Families and Financial Education: Has it Become A necessity?
Post the most recent financial crisis which ushered in economic hardships for many, the importance of financial literacy and the ‘understanding of money’ has become of paramount importance for the average family.
Why is financial education so important for families?
Financial knowledge is essential for investors but it is also of critical importance to the average family especially during these challenging economic times. There are numerous and widely reported stories which highlight the financial hardships that families face when they mismanage their finances. This can include not having the financial resources in place to provide a ‘buffer’ in case the main breadwinner loses their job for example or having the financial reserves to cover unexpected and expensive emergencies. This lack of financial planning, in worse case scenarios can result in the loss of the family home when mortgage payments are missed, which has serious repercussions for the entire family unit.
Added to these daily pressures, families are also increasingly solely responsible for their long-term saving and pension planning. Despite these decisions being some of the most important they will make during their lifetimes, once again many do not have the necessary financial education to fully understand the choices and risks associated with investment planning. Failure to make the right investment decisions can seriously undermine the quality of one’s life in later years and retirement.
To illustrate this point, recent global research has highlighted the fact that 44% of households were using short-term cash deposits to fund retirement, compared with only 22% using longer-term investments such as mutual funds and investments. A major contributing factor to this is that many people are being tasked with taking on sole responsibility and risk for complex money management and saving strategies, which were previously at least shared with governments or employers. With a lack of any formalised financial education for the average citizen, this is exposing many families to financial hardships.
To avoid these pitfalls, a family must take control of its finances. In the absence of any formalised education, families should read and utilise the significant online resources which are available on family financial planning, appropriate personal finance sections in newspapers, magazines as well as seek professional advice when needed. By doing so, a family can help ensure its long term financial health is protected and that there are adequate financial resources in place to cover day-today expenses, mortgages, children’s education, parents’ retirement needs as well as any unexpected emergencies.
What can families do in the short term?
In the short term, there are four key principals that families should abide by and they are:
- Make decisions as a couple: Ensure that all financial planning decisions are discussed as a couple to ensure the family as a whole is aware and prepared to meet specific life goals in addition to think of and plan for retirement.
- Start financial planning as early as possible: Plan for life’s major events such as children, education, bereavement and retirement and invest and save accordingly.
- Seek professional advice: Ensure that all financial decisions and investments are reviewed by an expert to ensure they are both appropriate and cover all eventualities.
- Balance risk: Ensure that savings and investments balance short term risk with long term rewards and are balanced accordingly.
How can financial education be improved for families in the future?
Our recommendations provide short term support but the long term solution lies in financial education being treated as an essential ‘life skill’ and taught in schools as part of the education curriculum just like a core subject such as Arabic, English, Maths or Science.
Teaching these ‘real world’ skills will ensure that children, who are the parents of tomorrow will all have an equal opportunity to learn about money and savings regardless of their family’s financial background. In the USA for example, some junior schools are now offering introductory child friendly ‘finance classes’ over a 8 week period which instills the importance of basic ‘money management’ and the concept that you don’t need to be rich to have money - just the willingness to save. This is a fantastic education initiative which teaches the three pillars of finance - spending, saving and investing.
Governments must be made aware that for a significant percentage of families globally, financial education is a skill set, which is lacking. This has serious financial repercussions not only for the family unit but for our society and wider economies as a whole. Teaching our young people personal finance and money management skills early in life should be a key priority for Government’s education and public information initiatives. Such policies would help to educate our citizens and provide them with the necessary personal finance skills to look after and provide for their families in the future.