People walk outside a payday loan shop in London, UK. Research suggests that young people under the age of 25 in the UK are twice as likely to turn to companies such as Wonga than talk to their bank account manager or credit card provider when struggling with outgoings

Given the state of the UK economy, having the necessary knowledge to make the right financial decisions is more important than ever. But sadly, more often than not, people lack the knowhow to avoid making mistakes with their money – something that has the potential to tangle them up with a whole lot of debt and an even bigger headache. This is particularly true for young people, who after many years at home will eventually venture off to universities, where they will be left in sole control of their finances for the first time.

Once there, the temptation to overspend will inevitably kick in, and so too will the phone calls home asking for a bailout. But once the bank of mum and dad finally closes, that is when the real problems begin. Strapped-for-cash students tend to dive deep into their overdrafts. Sales teams on campuses tempt financially naïve youngsters with the allure of a nought percent student credit card, and then, when they leave to make their mark in the big wide world, many may make the mother of all debt-inducing decisions: turning to payday loan websites to cover their outgoings. In fact, in the UK, people under the age of 25 are twice as likely to turn to companies such as Wonga than they are to talk to their bank manager or even credit card provider, according to data released by the Citizens Advice Bureau late last year.

Generation Credit

“Generation Y is fast becoming Generation Credit”, says Citizens Advice Chief Executive, Gillian Guy. “The housing and money pressures on young adults are significant and… it is a big concern that so many young adults are turning to some of the most expensive types of loan to get by. Often, [these] high-interest loans end up spiralling out of control and many people in debt end up feeling they have nowhere else to turn other than a vicious circle of more borrowing.”

More than 50% of BRITISH children aged between 10 & 17 see advertising for loans often Source: Young Enterprise

Clients aged between 17 and 24 make up 10 percent of Citizens Advice’s serious debt cases, but the charity says they make up more than 15 percent of the cases where debt has been caused by taking out a high-cost loan, with payday loans accounting for 62 percent of the high-interest credit taken out by under-25s.

For so many young people to fall foul of such elementary errors is evidence that many simply do not have a basic understanding of how to manage their money, or even where to turn when they find themselves in their own financial crises. In order to combat this problem, Young Enterprise and the Personal Finance Education Group successfully campaigned for personal financial education to become compulsory throughout secondary schools across England. And, as a result of their combined efforts, since September 2014 financial education has been part of the national curriculum within the statutory subjects of mathematics and citizenship.

The new curriculum covers aspects of personal finance including the importance and practice of budgeting, income and expenditure, credit and debt, insurance, savings and pensions, and even how public money is raised and spent. On top of this, there is an expectation that appropriate financial contexts be provided in mathematical learning, with the intention of providing a foundation in financial education. While this represents a huge first step in helping young people become better managers of their money, as well as setting an example for other education systems around the world, according to Michael Mercieca, the Chief Executive of Young Enterprise, there is still plenty more to be do.

“This has been an important leap forward and reflects the commitment, support and hard work of many people and organisations that have helped make this a reality”, said Mercieca. “While there is now a mandate for schools to teach about money, it will not in itself be the driver. There is a need to provide schools and teachers with the guidance, advice, support and resources that they need to make financial education a reality in the classroom. We still need compulsory financial education in all primary schools, and this is something that we have committed to working towards within our 2015 manifesto.”

Some payday lenders in the UK have an annual interest of 4,000% The cost of UK student accommodation has doubled in 10 years with 21+ students taking out high-risk debt at 6% Source: National Union of Students

Child’s play

Starting personal finance education at such an early age may seem a little severe to some, but a study published by the Money Advice Service claims parents and caregivers possess the power to shape the money habits of their children. Behaviours they adopt in childhood will affect financial decisions they make in their adult lives.

Authored by behaviour experts at Cambridge University, the report reveals how, by the age of seven, most children have learned to recognise the value of money and count it out; by this age they will also have come to understand that money can be used to buy goods, as well as concepts such as what it means to earn money and even understand what an income is. The study also states that seven-year-olds are capable of complex functions such as planning ahead, delaying a decision until later and understanding that choices are irreversible.

“In today’s world there are many pressures on young children and their families which make financial education increasingly important”, says the co-author of the study, Dr David Whitebread of Cambridge University. “The ‘habits of mind’, which influence the ways children approach complex problems and decisions, including financial ones, are largely determined in the first few years of life.

“By contrast, early experiences provided by parents, caregivers and teachers which support children in learning how to plan ahead, in being reflective in their thinking and in being able to regulate their emotions can make a huge difference in promoting beneficial financial behaviour.”

Taking financial education home

Another indirect benefit of promoting financial education in primary schools is the fact that what kids learn in the classroom can be taken back into the home. It has the potential to impact the way parents and other family members think about their own financial decisions, creating a positive feedback loop.

Commenting on the publication of the study, Caroline Rookes, CEO of the Money Advice Service, said: “This study really demonstrates the power of parental influences, and illustrates how much of what you learn and absorb when you are young, both consciously and subconsciously, affects the choices you make throughout the rest of your life. Over the next few months, we will be working closely with experts in education and the financial services industry to bring together a forum, and develop world-class parenting and teaching resources.

“But these steps alone are not enough – even more can be done to shape the money habits of young children, by including money education in the primary school curriculum in England.”

By fostering these types of skills and educating children and young people in this manner, the hope is that, in the long term, a new generation of young people can grow to become better, more responsible borrowers, more effective savers, and to make better informed financial decisions throughout their adult lives.

“Many young people have unrealistic expectations of the value of money and, as such, can set themselves unrealistic plans”, says Mercieca. “Financial education provides the knowledge, skills and attitudes to set achievable aspirations, as well as the means of getting there.”