Financial Literacy – Freedom for All
Structural change in western society has made financial literacy an essential skill for us all. Today’s post is not advocating whether you should use a professional financial planner or take a DIY approach. This post highlights the structural changes in society. These changes make planning our financial future essential.
There are 4 forces over which no person, organisation or government has complete control. They are:
- Employment structure
- Lifestyle choices
- The Cost of the Welfare State
These forces are the 4 reasons why financial planning is vital to all of us:
50 years ago the workplace was very different. Workers spent 40 years with one employer. The employer provided them with sick pay, holiday pay, a generous pension and a lump sum to the family if the employee died. They did not have to think about financial planning.
Now very few people spend more than a few years with an employer.
Commentators have said we will now have ‘multiple’ careers. This means we cannot rely on ever-increasing salaries. Our income may dip for a while, whilst getting to grips with a new role or during periods of unemployment.
Benefits for expatriates are limited. The trade-off for seeing more of the world is generally little or no contribution to any pension, sick pay based on local law and lower levels of life assurance. Expatriates are expected to make their own arrangements.
Expats have financial planning issues which are not experienced by their friends who stay in their home country. They must consider exchange rates, local and international laws, local and international taxes and a myriad of investment choices from regulated and unregulated sources. Developing the skill of financial literacy and a financial plan to go with it is essential.
The next most significant thing to impact on financial planning is demographics.
50 years ago, the life expectancy of a person in the UK was just 72 years. Back then, the age people retired was set by their employer’s pension scheme. Often this coincided with the State pension scheme. With state retirement age in the UK set at 65 for men and 60 for women at that time, this meant that the pension they accumulated during their working life needed to last 7 years for men and 12 years for women.
With the advent of modern medicine, improved diet, exercise and healthcare life expectancy has increased dramatically. Life expectancy in the UK is now 81 years. This is an increase of 9 years in the last half-century. The state retirement age has increased by 1 year for men and 6 years for women. From 6th October 2020, they both receive state benefits at age 66. Those who are now in their 40s will have to wait until 67.
So a man retiring today at age 66 can expect to enjoy 15 years in retirement, more than twice the time his grandfather could have expected. But he will have had the same length of time to save for it in a less certain world with a more volatile career path.
This is before we consider the substantial number of people who want to retire early.
Financial Literacy and Lifestyle
People are spending longer in education. This delays the time at which they start to save for their retirement. Assuming a delay of just 3 years at the start of a lifetime’s worth of savings reduces the value at maturity by a 6th of 16%. Therefore, to make up the difference they would need to delay their retirement by at least 3 years or make higher contributions throughout their lives.
The role of primary carer for children is also changing. Many couples now share this responsibility, taking time out of work to spend with their young family in those precious early years. This too has an impact on longer-term planning.
More people are self-employed than ever before. This means they do not have the luxury of any form of financial planning arranged by their employer. They must be self-sufficient. The self-employed are often masters at their own particular trade or service. Financial literacy is an important skill when it comes to running a business but many learn ‘on the job’ rather than undertake serious research. When transitioning to a self-employed or ‘gigging’ role. Working out the cost of your former employer benefits will help you set your charge-out rates.
Cost of The Welfare State
Finally the cost of the welfare state.
The ageing population, caused by improvements in diet, exercise and healthcare, has resulted in the welfare state in most western countries becoming unsustainable without dramatic (and unpopular) changes. This is because the birthrate in many western societies has fallen below the replacement level. This means that in less than a generation there will be more people seeking to benefit from state benefits than those who are contributing. This leaves politicians with the unenviable task of choosing between higher taxes to fund the system or lower benefits. I expect there to be an impact on both.
Recognising the time bomb which is building up in our society, politicians passed laws which encouraged freeing up the financial markets. This gave individuals the opportunity to take control of their own financial wellbeing.
Sadly, there was little or no change in the school curricula and so school leavers had as much knowledge about these subjects as their grandparents.
This is regrettable as it has never been more important for individuals to understand their own finances and to know how to plan properly.
I hope the above has highlighted some of the reasons why financial planning is so important.
I encourage all of my clients to take an active role in their own financial education and financial literacy.
My mission is to help people who want to take positive steps towards achieving their financial freedom. There are those who want to use the information I provide and manage their own finances. Others meet with me to establish their financial strategy and have regular contact for advice over many years.
On my blog, you will find a number of books which I have read and thought would be useful for those wanting to take charge of their financial future. For more information on what you should do before you start saving, read this post.
If you have any questions or comments, please contact me.
I look forward to hearing from you.