Feb 11

The ten-year-old test

In order to provide children with better skills to manage money, it has been suggested that Banks should go into schools to teach basic financial life skills. This suggestion is not without its critics, using much the same arguments as why sugar companies should not provide educational materials about nutrition.

I set about explaining banking and finance to a ten year old, inspired by Lucy Kellaway’s column in the FT. As the column says, if you can’t explain or justify something to a ten year old then you probably shouldn’t be doing it. “Why do the bosses of big US companies earn almost 400 times more than the average worker?” It was, after all, a little boy who pointed out the problem with the emperor’s new clothes.

At the end of the day I couldn’t get better than this:

“We need banks to keep money safe and to lend it to people who need it.”

Put this definition to a class of ten year olds and you will get some incisive feedback.

“Why should we pay banks to look after our money?”
“Yeah, My dad says all bankers are crooks”
“Why do the people borrowing the money have to pay the banks extra if it isn’t their money?”

But the thoughtful child in the second row would come out with the most difficult question:
“What happens if the people borrowing the money don’t pay it back”
After a moment more thought they will then ask:
“If you are supposed to be keeping money safe, why are you lending it to other people who might not pay it back…?”
“And what happens if we need our money back and the other people haven’t finished using it.”

I think that they have understood the problem.

Permanent link to this article: http://transformingfinance.eu/the-ten-year-old-test/