For many of us, school involved too many quadratic equations and not enough practical money management. Here’s what they should have taught us instead…
Bizarrely, financial education has only been a compulsory part of the national curriculum since 2014 – too little too late for a lot of current uni students already reeling from £9k+ tuition fees and complicated student loan terms.
Our National Student Money Survey revealed that as many as 50% of students in the UK don’t understand their student loan agreement, and three quarters of students have said they didn’t get enough financial education in school.
With today’s young people facing a tough economic climate, a tricky housing market and student debt, it’s more important than ever to swot up on your finance.
We asked Save the Student readers what they wished they’d learnt about personal finance as teenagers and this is what they said…
15 money skills we wish we were taught in school
How to make money last
If you’re having trouble making ends meet, it boils down to simply earning more or spending less.
However tempting it is to go on a massive shopping spree as soon as your student loan or wages drop, it’s crucial that you work out your disposable income first. Paying the rent and setting aside cash for bills doesn’t take long, and once you have that sorted you’ll have a much clearer idea of what’s available to spend.
App-based bank accounts can be a great way of keeping track of your money and knowing how much you have left to splash.
Saying that, try to avoid any impulse purchases, be aware of the tricks used by supermarkets to make you spend more cash, and take time to consider (and save towards) exciting big-ticket purchases, such as a laptop or a holiday.
How much money do you need to live off?
There’s no clear-cut answer to this, as the cash you need to live off in London will be vastly different to what you’d need in Leeds (this is why maintenance loans vary depending on your situation).
We did some digging and found out how much students at each university in the UK spend each month on average and what they’re spending it on – use this as a guide for what you should expect to be spending, but always try to cut back where possible.
The first step to working out how much you’ll need personally is by working out a budget. Follow our budgeting steps and download our nifty spreadsheet to give you a clear idea of what your outgoings are.
The aim of the game is avoiding nasty surprises by planning ahead. Got Mum’s milestone birthday coming up? Pop it in your spreadsheet, set a reminder on your phone, and start saving for her present now.
Building up a contingency fund is also a bonus for unexpected costs, such as last-minute group holidays or fixing another broken iPhone screen.
How to haggle
There’s no shame in haggling to get the best deal when you’re buying something. What better way to convince a seller to lower their price than the fact you’re living off a student loan?
But unless you’ve got years of experience as a market trader, you probably weren’t taught how to barter like Del Boy in school. Thankfully, we’ve got a really useful guide to haggling like a pro. Get practising!
While you should always ask for a student discount (even if it’s not advertised), the opportunities for a bit of bargaining are endless. For example, head to a farmers’ market as the day comes to a close and take home some gourmet stock for less than you’d fork out on Tesco Basics.
One of the best opportunities for haggling is when your mobile phone contract is about a month or two away from expiring.
Just ring up, ask for the cancellation department, pretend you want to leave them and turn on the charm. Free texts, extra data, a better phone and cheaper plans are all achievable with determination and patience.
The real dangers of debt
Some debt is unavoidable and even necessary. For most students, going to university would be impossible without incurring debt from tuition fees and maintenance loans – and despite some of the scare stories, repayments are actually achievable, easy and always in line with how much you’re earning.
However, some types of debt can be quite dangerous if you’re not careful.
Credit card debt can spiral out of control if you don’t keep on top of repayments, while predatory payday loans come with astronomically high interest rates and should always be avoided. The consequences can be devastating, as we found out when we interviewed a man who ended up in £26,000 of payday loan debt.
How to improve your credit score
When you apply for most financial products (things like credit cards and overdrafts, where you essentially ‘purchase’ money), lenders will run a credit check on you to calculate their risk.
By looking at your application and borrowing history in reports managed by a small number of credit referencing agencies, they’ll decide how likely you’ll be able to repay what you borrow, judging by how you’ve paid things off in that past.
A poor credit score can affect your chances of getting a mortgage later in life, renting a house, or even just getting a mobile phone contract. Every time you get declined for something because of your bad credit, it will remain as a ‘black mark’ on your report for seven years.
Think twice before applying for financial products (do you really need another credit card?), and always make your repayments on time.
It is possible to check your credit reports to see how you’re fairing, and to scope out inaccuracies and fraud. One of the top credit rating companies offers them free of charge – woohoo!
How interest rates work
Interest rates for the whole of the UK are set by the Bank of England and commercial banks, with the former setting the ‘base rate’ and the latter adding more depending on the service offered and how generous they’re feeling.
Generally speaking, interest rates are currently at an all-time low since the UK voted to leave the EU. Increasing the base rate would be harder on borrowers (not the tiny people kind), but great for savers.
A goody-two-shoes with £20,000 of savings might earn 3% interest on top of their cash every year, while a shopaholic maxed-out on their credit card with a £3,000 limit could be paying 20% interest on the cash they’ve borrowed.
Some credit cards, overdrafts and mortgages often advertise low-interest rates, but there’s no guarantee you’ll get these deals. That’s because the best rates are usually reserved for people with the highest credit scores.
The reasons to have a credit card
There are plenty of potential pitfalls to owning a credit card, for sure.
Not least is the danger of a debt spiral if you don’t keep on top of things: you should never have a credit card if you think there’s a chance you might not be able to afford the repayments.
However, when used in the right way, credit cards can be quite beneficial. Being a responsible credit card user is one of the easiest ways to build up a good credit rating, as it’s the most straight-forward way of demonstrating you know how to pay up on time.
Every credit card is different, but generally they can be helpful for making larger purchases you know you can’t afford to pay up in one go, but will be able to pay off in installments at the end of each month.
If you’ve got the self-discipline to settle in full (not just the minimum payment) when the bill arrives, you typically won’t pay any interest on the purchases you’ve made, either.
There are also a few perks for credit card customers out there, such as Airmiles to put towards a holiday, cheap foreign exchange, cashback and fraud protection. However, you shouldn’t choose a credit card based on the benefits alone or you could quickly find yourself paying over-the-odds just so you can build up your miles for a holiday.
A lot of credit cards offer 0% interest for a certain period of time when you first get your card. Some smart people regularly switch between banks and credit card offers to take advantage of the perks, freebies and 0% interest period on offer.
How to shop around for the best deal
As boring as this stuff can be, making the right choice when it comes car insurance, energy bills, savings and investments, and even which student bank account to go for, really do matter.
For example, do you know how long your arranged 0% student overdraft is available for, and how soon after graduation you’ll have to start paying it back?
Do you know what the penalties tied to your unarranged overdraft are? Do you know when your savings account will drop to a measly 0.09% interest?
So many students we speak to stay loyal to their bank just to ‘keep things simple’, but the truth is this could be costing you big time. We’d recommend keeping an eye out online for the best deals going on bank accounts, and switching whenever you see a better offer pop up.
Banks even offer hassle-free switching (where they change over all your standing orders so you don’t have to organise that yourself) and cash incentives to encourage you to switch! Read our guide to the best student bank accounts for all the info you need.
Not to trust everything the ads tell you
You wouldn’t be unreasonable in thinking that if an advert is promoting something as ‘free’ it must be free, right? Well, unfortunately this isn’t always the case.
The CMA (Competitions and Markets Authority) is constantly calling businesses out for misrepresenting in their ads, whether it’s broadband providers being told off for misleading customers, or supermarkets offering promotions that don’t actually save you any cash.
Be particularly wary of multi-buy offers – not only will you often end up with loads of one product you probably didn’t want lots of in the first place, but this is also one of the nine dirty supermarket tricks they use to get you to spend more money.
What to look for in your bank statements
As painful as this may be, it’s important you get into the habit of checking your bank statements regularly if you want to avoid unexpected charges, wasting money or being fleeced.
This includes your current account, savings accounts, and (most importantly) credit cards. With most banks and building societies now operating online, keeping an eye on your money is as easy as surfing their site or opening an app.
You’ve heard this all before, but we’ll say it again: it’s totally crucial to keep on top of debts. Going beyond your 0% overdraft limit or delaying a credit card payment can lead to nasty charges (and a knock to your credit rating).
Regular check-ins are vital to keep tabs on any payments you’re expected to make (and penalties for missing them), any interest you earn, and for weeding out direct debits or subscriptions you can ditch (not watched Netflix since Breaking Bad? Ask yourself if it’s really worth it). If you spot any charges for things you don’t remember buying yourself, get on to the bank pronto!
Keeping an eye on statements also shows you month-on-month whether you’re balancing your books effectively or heading in a dangerous direction.
If you’re nudging the red more often than you’d like, this is where you can see just how much you’re blowing on Candy Crush boosters and take steps to rein it in.
The magic of compound interest
Compound interest is a powerful thing – it just depends on which side of the calculator you’re sitting.
This interest-ing (sorry!) concept can grow the money you start with quicker than expected, but makes it harder to clear money you owe. Why? Because compound interest multiplies over time by adding interest on top of interest.
How compound interest boosts your balance
When you deposit money in a savings account for example, after a certain period of time it will earn interest (essentially free money).
If you leave any interest earned from your initial stash in the account, then the new larger amount continues to earn interest. And as it happens over and over again (called compounding) your cash pile grows faster and faster, just like a snowball.
Leave £1,000 in an investment or savings account earning 10% interest a year (yes, rare, but we’re making a point) and you’ll have £7,328.07 after 20 years… from doing nothing. In this instance interest is compounded monthly, meaning the interest is calculated and added at the end of every month.
How compound interest increases your debt
However, it works the same when you owe money with interest. Folk who lend you money to buy things, whether credit card companies or car finance people, are literally making money from money too. Dangerously for us, this can lead to a debt spiral, as the more you borrow the more you owe exponentially.
So the example above can apply to debt too: borrowing £1,000 at 10% a year (compounded monthly) would build up to a terrifying debt of £7,328.07 after 20 years. Ouch!
While you can’t do much about borrowing rates, you can protect yourself better by being aware of the long-term effects of compound interest. Plan your spends, budget for payback and get help if you’re worried the costs are getting out of hand.
That time isn’t the only route to money
Most of us earn cash by trading our time for a paycheque, and frequently despising the 9-5 grind that involves. However, thanks to our beloved World Wide Web, your income doesn’t always have to be generated from your limited and valuable time on earth.
In fact, if you want to be rich or just have a good work-life balance (who doesn’t?), it’s a good idea to start thinking about passive income streams that bring home the bacon without you leaving the house.
Your starters for ten include: saving and investing (there’s our friend compound interest again), owning/renting out property, setting up a business, or selling multiple copies of something you only had to create once – think apps or books.
It’s not an overnight route to early retirement and may well require a lot of time, balls and brass to bring it about initially. But it’s all very possible once you realise life isn’t all about the 9-5 routine we’ve been schooled into following.
How to organise your pension
We know it seems a loooong way off right now, but you’ll never regret forward-planning your retirement fund.
In a nutshell, a pension is a kind of savings account where you squirrel away money to get your mitts on when you retire from work and no longer have regular income from a job.
The government provides a State Pension once you’re 60-something (although it’s likely to be 70-something by the time we reach that stage), but you’ll need to have paid enough National Insurance to get the full amount. Either way, it isn’t always enough to live on, and some people end up working much longer than they should because the state pension leaves them short.
A good option to look into is the government’s new Lifetime ISA that launched in 2017, where the government have pledged to pay you 25% on top of what you save. By the time you reach 60, that could involve a lotta dough! Read our guide on the Lifetime ISA for everything you need to know.
There’s also the Workplace Pension, where part of your salary is put towards a pension before you get paid, with some employers matching whatever you put in – extra money for free!
Whether to rent or buy a house
Living away from home can give you a taste for freedom: watching TV in your pants and eating ice cream at 2am.
At some point, though, you’ll start to wonder whether things could be sweeter if you actually owned your own place. And by sweeter, we also mean cheaper.
The way to get on the property ladder at a young age is to get yourself a mortgage – money a bank loans you to buy a house.
They’re a bit like taking on the mother of all student finance loans: you’ll be making monthly payments for about 20-odd years, and you’ll also pay for the privilege (land searches, solicitors, arrangement fees and interest).
The earlier you pay off a mortgage, the more years of free shelter you’ll have later. The hardest part is saving for a deposit, as you’ll be required to throw down a lump sum at the start of entering into a mortgage deal. If you plan on buying somewhere, start saving for a deposit now.
No lenders nowadays will loan 100% of a home’s value, plus the bigger the deposit you slap down the better the deal you’ll get, and the less you’ll have to borrow (and pay back).
The government have also started offering a ‘Help to Buy ISA’ to first time buyers (similar to the Lifetime ISA), where they’ll contribute 25% of what you save to put towards your mortgage when you buy your first property (but note that it can’t be used to supplement your deposit).
To own or to rent?
Owning is almost always cheaper each month than paying rent, but getting on the property ladder can be tough.
Any money you put into your property, whether towards your mortgage or interior decorating, benefits you instead of your landlord. It could even become an income stream if you buy to let instead of living in your property (utilising ‘buy-to-let’ mortgages).
The other side of the coin is that renters may be able to put away savings that home-owners might have to spend on fixing on leaky pipes. You can also move house just because you feel like it, and don’t need to worry quite so much about periods of unemployment.
Renting is generally a good idea at the start of your career while you’re figuring out where you really want to live and shudder at the idea of any big-time responsibility.
How much tax you’re supposed to pay
Did anyone ever tell you at school that the first few grand you earn each financial year is tax-free? It’s called your personal allowance (PA) and it’s updated every April, the start of the tax year.
For 2019/20, you won’t pay a penny of tax on the first £12,500 you make.
Income doesn’t just mean wages, although they’re the most obvious source. ‘Taxable income’ – the kind you’re expected to pay tax on – also includes interest from bank accounts, profit from selling any goods or services, and even some State benefits.
However you earn money, you’ll only pay tax on anything you make over the PA: 20% on the difference up to around £45k, with higher rates on anything you earn above that.
Most students won’t come close to earning more than their PA each year, but the way income tax is collected through wages means you could already be overpaying tax on a part-time job. Check your payslips, make sure your tax code is correct and, if you think you’re being overcharged, get on to HMRC to get a refund!
At the same time, don’t ever be tempted to avoid tax that you owe: HMRC do know who you are, and they will find you, and they will… ask for their money.
Get a tighter grip on tax with our seven facts you need to know.
Where to invest your money
Warning: As with all investing, your capital is at risk. The value of your portfolio can go down as well as up, and you may get back less than you invest.
Learning to invest is the key to making more of your money, and can result in you having a really solid source of money on your side.
The primary lesson here boils down to: get rich slowly, diversify (reduce risk), minimise leakages (fees) and eradicate all emotion from investment decisions.
Now you’ve probably heard of ‘fund managers’: people who happily take your money and pick companies and other assets to invest it in on your behalf… but not before they’ve had a slice of your pie in the form of fees and commissions.
The choosing, buying and selling of individuals’ stocks or investments is called ‘active investing‘. Here, the goal is typically to make big returns quickly, so it can be a lucrative way to trade. However this strategy tends to attract high risk and high costs whilst continuously sapping your time and energy.
Let us introduce you to something called ‘passive investing‘ – an alternative form of investing that you might not have heard of. Rather than trying to beat the market by basically taking the gamble that shares in a certain company will go up, ‘index funds’ track the market as a whole (its index).
For example, you can invest in the UK’s FTSE 100, which means you’re banking on the very best companies to grow collectively. They don’t promise quick wins but instead, as the market grows, so do your returns.
With no fund manager to pay for, index funds are cheaper to buy and hold. They also diversify your risk and remove ongoing decision-making and cold sweats at night.
Historically, as the chart below shows, the top UK companies have performed well and are growing overall. There are very few fund managers who have outperformed the markets over the long term, and overall they represent a very poor investment choice.
You can invest in an index fund through an online broker, but make sure you’re getting the best deal by checking this table by Monevator.com. There are then lots of index funds to choose from, such as Vanguard which are typically the cheapest. All you need to do is stump up some cash, sit back and leave it.
If you’d first like to dip your toe into the markets, read our guide on how to start trading and check out Andrew Hallam’s fantastic book The Millionaire Teacher.
The bell’s ringing, so that’s all for today! We’ve only touched briefly on some pretty major personal finance topics to give you an overview of the vital lessons missed in school.
It’s now time to do some of your own homework and equip yourself with knowledge that will ensure you have greater financial freedom for the rest of your life – and you can start by downloading our free guide to student money.
Want to brush up on your tax knowledge? Here’s 7 basic tax facts every student should know.