Ah, school. For most of us, there was too much talk about Quadratic Equations (knowledge we all need on a daily basis), and too little about managing money.
Financial education finally became part of the national curriculum in September 2014 – too late for current uni students already reeling from £9,000-a-year tuition fees. Yet if there’s one group who would have benefited from lessons in managing cash, it’s us lot.
Thankfully, it’s never too late to pick up the skills needed to make money work for you. We asked the Save the Student community what they wished they had learnt about personal finance as teenagers. We’ll be touching on everything from how to invest properly to defending ourselves against the supermarket’s marketing ploys.
‘If I could be in school again, I’d want to learn…’
1. 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 embark on a mass shopping spree whenever our student loans or wages come through, paying the rent and setting aside cash for bills must come first.
When shopping, beware of the raw emotion and thrill tied up in buying stuff. Avoid impulse purchases, learn the supermarket’s tricks, and take time to consider exciting big-ticket purchases, such as a laptop or car.
It’s also crucial to keep on top of debt – such as that pesky overdraft and credit card – as going beyond your limit or delaying payment now means nasty charges (and a knock to your credit rating) later!
That said, there is one exception to the rule. You may be eager to clear away your student loan as soon as you’re in work, but it’s very low interest borrowing, some of which may even be written off (say what?!): don’t rush to pay it off ahead of other debts.
Read our guide on the Tips for saving money at university
What’s the minimum you need to live on?
There’s no clear-cut answer to this. The cash you need to live in London will be vastly different to what’s required for a comfortable lifestyle in Leeds.
So the first step is seeing whether you’re in the black, or in the dreaded red – much easier if you follow our budgeting steps and download our nifty spreadsheet. You can also see what the average student spends here.
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.
2. The art of haggling
There’s no shame in haggling to get the best deal when you’re buying something. 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 useful guide on haggling like a pro.
While you should always ask for a student discount, 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 Tesco Basics.
One of the best times to get 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. Arming yourself with research on better deals from their rivals is a sure-fire way to guarantee results.
3. The real dangers of debt
Some debt is unavoidable and even necessary. Mortgages are a long-term way to spread the cost of living or investing in a property over time. The same applies for tuition fees and maintenance loans – going to university would be impossible for many students without them.
That said, the dangers of some costlier types of borrowing are often skipped in school lessons: 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 eye-watering fees.
Managing personal debt is probably the most vital lesson that most Britons should have learned, if these recent stats are anything to go by:
5. Interest rates for saving and borrowing
Interest rates are set by the Bank of England and banks, with the former setting the ‘base rate’ and the later adding more depending on the service offered and how generous they’re feeling.
Generally speaking, interest rates have recently been at an all-time low since March 2009. 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.
6. How credit cards can be good for you
There are plenty of pitfalls to sidestep when owning a credit card – not least a debt spiral – so you should never have one if you know you cannot afford the repayments. But, when used in the right way, they can be quite beneficial.
Each credit card offers different features and terms, but generally they can be helpful for cash flow and for making large purchases you know you can pay off at the end of the 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 made. You’ll also build up a good reputation with credit referencing agencies, and generally enjoy greater financial freedom.
There are also plenty of perks for credit card customers out there, such as: Airmiles to put towards a holiday, cheap foreign exchange, cashback and fraud protection. Just don’t fall for these without considering the cost of using the credit card or else you could quickly find yourself paying over-the-odds for the benefits.
Some people – known as ‘credit card tarts’ (not as much of an insult as you might first think!) – regularly switch between banks and credit cards to take advantage of the perks and freebies on offer and to extend the 0% interest period on existing balances.
Our guide to student credit cards goes into more detail to help you make an informed decision and avoid getting into bad debt.
7. Shop around for the best financial products
Making the right choices with everything from car insurance to energy bills, mortgages to pensions, and savings and investments, matters. If you don’t spend a little bit of time doing your research it could cost you serious dough, affecting your financial well-being in later life.
For example, do you know how long your arranged 0% student overdraft is for, and how soon after graduation you’d have to start paying it back? Are you aware what the fees and interest rates tied to your unarranged overdraft are? Do you know when your savings account will drop to a measly 0.10% interest?
Remember you should switch whenever you can to get the best and latest offers. As you’re probably (more than) aware, there are lots of price comparison websites to help – comparethemarket.com and gocompare.com among them.
So the lesson here is always make sure you’re on the ball to avoid hefty charges and missed opportunities to fatten your wallet.
8. Tricks used by the supermark
If your only experience of supermarkets so far is throwing an insanely large pack of Skittles into your mum’s trolley, you could be ill-equipped for smart student shopping – with overbuying and wasting food being the most common supermarket sins.
Multibuy offers can be mostly to blame here: two 500g bags of rice could be on offer for £2, while the 1kg bag on the shelf below costs just £1.50. You might also be tempted to ‘buy one get one free’ on something you wouldn’t usually buy, and end up throwing the extra food away because you bought too much.
We reveal 9 of the dirtiest supermarket tricks. Every penny saved is a victory for your wallet!
9. Why checking your statements matters
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?). And if you spot any charges for things you don’t remember buying yourself, get on to the bank pronto.
Think of it as a health check for your banking products: if they’re not helping you manage (and grow) your money shop around for better deals.
Keeping an eye on statements also shows you month-on-month whether you’re balancing your books or going for broke. 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.
Some banks only store a set number of statements online, or for a limited period. Download your own copies each month or they may charge you to send you paper copies later on!
10. 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 make it harder to clear money you owe. Why? Because compound interest – as the name suggests – multiplies over time by adding interest on interest.
How simple interest works
You stick a pile of cash in the bank (called your principal) and earn a set amount of interest on the original amount you put in, as a one-off payment which you then take out. Bada boom. Simple.
How compound interest boosts your balance
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.
As you can see, the earlier you save (even just a small amount) the more you’ll benefit from compounding over your lifetime. 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 £7,000 after 20 years… from doing nothing.
How compound interest bulks up debt
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 graph above can apply to debt too: borrowing £1,000 at 10% a year would build up to a terrifying debt of £7,000 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.
When you receive a lump sum that you don’t need immediately (eg. a grant or student loan instalment), siphon off some of it to an easy-access ISA (tax-free savings account). Compound interest will work its magic and leave you with a little more money in the pot!
11. Time isn’t the only route to money
Most of the population trade their time for a pay cheque, with many of us despising the 9-5 grind that comes with the territory. The smart (wealthy) cookies out there have realised that your income doesn’t always have to be generated from your limited and valuable time on this Earth.
In fact, if you want to be rich or just have a good work-life balance (who doesn’t?), you better be thinking about passive income streams that bring home the bacon without you leaving the house.
Your starters for ten include: saving and investing (and our friend compound interest), owning/renting out property or land, 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. But it’s all very possible once you realise life isn’t all about the 9-5 routine we’ve been schooled into following.
Start small, save what you can, get skilled or just get inspired.
12. Pensions matter before your first grey
We don’t know about you, but we were more about Pop-Tarts than pensions at school. Forget retirement: even the weekend seemed a long time coming. So. Just what is this pension malarkey?
In a nutshell: a pension is a kind of savings account where you squirrel away money to receive again 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 (pension age varies by gender and is likely to increase later on), 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, never mind get that yacht you’ve had your eye on.
You’ll probably also want to start paying into a private pension plan early into your career. The more you save now, the more comfortable you’ll be when you retire, whether you use the cash for heating, health care or holidays. But again, just bear in mind that you can’t get at any of it until retirement.
There are more flavours of pension fund out there than you can shake a log at. 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!
Now’s also the time to start thinking about any passive income you can kick-start, because, unlike wages, it doesn’t depend on you being able/available to work for your money.
13. Whether you should buy or rent a house
Living away from home can give you a taste for freedom. You know, watching TV in your pants, or building bookshelves out of things you found in a skip.
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 key to owning for most people is something called a mortgage. Mortgages are simply the money a bank loans you to buy a house, although in practice they can be complicated. They’re a bit like taking on the mother of all student finance loans: you’ll be making monthly payments for 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: 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). Don’t think mortgages are just for married types, either: it’s possible to get a mortgage with friends or other family members. Whether you’d want to is a different matter.
To own or to rent?
Owning is almost always cheaper each month than paying rent. Plus, any money you put in, whether towards your mortgage or interior decorating, benefits you instead of your landlord. It could even become an income stream if you let instead of live in a house (utilising ‘buy-to-let’ mortgages).
But you don’t have to own to live the good life. Renters may be able to put away savings that home-owners might have to bust 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 whilst you’re figuring out where you really want to live and shudder at the idea of any big-time responsibility. Selling a house isn’t cheap. As always, cost it out and see what makes most sense for you.
14. Don’t underpay or overpay tax
Did school teach you that the first few grand you earn each financial year is tax-free? That’s your personal allowance (PA) and it’s updated every April, the start of the tax year. For 2015/16, you won’t pay a penny of tax on the first £10,600 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 £30k, with higher rates on anything you earn above that.
Most students won’t come close to earning more than their PA but the way income tax is collected through wages means you could already be overpaying tax on a part-time job. Check your payslips and tax code 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… not be very nice.
15. How to invest properly
Learning to invest is the key to making more of your money and building real wealth. Very simply the 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‘, the other side of the coin that you’ve probably never heard of. Rather than trying to beat the market by basically gambling 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.
FTSE growth since 1980
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 all this has got your attention and you’d like to know more, you can read this article and check out Andrew Hallam’s fantastic book: The Millionaire Teacher.
If you can’t spare the cash, or are already in debt, it’s not the right time to be investing. Having said that, stashing away what you can early in your life will put you in a very good financial position later in life.
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! Start by downloading our free guide to student finance.
You don’t understand what I’ve been saying for the past few minute?
Read: Banking jargon explained