Neither a lender nor a Cypriot be

There are two trite and prissy sayings from Eng Lit often used to kick off money advice discussions. One is Micawber's banality about annual income, expenditure, misery and happiness in David Copperfield. Oddly, people quote it as if it were a rare but eternal truth from a sagacious guru. In truth, Dickens is making fun of the self-important and feckless sponger.

The other saying is from an equally paternalistic windbag, this time in Hamlet. Amid a long string of irrelevant advice Polonius tells his departing son Laertes, "Neither a lender nor a borrower be".

Financial educators might be tempted to offer the same advice to young people. As Polonius explains, "loan oft loses both itself and friend".

There's a major problem with that advice. A young person who decides not to lend money cannot, strictly speaking, open a bank account. People don't talk freely about it in these terms. But the unfolding banking crisis in Cyprus illustrates the legal situation perfectly. When you deposit money in a bank it ceases to be "your money". It is the bank's money. You've lent it to them. You are a simply a creditor.

Banks, like other businesses, can go broke. If it happens when you are a creditor you may get back some of your loan to the bank - the stuff you used to think of as your money. But you'll be in a queue with a lot of others, and probably won't get it all. That's what the savers in banks in Cyprus are discovering.

In the UK, the situation is a lot less bleak than this sounds. Banks are, for obvious reasons, pretty secure businesses. If they go bust, the fall-out is serious, so there is a lot of effort to reduce the chance of it happening. Even if one does go broke, there is a Financial Services Compensation Scheme. In the last resort this will pay out what you are owed, up to a limit of £85,000. It can take time and is a pain, but it does work. Savers were reimbursed after some Icelandic banks and the subprime lender London Scottish failed a few years ago.

Savers with the Christmas club run by Farepak were not compensated when the company collapsed in 2006. Why not? Because the savings scheme wasn't registered with the FSCS.

The key lesson from Cyprus for young people is to ignore the old goat Polonius and by all means become a lender. Open a bank account. Apart from anything else, you'll find it very difficult to get wages from an employer or a benefit payment without one. Just make sure you check and lend only to financial institutions covered by the Financial Services Compensation Scheme. Most high street banks are, of course. Likewise credit unions. The scheme applies to insurance policies too.

PJ White is editor of Youth Money