By Frank Conway
Research shows that children as young as age seven form lifelong money habits. Financial education content and apps can help them develop good money habits that will return a lifetime of benefits.
Many Irish adults struggle when it comes to the essential aspects of money. Like how credit cards really work. Or the real cost of buying a home…or a car. And when it comes to choosing the right protection policies, many struggle to identify their financial needs correctly.
With the rise in contactless payments, more and more adults are increasingly disconnected from making day-to-day money decisions. Not only do they not shop for better value, some don’t know where to start.
We are often tempted to group people into the ‘saver’ and ‘spender’ camp but this is just the tip of the iceberg. In fact, to really understand money, there are six key pillars; earning and income, saving and spending, credit and debt, risk and protection, investing and growing money and finally, financial decision-making.
In this context, savers and spenders are just opposite sides of the same coin, they are just one sixth of the complexity of money and if this were just the focus of any financial education programme, it would miss by a long-shot.
Money habits from age seven
Experts at the UK’s Money Advice Service believe that children as young as age three form an awareness of the significance of money. However, by age seven, many children are already forming money habits that can last a lifetime. The research was carried out in collaboration with a leading UK university a number of years ago.
In light of the UK study, MoneyWhizz (www.moneywhizz.org) set about to identify how best to provide financial education that was both engaging and relevant.
This is European Money Week, a pan-European initiative to support parents, families and educators to promote better money skills through better financial education.
Financial education can really make a difference in the lives of all our citizens. This is a major part of the financial education programmes developed for a wide array of age groups.
For many Irish people, the increases in life expectancy, the abandonment of final salary pension schemes and a whole range of other factors means that more and more, families are having to burden greater financial responsibility. It is essential they are supported through financial education to be better prepared.
Taking the first steps
Talking Cents is a new financial education programme that has been growing a popularity among primary school teachers across Ireland. With over 25,000 children now running this commercial-free programme, teachers and kids can engage with relevant and engaging financial education material and supports.
One important lesson we have learned over the years is that parents and teachers usually do not have the financial knowledge to teach children good money habits. In fact, in some cases, especially those that support secondary school teachers, it is the teachers that are often saying how much they learned from financial education classes provided in-school to students.
In a recent financial education school survey conducted among primary school teachers, a majority want more financial education supports, not less. All viewed financial education as a critical life skill; all wanted more help and supports to help them in developing a robust and modern programme of financial education to promote better money habits.
What teachers have asked for is more material that provides the basis for helping kids to develop critical thinking skills when it comes to money. In other words, they don’t just want to one-directional teaching process, they want a two-directional money discussion programme.
One thing we know about adults is there are many financial personalities.
People are no longer grouped into the narrow bands of ‘savers’ or ‘spenders’. That was a simple definition of how some people handled money. Today, we know that while some people may be great savers, they may also be terrible investors. And unfortunately, to really make the best financial decisions, people will need to make investment decisions more and more if they want their savings, and pension to grow.
So, how can a parent or a teacher teach a seven-year-old about money? Well, you start with the basics and work out from there.
A key feature of Talking Cents is it has been developed to provide discussion time about money between parent / teacher and children about money. But since children age seven and age twelve are very different, the is specific content for younger and older children.
The material provides a series of stories and also, a range of activities that support the development of important skills, like patience and planning. One simple activity is to give children pocket money and a series of colour codes savings boxes for short-term, long-term and medium-term savings goals. This simple activity encourages kids to consider time and planning their savings and spending activities.
The art of conversation
At one Dublin school teachers wanted more content, more discussion material and more resources. At first, my concern was that since the school was located in what might be referred to as an economically ‘disadvantaged’ area, parents might shy away from their kids being taught better money skills but this was not the case at all. In fact, the reaction from teachers was that parents from all backgrounds are eager for their children to be supported in the development of good money skills as they view it as a critical life skill and not a statement of their present situation.
In developing the Talking Cents financial education programme, the first objective was to make the content highly relevant and very engaging. To achieve this, I developed a series of storylines that children could relate to and feel comfortable discussing. Additionally, a key feature of the programme was the development of age segmented content. This was critical as the language of money for an eight-year-old is very different to that of and eighteen-year-old.
The reaction from teachers across Ireland has been fantastic with over 350 school teachers and 25,000 primary school students now running Talking Cents financial education.
Foreign banks say no thanks to Irish savers and borrowers
With today’s announcement that RaboBank is about to exit its online savings offers, it means over the last few years, savers and borrowers in Ireland have experienced a major contraction in options to save…and borrow.
RaboBank had an estimated 90,000 savings accounts here in Ireland. The Dutch bank said that it will pay any future interest up front to customers as it speeds up withdrawal.
RaboBank is not alone.
Last year, Tesco exited the Irish credit card market. Up to that point, it had offered one of the best deals to customers.
Since the credit crunch almost a decade ago, non-Irish financial services have exited the Irish market in droves. It began with the exit of Bank of Scotland (Ireland). This was the bank that had heralded the tracker-boom when it undercut Irish lenders in the late 1990’s and early 2000’s with cut price mortgages that are todays financial albatross around the necks of Irish banks.
Following the BOSI exit came the departure of Danske Bank from day-to-day banking activities and the closure of it’s branch network across the country.
Nationwide UK (Ireland) dumped its 14,000 Irish customers to ‘concentrate’ on its UK business.
Leeds Building Society have become inactive in the savings landscape and while it officially has a continued presence in Ireland, it advises those visiting its website that things are under review and it is no longer accepting new savings business from new accounts.
Ireland is a small market
All of the exits underpin the major feature of the Irish market; it is miniscule. And with the rise in capital and compliance requirements across the EU, there is very little ‘easy’ business nowadays. In fact, having a non-domestic presence is expensive and risky and without a hefty profit margin or the promise of one, the rationale for remaining (or entering) is doubtful and probably will no longer pass a basic risk assessment.
Other banks that exited include Bank of America and the MBNA card it offered and PostBank which was at one point seen as a potential rival to the likes of Bank of Ireland and AIB. But is lifted anchor and sailed east when the economic waters around Ireland got choppy in 2010.
Which brings is back to the plight of savers and borrowers.
At present, they have become persona-non-grate at non-Irish banks. They are likely to remain so for a long time to come.
Mortgage lending unsecured in all but name – interest rates no longer reflect risk!
Over the course of the last few years, a debate surrounding the cost of mortgages here in Ireland suggested something might be wrong. A central tenant to the argument was a comparison of the cost of mortgages in other Euro countries; mortgage costs were deemed to be high in Ireland simply because they were lower elsewhere.
Mortgage rates are the result of a complex set of factors, not just the cost of money.
Those interest rates reflect three primary risk factors; income, credit and security.
The third of those three risks, security is what ultimately mitigates the complex risk factors that mortgages present to all lenders. Without it, interest rates would be far higher.
But over the last few years, some disturbing statistics have come to light that threaten to undermine the core principles of underwriting and assessing mortgage risk.
Take mortgage arrears. There are still over 50,000 mortgage holders in arrears of 90 days or more. In fact, Ireland has one of the highest rates of long-term arrears across the EU but on the back of that, it has one of the lowest rates of foreclosure.
Nothing wrong with a society working to ensure those in financial difficulty do not lose their homes.
But here, it seems something is amiss.
Mortgages by their nature are complex ‘secured’ loans. In other words, the guarantee of repayment of the debt is secured by the property; if the borrower is unable to repay the loan in the future, the lender has the right to sell the property in order to settle the outstanding debt. This right is granted by the borrower to the lender by way of the mortgage contract.
When the lender assesses the borrower if they are ‘qualified’ for a mortgage, a whole range of risk factors are taken into account. Broadly, those boil down to credit, income and equity security.
But the first two risk factors, income and credit are short-term in nature. They only provide the lender with a few short years of earnings history and credit history. Neither can offer the lender any guarantee the applicant will continue to be employed, or earn the same income or enjoy the same level of income in the future as they might have when they applied for a mortgage. The same goes for credit history, this can change if the applicant loses a job, becomes ill or suffers a marriage breakdown.
It is only the third pillar, the property security that offers the most reliable protection for any lender into the future (yes, prices can and do fluctuate but prices are again increasing here in Ireland).
But, the mortgage risk premise here in Ireland is flawed.
For a start, it is extremely unlikely that lenders will take possession of a property where the borrower has not made repayments for a prolonged period of time. This makes mortgage lending ‘unsecured’ in all but name.
Unsecured lending is typically far more expensive that secured lending.
To compare costs, even where we take some other forms of secured loans here in Ireland, car finance loans offer a good example. Many are offered to consumers at rates of 3% – 4%
Unsecured loans on the other hand include personal loans and credit card debt. Both cost anywhere from 8% – 18%, or more!
But mortgage lenders currently offer loans to home buyers at interest rates of about 3%. This is very cheap finance for loans that are largely unsecured in nature. So, what are lenders to do?
Broadly, lenders can price for risk individually or collectively. On an individual basis, this would focus on borrower losing their right to the property the mortgage was granted against if they are unable to make payments for a prolonged period of time. The second alternative is the risk is priced collectively, where all borrowers pay higher mortgage costs from inception.
Of course, the third alternative is for mortgage lenders to restrict mortgage lending altogether and they could do this a number of ways:
Mortgage costs are typically priced on the basis of the property acting as the main security backstop. As this continues to be largely unused here in Ireland, it could pre-empt a new mortgage model, one that is more selective in those that qualify and in cost to those that do.