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Know the facts

More detailed information about a wide variety of personal finance themes can be found in the 'dossiers'. You could also look at the fact sheets in the 'Savings and Lifeskills' programme for ages 12-14 and 14-16. Below are some simple ways to help explain about banking and finances to your son or daughter.

Know the facts: Building societies and banks

Building societies and banks offer a huge range of financial services including accounts (e.g. current, savings and business), loans, mortgages, insurance, investments, credit and debit cards, overdrafts and foreign currency exchange. Some of these services are also offered by other organisations such as the Post Office and some supermarkets. One of the services that most people will have is a building society or bank account.

An account:

  • keeps money safe (so it won't get stolen or lost).
  • lets you get your money out when you need it (from branches or cash machines).
  • can pay your usual bills regularly.
  • lets you pay for things over the phone, on the internet, or in person.
  • lets you manage your money by keeping track of everything.
  • can sometimes lend you money (but it has to be paid back).
  • can give 'interest' on savings, therefore making your money grow.
  • can be one of many different types, with different terms and conditions (e.g. instant access to your money).
  • can offer different types and levels of interest rate, so savers should look for high interest rates to earn as much interest as they can.

Some of the services offered by an account include:

  • a chequebook (for you to write out cheques).
  • a cheque guarantee card (this gives you cash up to an agreed amount and is a safeguard for the cheque).
  • a cash card (allowing you to get cash 24 hours a day from a cash machine).
  • a direct debit facility (for paying bills automatically).
  • a standing order facility (for paying any regular bills).
  • monthly statements (telling you all the transactions you've made on your account).
  • overdraft facilities (allowing you to borrow more money than you have in your account).
  • telephone and online banking (so you don't have to personally go into the building society or bank, but can carry out transactions by phone or computer).

Know the facts: Budgeting

Managing money is an important life skill. A good way for young people to get started is to learn how to budget: planning for what comes in and what is needed to pay out - so they become familiar with how much it costs to live and run a household.

Making a budget sheet (on paper or on a computer spreadsheet) is a great habit to get into (for parents as well as children) and you can never start too young. It's easy to show your son/daughter how to do one, and you can make them as simple or as detailed as you like. A blank budget sheet can be found here .

Learning to budget:

  • Start by making sure they are familiar with the financial documents required for budgeting (e.g. purchase receipts, account and credit card statements, bills) and know how to interpret them.
  • Explain that budgeting is about comparing income (money you receive) with expenditure (money you spend). The best way is by looking at them side by side in two columns.
  • List all sources of income for one month in the first column and all areas of spending in the second column. Remember that quarterly bills can be divided by three to get the monthly amount. Talk about which household expenses are a fixed amount every month and which ones vary.
  • Talk about the importance of estimating costs as accurately as possible. As a general rule, overestimate costs rather than underestimate, in order to be safe. Be careful when counting cash machine receipts, as the cash will also show up as an expense in the form of purchase receipts - make sure you don't count the money twice and end up with a huge overspend!
  • Talk about the impact of emergency costs (e.g. replacing a broken door lock).
  • When the budget is complete, compare the two columns (income and expenses) and discuss where savings could be made.

Know the facts: Saving and debt

Many young people will have an income, either through a job, benefits, grants, bursaries, scholarships or pocket money. With so much of the country in debt, it's important to encourage young people to save their money and avoid making decisions that could lead to them owing money. Some top tips include:

  • Save for a 'rainy day' - Save money regularly so that you have enough money to cover you for unexpected or emergency expenses.
  • Pay off the most expensive debts first - If you have more than one debt, pay off the one that is costing you the most in additional payments (possibly the one with the highest interest rate) first. Speak with a financial advisor to see what you could do to reduce your debt.
  • Avoid buying on credit - Try to pay for things straight away and take the time to save up if you need to. If you use a credit card or store card, pay off the total balance so you escape paying interest as well. Cut down on your spending rather than using your overdraft. If necessary, get rid of your credit card so you're not tempted to use it.
  • Debts before spending - Use any extra income to pay off debts rather than spending on luxury items.
  • Find the best interest rates - Remember that you're looking for high rates on savings and low rates when borrowing or using credit cards. Also investigate the types of rates that are available.
  • Pay bills straight away - Avoid paying extra charges on late bills by paying them as soon as you receive them.
  • Learn from your mistakes - Managing money is a skill. It can take time to get good at it. If you make a decision that gets you into unnecessary debt, learn from the experience. Adjust your financial planning so that it doesn't happen again.

Know the facts: ‘Credit crunch’ and the recession

The credit crunch

A credit crunch is a worldwide reduction in the amount of money that is available for people and businesses to borrow to pay for things. Banks rely on people depositing money into their savings accounts. They have to keep a percentage of this money safe, called 'capital reserve', but they use the rest to make investments and lend to people and organisations. They also lend large amounts to other banks and building societies. They make money by charging interest on all the money they lend.

How did the recent credit crunch start?

This latest credit crunch started in the United States of America where much of their economy is funded by loans from banks:

  • People borrowed money (e.g. for mortgages to buy houses or for investments).
  • Businesses borrowed money to expand.
  • Banks even lent money to people on low incomes and with poor credit ratings, who found it difficult to keep up their repayments.
  • Some people who had taken out mortgages couldn't keep up with their repayments and banks had to repossess their houses to resell and get their money back.
  • Businesses saw a drop in sales because many people were having financial problems and some people lost their jobs as well as their houses.
  • So businesses also had difficulty repaying their debts and loans.
  • The stockmarket (where shares in companies are bought and sold) began to have problems as people were unable to invest their money.
  • Banks started to ask for the money they had lent each other back, but almost every bank was in the same situation.
  • Banks all over the world are connected, as they lend and borrow from one another. When the American banks reduced lending, financial organisations around the world were forced to do the same.
  • This led to a downward spiral of economic activity, leading to the British economy falling into recession in January 2009.

The recession

The definition of 'recession' is a grey area but it's to do with the total amount of goods and services that a country produces, which is known as the gross domestic product (GDP). These are valued by financial experts every quarter. If they 'contract' (drop in value) and experience 'negative growth' for two consecutive quarters (a total of six months), the country is said to be in recession. How severe the recession is depends on the size of the drop and how long the economy remains in negative growth.

Since the British recession began in January 2009, the Government has put in place a number of steps to try to kick-start the economy. Some of the major ones include the following:

  • The Government poured in a lot of public money to 'bail out' the banks and prevent them from going bankrupt (unable to pay back the money they owe). Some were nationalised (taken into Government ownership).
  • The Government also guaranteed up to £20 billion of loans to help small and medium sized businesses.
  • The Government participated in the G20 summit and agreed to help put in place measures to solve the global economic crisis.
  • The Bank of England dropped interest rates and left them at 0.5% for a number of months.
  • The Government temporarily reduced VAT from 17.5% to 15%.