Why are so many people so bad at managing their finances?

Last week, my colleague Pauline Skypala rightly took the financial services industry to task for continuing to market products that disguise risk and charges, in spite of the ever-growing list of misselling scandals.

But consumers also bear responsibility for their own lack of financial understanding and planning. This generation of people retiring may well be the last to enjoy a generous pension from final salary schemes or plump profits from property investment. For the rest of us, refusal to plan for our retirement, or how to repay our mortgages, looks like a collective burying of heads in sand.

A survey this week by Interactive Investor found that, although we are unwilling to spend time sorting out our finances, that doesn't stop us worrying about them. Four out of five Britons surveyed said they lost sleep because of anxiety over money, while a survey by Clydesdale Bank found that, while Scots worry slightly less, one in five still lies awake at night worrying about the shaky state of their finances.

Our high levels of financial anxiety do not seem to translate into us putting much effort into dealing with the problem. Four of the five Britons who lie awake worrying about money spend only an hour or less a week tending their finances.

To find out why this might be so, I conducted an informal poll of friends and colleagues many of whom might be unkindly described as overpaid and overdrawn. “It's boring thinking about money” was a frequent response, but even more frequent was “it's frightening”.

Scary amounts of personal debt may be one reason for the fear (in July the Bank of England confirmed that borrowing by people had topped £1,000bn but another explanation is that most people, however well educated, lack the basic tools for dealing with their finances. Knowing what interest rate you are paying on your credit card debt or on your mortgage, budgeting realistically, or understanding what penalties will apply if you cash in your endowment are skills which seem to tax even the brains of high-flying City lawyers.

Even though we lack these tools, we are unwilling to seek help, partly because we don't trust the financial services industry to advise us. Instead, we need to call on our inner resources.

Much ink has been expended on how to make us better at thinking about money. In their book “Why Smart People Make Big Money Mistakes and How to Correct Them”* Gary Belsky and Thomas Gilovich identify some common conditions (“Americanesia Expressaphobia, noun Financial affliction, in which the sufferer forgets the amount charged on a credit card but is terribly afraid that it's way too much”), and suggest some simple ways of improving money management skills.

Imagining that all income is earned income, paying off credit card debt with emergency funds, investing in trackers rather than actively managed funds, and being aware that small numbers like brokerage or management fees can be significant, are just some of their nuggets of sensible advice.

“Finally, track your spending,” they conclude. “It sounds annoying, and it is. That's why we recommend that you try it for just one month.”

Tracking your spending can be as easy as tracking your calorie intake, says Rachel Cunningham-Day, who has recently published a book which suggests, probably uncontroversially, that men and women approach their finances in different ways.

“This book will encourage you to approach your finances as you would a diet,” she says in The Girls' Guide to Wealth**. “All diets start with an understanding of body condition followed by a period of adopting diet guidelines. This book contains exercises to enable you to understand your current financial condition and to monitor it.”

Eileen Gallo, a Los Angeles-based psychotherapist, says addressing the challenge early is the most effective. She says the money messages received during childhood are a better indicator of financial behaviour in adulthood than the child's actual behaviour with money while growing up.

“Most parents don't talk to their children about money,” she says. “Even in families that occasionally talk about money, parents usually don't explicitly teach their children how to manage money.”

Parents may baulk at the suggestion made by a financial planner recently consulted for the FT's Money Makeover series to hold “family wealth meetings”, in which discussions could cover “pollution, loss of natural resources like oil and gas, and the slowdown of economic growth”.

But improving the personal finance education children receive should be the priority for a government keen to urge the population to save more. The subject has recently scraped its way into the core curriculum, but it is still possible for pupils to go through their entire schooling without receiving any personal finance education at all, according to Wendy van den Hende, chief executive of Pfeg.

Pfeg, a government- and industry-funded charity, is trying to integrate personal finance teaching into subjects like French and Maths for example helping children to understand exchange and interest rates by producing case studies that teachers can use in class.

The attempt is in its very early stages, but is much to be applauded. It is hoped that it will end up producing a generation of adults whose response to compound interest calculations is not to wail and clutch their heads.

But those of us still happy to keep our heads in the sand can take comfort in the fact that we are not alone in a fantasy world. The Clydesdale Bank survey found that, of the 1,000 people questioned, over 60 per cent dreamed of a lottery win to pay for their retirement.

Dream on.

sarah.ross@ft.com

*Why Smart People make Big Money Mistakes and How to Correct Them, by Gary Belsky and Thomas Gilovich, Fireside, 1999

**The Girls' Guide to Wealth, by Rachel Cunningham-Day, Universal, 2004