Often, in our formative years, we’re taught that we can do anything we want. Teachers, parents, and other authority figures tell us that we have the ability to do anything we put our bright young minds to. Later we enter university, or a trade, and we actually start doing that anything. Maybe we don’t all love our jobs, but we do love the freedoms they give us. We have bank accounts, credit cards, our own flat, and even a car.
Sadly, many of us also have a cancer slowly eating away at these freedoms, because no one ever taught us about finances.
The worlds our parents grew up in were different. A day’s work was a man’s pay, and that pay was shepherded. There weren’t credit cards, and loans were given on the strength of what someone had accomplished, or was known for. It’s where the tradition of last names and naming children after their father or mother came from. People in town knew that the Smiths were trustworthy, and the Blacks weren’t going to repay their debts. That reputation was carried across families, and was what credit was built on.
It wasn’t always a just or fair system, but it was an order of magnitude more transparent than the system we live with today. There were no centralised systems that preyed on the ignorance of the common man to issue credit with crippling interest rates. Instead a person was known by whom they were, a large part of that having to do with their history of banking and sound financial management. Bankers could see the entire history of a man and his family, and if a man needed financial advice or help, he trusted his bankers to provide that help.
In those days bankers were honourable and trustworthy people.
Of course, not all bankers were honest, but most of them were. For those that weren’t, smart men combined their finances and created Building Societies. They pooled their money to the last man, building one another homes, founded on mutual trust and financial responsibility. Over time, bankers became greedy though. They started cheating people, a little at first, but more and more over time. No one was safe, and even the historically great ideals behind Building Societies crumbled under the increasing weight of High Street corruption.
These historic societies either ceased to exist, according to their charters, or were bought out by banks, joining ranks with the corrupt. Meanwhile the world moved on, and with it, finance. Over time credit cards became commonplace, with gleeful bankers happily counting the millions, and later billions of pounds they were skimming in interest. Marketing and advertising firms were hired to make credit cards a status symbol, and the UK blindly stumbled along in a stupor of crippling financial illiteracy. We sold out, never even realising that we were for sale, or that we’d sent our children off to the slaughter of financial ignorance too.
Now we’re a financial juggernaut of immense proportions, but we’re also a nation slowly falling prey to our own ignorance. In fact, according to Bloomberg, in 2014 New York edged London out as the world’s financial capital for the first time in history. This is because we are slipping, and slipping fast. Educational reforms aren’t doing what we need either. Sure, lately there have been some new ones, and they will make a big difference in ten years. Meanwhile Hong Kong, Malaysia, and Singapore all have far more financially literate populations.
In other words, we gave the world a financial leg up on us.
Competing countries have cheaper labour costs, a better educated population, and many of their leaders are educated here in the UK. Then they take their expertise home and build their own competing businesses with us. To make matters worse, huge numbers of our pensioners are moving to these countries because of their lower cost of living. They’re buying retirement homes, and spending their money in competing economies. Financially speaking, the UK is on fire, and no one is taking notice.
If you don’t believe this, ask yourself some basic financial questions.
1) What does APR mean?
2) What does APY mean?
3) What does AER mean?
4) What is an Effective AER?
5) What is the difference between these terms?
6) What does compounding mean?
7) How is inflation calculated?
8) What does inflation do to your savings?
After you’ve stewed on them for a minute, ask yourself one more question.
Do you think a million pounds is enough to retire on?
Really think about it, and use all of your years of financial experience to answer the question. Then ask a teen what they think. Chances are you both think a £1mln would be a great retirement, and you’d both be dead wrong unless it was carefully shepherded and managed. Even then you’d be steps from a shelter, or living with your children.
Think about it. You’re probably spending an average of £5,000 a year for your car, and at least another £5,000 a year for food. Throw in all of the other costs you’re likely to have as a pensioner, and you’re looking at £20,000 minimum per year to live a basic life. None of those trips around the world you dreamed of, and no dining out in expensive restaurants every night. No, at £20,000 a year, you’ll last about 30 years in today’s world, barring any major medical problems or unexpected costs you might incur. That doesn’t sound bad, but it actually is, because we’re not thinking in terms of financial literacy.
One might even argue that the official figures on the cost of living for pensioners are an average of £10,000 per year in the UK. £1mln would seem like it could go the distance, except that this cost has risen by about 30% in the last 10 years, while the spending value of sterling has continued to decrease due to inflation. Now figure that the teen you just asked has a good 40 years before he or she actually gets to use that million they are going to retire on.
Using historical figures, calculating from 1974 (40 years ago), to have £1,000,000 today, you’d need about £10,000,000. That means, using historical figures as our basis for comparison, your teen would actually have a spending power of about £100,000 when he or she became a pensioner. At best, using the current minimum pensioner average of £10,000 per year living costs, that’s ten years worth of retirement. If you use our more realistic figure of £20,000 per year, it’s just five years.
In other words, if you reached this point in the article, answered all of the questions, and knew that there was no way you could possibly live on £1mln, you’re financially literate. If you didn’t, you’re financially illiterate, and have quite a bit of homework to do on banking, investing, and of course, inflation. You should also take that teen aside and make sure you educate him or her too. That education will do far more for them in retirement than the £500 a year savings account you started when they were born.
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