Why personal finance in schools will fail

Here are three vital money lessons that no personal finance course at school will ever teach you.

To truly understand a subject, you often need to understand other ones too -- and in direct context. That's sometimes obvious: when studying physics, you're also using maths. Yet, much of the time, each subject largely ignores the others.

When children start learning more about personal finance in school, as seems likely (with a parliamentary debate on the subject taking place just last week), it's going to be the same. You'll be told what APR is, about compounding and the benefits of saving.

But lovemoney.com and other publications write about these strategies and concepts all day long. Plenty of people read them, yet they still don't save. They still don't think about compounding. They continue to overspend. They buy insurances they shouldn't and don't buy ones they should. They don't plan their retirement, they don't write wills.

This isn't because it's hard. The industry might want you to believe otherwise, but you only need a couple of GCSEs and a bit of research to understand 90% of what you need to know about money. It's just that lots of us don't use this knowledge once we've got it. Indeed, I know that some of my colleagues in the business, who write fantastic personal finance articles, frequently fail to follow their own immaculate guidance.

The reason for this failure is that we don't consider other disciplines enough, such as history and psychology. Psychology in particular is inseparable from personal finance and accountable for many intelligent people's money problems today.

However, any extensive personal finance syllabus we introduce to schools is going to have these gaping holes. Psychology and history will be seen as tangential, and someone else's territory, rather than what it really is: key to sound money management.

I'll give you three examples of what won't be on the syllabus:

Financial incentives

Many dentists started doing fewer bridges and root canals, but more fillings, when their pay structure was changed in the mid-noughties. Hospitals in Germany started doing more caesarean sections when their pay structure was changed. Some financial advisers are planning to change the products they sell to their customers when their pay structure is changed in 2013.

The need for caesareans in Germany can't have permanently flipped overnight, right at the time hospitals started getting paid more for those procedures and less for natural births.

Problems with incentives are omnipresent: in brokers, insurers, mechanics, accountants and every single trade you ever need to call upon. And in you, too. Perhaps if you're employed in a safe job and get a minimal bonus for performance, you're more likely to take longer tea breaks, for example.

We may even see it directly acting on the syllabus. The finance industry could be deeply involved in these courses, but they have strong financial incentives to sell as many of their highest-charging products as possible, and to hide their history of mis-selling, dodgy sales tricks and thousands of small-print booby traps – which are all caused by financial incentives.

Always think about what incentives someone may have when they're encouraging you to sign a financial – or indeed any – contract.

How do you feel?

Those of you who borrow to finance holidays, nights out and other luxuries are ignorant. You don't understand an important fact about money and that's why you'll find it hard to be wealthy and prosperous.

How do you feel about my last paragraph? I apologise, and admit I put it in that way to generate a reaction for a reason, which I'll explain.

No-one likes to be told they're wrong. We dismiss criticism immediately without considering it. On the other hand, we grab anything that supports our views. If a friend borrows every year for luxuries and encourages you to “live a little”, you'll hold onto the fact it's “normal”, which is all the justification you need.

The result of borrowing for luxuries is that 1) after just a few short years, you'll have fewer luxuries than if you'd never borrowed at all, and 2) even when the debt is gone, you'll now afford fewer luxuries for the rest of your life.

You can read more on that in How to spend less and have more, but getting back to my main point: you didn't like being told you were wrong and, at first, you didn't want to read why. You were angry and dismissive.

Ask yourself how you feel. Train yourself to listen to opposing arguments and challenge your beliefs and desires. If you succeed in proving yourself wrong, be proud of yourself for beating a costly psychological weakness that we all have.

Whale songs

Scientists are asking ordinary citizens to listen to whale sounds and watch the soundwave charts to find matches and build a whale dictionary. The scientists tried computers but, apparently, humans are better at spotting patterns.

We're brilliant at it but, unfortunately, we assume that patterns we've seen before will happen again. There will be thousands of examples in the past 100 years alone that demonstrate how terribly we predict our future employment, interest rates, economic growth, costly emergencies, and more. Yet we keep trying.

I strongly expect that any personal finance GCSE would fall short in getting this message across. Despite the wealth of historical examples, school leavers will continue to be convinced they can see order in the chaos. It's just the way we are.

All of the weaknesses mentioned in this article are summed up in one example in Why house price forecasts are dangerous, yet there are many ideas from a variety of disciplines that are important for a secure, comfortable future. Those won't be on the syllabus either.

I do well with my money not because I have any special, secret knowledge beyond what anyone who understands this article can learn, but because I take steps to counter our psychological weaknesses and to learn from history. I certainly don't always succeed but, the more I do, the richer I get. The benefits which overlap all other aspects of your life, such as your improved self confidence, come for free.

More: compare savings accounts on lovemoney.com | Quality, free advice on your pension | New credit card to watch out for