your kids.

However, my parents' financial knowledge did have some gaps. I observed firsthand the struggles my late father endured handling some retirement money after being laid off from a job when I was a child. In subsequent years, this situation propelled me to learn about investing to help myself, my family, and others.

In many families, money is a taboo subject - parents are not honest with their kids about the limitations, realities, and details of their budgets. Some parents I talk to believe that dealing with money is an adult issue and that children should be insulated from it so they can enjoy being kids. Others readily admit the many holes in their financial knowledge and don't feel comfortable teaching their kids about personal finance for this reason. In too many families, kids hear about money only when disagreements and financial crises bubble to the surface. This begins the harmful cycle of children having negative associations with money and financial management.

In other cases, parents with the best of intentions pass on their bad money-management habits. You may have learned from a parent, for example, to buy things to cheer yourself up. Or you may have witnessed a family member maniacally chasing get-rich-quick business and investment ideas. Now, I'm not saying that you shouldn't listen to your parents. But in the area of personal finance, as in any other area, poor family advice and modelling can be problematic.

Think about where your parents learned about money management and then consider whether they had the time, energy, or inclination to research choices before making their decisions. For example, if they didn't do enough research or had faulty information, your parents may mistakenly have thought that banks were the best places for investing money or that buying stocks was like going to Las Vegas. (You can find the best places to invest your money in Part 3 of this book.)

In still other cases, the parents have the right approach, but the kids do the opposite out of rebellion. For example, if your parents spent money carefully and thoughtfully and often made you feel denied, you may tend to do the opposite, buying yourself gifts the moment any extra cash comes your way.

Although you can't change what the educational system and your parents did or didn't teach you about personal finances, you now have the ability to find out what you need to know to manage your finances.

If you have children of your own, don't underestimate their potential or send them out into the world without the skills they need to be productive and happy adults. Start early - even very young children can be taught basic concepts of spending versus saving, and can have fun learning how to budget their pocket money. And see Chapter 14, which discusses options for investing money for children.

Identifying Unreliable Sources of Information

Most people know they're not financial geniuses. So they set out to take control of their money matters by reading about personal finance or consulting a financial adviser.

But reading and seeking advice to find out how to manage your money can be dangerous if you're a novice. Misinformation can come from popular and seemingly reliable information sources, as I explain in the...