I got asked about children and pocket money following research which found that parents are encouraging children to work for their allowance.

There were some good questions asked – they’re all actually answered in the book Taming the Pound  but if you’re still waiting for your copy to be delivered (or you haven’t bought it on Kindle!), here’s what I said.

How can parents teach their children the value of money?

It depends on the age – small children think in quantity, so five pennies is more than one fifty pence piece, older children understand different value, but they don’t understand consequences (nor do many adults). So give them experience of judging value and let them know consequences – if they can’t pay their mobile bill, they don’t have use of the phone except for emergencies, if they spend all their dinner money on sweets they stay hungry until meal times. They might still spend all their student loan in two weeks, but it’s less likely if they found out years before that spend first, think later is a bad move.

Why is it important that parents get their children into the saving habit early?

We live up to our image – if you “save at the end of the month, if I have some money”, you’ll never save because

a) you can always spend money left over from saving first, but if you spend first you never have any to save and

b) you define yourself as a non-saver.

So your habit is “if you’ve got it spend it” – you never save. If you save first, you think of yourself as a saver and it becomes a habit. Children learning that the thing you do each month is save, will end up doing it automatically – then the habit they have will be one that will help them.

What advice would you give to families who are suffering from the economic downturn?

Everybody ought to think about what they really want, if you’re feeling the pinch it’s even more important. Materialistic attitudes, always wanting more “stuff”, actually make you unhappier. You might become the richest person in the graveyard, but you’ll have a miserable life. It also makes you the servant of the Great God Money – it’s the boss, you’re the slave. Things like relationships, doing work you enjoy, helping others etc., actually make you feel good – and usually don’t cost anything. So prioritise your spending for things that are really necessary and that make you happy long term (like building good relationships, having a purpose to your life) – that way you’re the boss and the money is a tool.

What impact can debt-related stress have on an individual?

It impacts on just about everything, mental and physical. People are designed to deal with perceived threat by fighting or running and hiding. You can’t run and hide from a foreclosure order, and hitting the bailiff is not a good plan. We’re not designed to deal with ongoing, low level stress, we’re supposed to see the threat, run or fight, then an hour later we’re back to normal. Nowadays our body and brain chemistry stays unbalanced for months on end – so we have depression, susceptibility to minor illnesses, are more prone to accidents, get headaches, can’t sleep, can’t digest food properly etc. We can end up with a whole range of niggling things, and become more susceptible to serious illness because our immune system isn’t working properly.

1. Why do you want the money, what do you want to do – what is the money for, what do the family want to achieve with it?
2. Given that’s what you want to do (have a holiday, buy the kids a pony, build an extension to have a playroom – whatever) what are the short and medium term goals?
3. What is the reality of the situation, do the paperwork, what have you got now, how much debt, what regular commitments, what money are you wasting on things you no longer want or need?  That is where you do a budget, you work out where the money is currently going and compare it to what you want to have happening.
4. Prioritise – you know what you want, so how much do you want it?  Do you want to coach football enough to give up the overtime, do you want to build the extension enough to bother to change energy suppliers, give up cigarettes and start cooking from scratch instead of buying take-aways and ready meals?  That’s where you get your sources of saving money to achieve the goal, and in the process pay off the debts.
5. Save the money – knowing why you’re doing it, which gives you the incentive to check out the best ISA, etc.

Taming the pound interview

I did about 7 or 8 interviews the other day.

Some interviewers wanted to talk only to Robin Taylor, Head of Banking at Co-operative Bank, some only to me, some to both of us.

Rather than repeat similar things each time, here are a couple, the interview I did with Louise and Jamie at BBC Wales, 09.10 on 29/2/12 

BBC Wales

And the joint one that Robin and I did with Sunrise Yorkshire with Gail.  It was pre-recorded at about 12.00 on 29/2/12, but I’m not sure of the exact time of broadcast.

Sunrise Radio Yorkshire 

I don’t usually focus on other people’s work, but I thought this was impressive.

It’s by Rob Diener (who is somebody for whom I have great admiration) one of the world’s leading experts on positive psychology.

He’s essentially saying that trying to teach too much to children is counter productive, something that I completely agree with.  In fact, I’ve said pretty much the same in some of my posts.

Here’s what Robert said.

Here’s where and when I’m on, and the region it’s aired in.

Station Name             Area Covered                Date                              

Radio 5 Live                   Nationwide                   28/02/12   

Morning Reports     

 21:20:00 – 21:30:00  

Prerecorded

Airs across:

• BBC      Radio Kent
• BBC      Radio Bristol
• BBC      Radio Gloucestershire
• BBC      Radio Lancashire
• BBC      Radio Wiltshire
• BBC      Radio Somerset
• BBC      Radio Tees

BBC Radio Cumbria              Cumbria                       29/02/12    

 07:00:00 – 07:15:00   Live

LBC News 1152 AM              Greater London            29/02/12    

07:45:00 – 08:00:00   Live

BBC Scotland                       Scotland                         29/02/12    

08:30:00 – 08:45:00   Live

BBC Radio Wales                 Wales                             29/02/12    

09:00:00 – 09:20:00   Live

Audio Feature & Business     Podcast Recording       29/02/12    

10:30:00 – 10:45:00   Prerecorded

BBC Radio Norfolk               Norfolk                           29/02/12    

12:00:00 – 12:15:00   Prerecorded

Sunrise Yorkshire                 Bradford                         29/02/12    

12:15:00 – 12:30:00   Prerecorded

BBC Midlands Hub                Midlands                            02/03/12    

19:25:00 – 19:25:00   Live

Airs across:

• BBC Stoke                                                                                  
• BBC Shropshire
• BBC Derby
• BBC Nottingham
• BBC Leicester
• BBC Hereford and Worcester
• BBC Coventry and Warwickshire

II did a piece about people in debt a while ago.

One of the things that caused the physical problems I mentioned is that people have chronic debt.

That’s, chronic, not in the sense of bad, but of ongoing, of constantly having too much month at the end of the money.

Which brings me to a BBC programme about pawnbroking.

The use of pawnbrokers is on the rise, apparently, even among people who can afford to pawn items such as a watch valued at over £30,000.

I’m not sure that makes a lot of sense in the real world.

It is cheaper, we’re told, than alternatives.  The figures given were that for a month’s loan of £100, the redemption charges would be:

Pawnbroker £108

Pay day loan £142

Unauthorised bank overdraft £200

By my calculations, that means that the relative APR’s are:

Pawnbroker 151.82%

Pay day loan 6,621.41%

Unauthorised bank overdraft 409,500%

Now there’s no doubt that the pawnbroker is cheapest.

But is more than 151% APR a good rate?  It makes credit cards at 25% or so look cheap (and they certainly aren’t). 

What is wrong with an authorised overdraft, or even a credit card?

Presumably in those situations, the person involved can’t get credit.  But if we’re talking about people who can pawn things of high value, why are they borrowing at 151% or more on a short term basis?  Either their long term financial situation is dire, and a short term loan at extortionate rates will push them further behind, or they genuinely only need a short term top up until things turn out fine again, in which case how did they so mishandle their finances that they have no cash to buy food but have a £30,000 watch?

I think the answer is that people adapt very fast on the way up, slowly on the way down.  Like Gerald the “company Director” (played by Tom Wilkinson) in the film, The Full Monte, plenty of people feel they can’t allow the facade to slip.

When we face reverses, loss of job, portfolio wrecked, cash crisis, credit card bills, children who want more material goods, human beings try to pretend it hasn’t happened.

We continue to live on credit, even when we know that we’re paying a very high price for not being realistic.

We could say, “things have turned against me, I need to face reality, to stop playing the market, replacing the car every year, having the glamorous holidays, paying the green fees for the exclusive course”.

In other words, to be realistic and to accept that happiness in life doesn’t depend on material goods our grandparents never thought of.

But do we do that?

Is it really a good idea to encourage banks to lend at “competitive” rates, and to authorise ever higher overdraft limits for people who, on the evidence, are a poor risk for repayment, and who thus should be charged a high rate for high risk, in accordance with the tenets of prudent banking practice?  Didn’t bundling of junk loans and triple A securities contribute to the crash? 

So why do we, as a nation, want to do it again?

And why would you do it to yourself?

A twenty minute conversation became (as these things do) a single line in the Financial Mail on Sunday, to the effect that I thought people would use the money to prop up their lifestyle.

There was also a quote from another “expert” who said everybody would save it, or use it to pay off existing debt.

A simple – people will spend it – doesn’t really reflect what I said and I’m sure that the comment that people would all save their money doesn’t encompass the other argument either.

But then typically, journalism is about headlines, and it wants simple answers.  The desire is for black and white absolutes, people are all the same, all act together, will all spend or all save.

So what’s going on, and where will the money go?

Firstly, this  money is in respect of payment protection cover, which is not really a mainstream need.  Like pet insurance, critical illness cover, boiler and heating cover etc. it’s  something that (if I was still a financial advisor), I’d usually suggest you not take. 

As a coach and psychologist, I tend to ask what you want to get from an insurance (or an investment such as a pension plan, come to that).  If you want value for money, you probably won’t get it from something like PPI. 

The chance of actually claiming on the PPI, boiler cover, pet insurance is quite small.  If you multiply the amount of premium you pay by the amount you’ll get if you claim and do the calculation for the duration of the policy you’ll get less than you pay in premiums.  

That’s true of most insurance (if the odds were in your favour, the company would have to put the premiums up, or they’d go broke).  I’ve explained that in more detail in the book,

 The point is that a car, a house, your life etc. are usually more money than you can afford, so you can’t “self-insure”.  With PPI, pet insurance etc. you’re unlikely to go bankrupt from paying a claim out of savings, and if you invest the money that would have been the premium you end up with more money at the end of the day, even if you have to dig into that saving at some point to pay a claim yourself.

If people actually think what they want, most of them will not want PPI – the exceptions will be if the claim would be an absolute disaster, and they don’t mind paying over the odds for peace of mind.

The same thing applies to critical illness and many insurances that are heavily marketed.  If most people needed them, they wouldn’t need to be marketed so heavily.

So a lot of the people who are going to get compensation are people who took out cover they didn’t need.  Theoretically, all of them were over-sold it (or they wouldn’t get a refund) but I imagine that quite a lot actually did want it because they thought they needed it, so in fact the sales people are getting a bit of a beating on those cases – how sad!

The reason people got the cover was, often, that they didn’t understand it, they thought they had to have it, they wanted to do what most people did, they wanted to look financially responsible etc.

Very few of them, however will have made a calculation about whether they really needed it, or they wouldn’t have taken it out, or would have voiced objections at the time.

It therefore seems likely that they are not going to be very “calculation” minded, or prepared to make a lot of individualised decisions about their money.  They’ll probably follow what most people do.

One school of thought (the “savings” school) is that people getting this refund will have learned a lesson.  So they will mostly save the money.

The argument is that, having been conned once, they will be careful, save their money, pay off existing debts etc.  That assumes people learn collectively, not individually.

The idea to which I subscribe is that very few people indeed really behave logically with money.  Human beings don’t really think logically at all – logic not being a survival characteristic throughout most of human history, when we were evolving our advanced brains.  And we learn from our own experience, not collective experience.

Most people, given some money will think of it like money won gambling, found in the street or (very commonly) on credit card.  It will be seen as a form of monopoly money.

Add that to the fact that people have been tightening their belts already, and that these particular people don’t really like doing careful calculations of need.

Bear in mind that status is pretty important to most people and if you can’t afford a new car or holiday and your friends, relatives and neighbours can (or can stick it on credit so that they appear to be better off than you), you have a recipe for a show of conspicuous consumption.

I’m not saying that everybody, including you, if it applies to you, will spend the money.  That’s the problem with the papers, they assume it is always one thing or the other.

Each person is an individual, so there will be a mix of behaviour. But I think the majority will carry on trying to live the life they lead before.

I could be wrong – and if this does include you, spending it and not reducing debt will almost certainly be a big mistake.

But if you think that debt will decrease, savings increase and retail sales spiral downwards, as people act “sensibly”, I think you’ll be wrong. 

It seems more likely to me that, while some “behave responsibly”, the money will run through the majority of hands and never be used to reduce borrowing.

It will be interesting to see whether, however many millions are paid in compensation, personal debt drops by a commensurate amount.

 I don’t think it will, but I hope it does for you.

I’m on Talk Radio Europe on 12.40pm (UK time), talking about the book, Taming the Pound .

Then at 6.30 I’m doing a talk to the London Branch of the Chartered Institute of Personnel and Development, about financial decision making.  It’s more geared to corporate finance, particularly personnel decisions, than to personal finance – but the principles are still the same.  People in companies don’t really work out what they are trying to do, make decisions very fast mainly based on subconscious thinking and emotion, and then try to justify them with “logic”.  It’s just that they usually have a better armoury of spurious maths and post hoc rationalising than people can manage for their own money decisions!

I’m doing a talk on a similar subject to the Reading branch of the Chartered Insurance Institute next week, on the 26th January at 12.30.  The subject is the same, but the content is different.

That’s because the CIPD audience will be mainly people who run personnel and HR budgets, they are trying to get the financial people (the accountant, Chief Finance Officer etc.) to fund intangible things letter better appraisal schemes, management training etc.  The CII audience will be people who can usually use maths and logic to work out rates of premium for things like car insurance.

The need to make financial decisions is the same and the fact that they often make decisions that are not the best they could have made is the same, but the way they usually go about making the decisions are quite different. 

Another thing that is the same is that they all tend to think they alone are logical, and other people can’t think straight, which is the way that everybody thinks.  So, because their typical idea of what is “logical” is quite different, each audience needs a different approach to help them to think through how they make decisions, and to allow them to make better decisions that will save their organisations money.