This is not an article about financial literacy that ends with a couple of bright-eyed 27-year-olds outside their newly-bought house. You know the kind. The couple is smiling. They both have very good teeth – better than yours. The pullquote reads, “When you were buying two coffees a day, we were putting away a third of our income!” This is a Financial Success Story, the happily-ever-after following years of self-restraint and forward-planning.
At the other end of the spectrum is the Horror Story, about people whose investments have gone horribly wrong, or who have defaulted on payments. In these, interest rates and penalty payments have “soared” and “skyrocketed”, as credit ratings have “plummeted” and lives have suffered.
“Anecdotes are helpful,” says economist Shamubeel Eaqub, of the New Zealand Institute of Economic Research, “but they’re not truths. We get potted histories as to why we should do one thing or another. That’s not an exposition of how things got that way and the trade-offs that were made.”
The truth is, most of us fall somewhere between a shining example and a red flag: with a working knowledge of how money works, and a healthy capacity for denial, we do what we can with what we have. Yes, we have $20 in the bank, and it’s three days before payday. Yes, we’re signed up to KiwiSaver, but we went with the first provider we were offered, and we’ve been meaning to look up how it affects our plans to move overseas. Yes, we did use our course-related costs to go skiing a couple of times. Quit it with the Spanish Inquisition already.
But because personal finance is often discussed in narratives of rainy-day saving and spiralling debt, it’s easy to feel that it doesn’t really apply to most of us. The result is we hear phrases like “buy now, pay later” more often than we do explanations of what they really mean.
General levels of financial literacy – the ability to make informed judgements and effective decisions about money – are low, says Miriam Bookman, 22. The University of Auckland student is the CEO of SavY, a charitable trust founded in 2008 that promotes good financial habits through workshops for secondary and tertiary students. Its facilitators, tertiary students themselves, use interactive materials to explain basic economic concepts – and sometimes the lack of pre-existing knowledge is striking.
“I’ve been to workshops where the kids are asked what interest is, or what a credit card is, and none of them know,” says Bookman. “It’s scary to think there’s nothing compulsory about financial literacy at all.”
Eaqub sees the role of financial education as “making sure people can ask the right questions, and are able to judge for themselves whether they believe the answers.” The measure by which he assesses its success is the question, “Are we teaching kids or others the right way, to give them the opportunities they need to make decisions later in life?”
But financial education is a bit like civics education, in that people agree that it’s important, it’s necessary, and it’s lacking, but no one wants to take responsibility for delivering it. (Though Social Development Minister Paula Bennett’s recent allocation of $22 million over four years to non-government organisations delivering community budgeting services is a step in the right direction.)
Diane Maxwell, the head of the Commission for Financial Literacy and Retirement Income, told the Sunday Star-Times last month that “embedding [financial literacy] in the school curriculum makes absolute sense.” But the same article went on to cite “teachers who feel incompetent to teach the subject as a result of their own lack of knowledge or inability to manage their finances” as the biggest barrier to the subject being taught in schools.
“The education sector is bombarded with interest groups pushing inclusion of their subject—it’s called ‘curriculum squeeze’—but I think financial education can be integrated into the current education system without changing anything,” says SavY’s Bookman.
She reckons it fits best under social science. “Teaching it just under maths or accounting makes it somehow less exciting. And financial literacy isn’t just about maths or accounting – it’s such an everyday concept. But it’s dependent on a teacher who’s willing to do it.”
Like the words “Uncle Scar” or “we need to talk”, the word “debt” has negative connotations
One of the difficulties of teaching financial literacy is that it doesn’t neatly apply to real-world situations. Those carefully counting cents to get by week-to-week face drastically different and more limited ways of exercising their financial literacy than those looking to turn a surplus of income into something larger, and young people are more likely to fall into the former category. Whether it’s a result of Rogernomics or simply the stage of life we’re at, engaging with our own levels of financial literacy, and aspiring to significant investments, isn’t that much of a priority.
One reason is that debt is moralised. Like the words “Uncle Scar” or “we need to talk”, the word “debt” has negative connotations, but the distinction between debts that are reasonable to incur and those that should be flat-out avoided is a basic component of financial literacy. Plus, it’s hard not to resent people who put away a third of their income for a rainy day.
Worse than moralised, money talk is often really boring. “We ban the phrase ‘financial literacy’ in workshops,” says Bookman. “You have to teach these concepts in a language relevant to the audience – it’s the same reason all our facilitators are young. If you don’t make it relevant, the kids just switch off.” (Congratulations on having read this far.)
When it comes to making decisions about money, Eaqub says it’s easy – if not human nature – to rely on gut instinct, past experience, or the advice of family or friends. “Humans are hard-wired to take these kinds of shortcuts in making decisions. But the world doesn’t always work in ways that are intuitive.”
He points to home ownership versus renting as an example of an emotive issue, as well as a financial one. “When I suggest it might be financially better for people to rent, they get angry, like ‘How dare you take the dream of home ownership away from me!’ When I ask them if they have done the sums, they never have.”
Eaqub believes behavioural economics is a helpful lens through which to frame our thinking on financial literacy. As opposed to classical economic theory – which assumes that individuals act rationally, weighing up the costs and benefits to arrive at an action that maximises their personal advantage – behavioural economics explore the boundaries of rationality, looking at the effects of social, cognitive and emotional factors on economic decision-making.
“If people have a better understanding of how they make decisions, they have a tool that can stop them from making mistakes where they would have had they relied on their instinct or their current assumptions,” he says. “If we question what we base our knowledge on, or ask whether history can tell us anything, we ask more informed questions and – chances are – make better decisions.”
Being financially literate relates to decisions around the use and management of money, but decisions made by government and business (or government at the behest of business) affect what you can do with your money. Some understanding of the wider pressures of the economy – interest rates, trends in house prices, unemployment – are necessary for general financial literacy.
This doesn’t mean that the NBR needs to become morning reading. You don’t have to know everything. You just have to be willing to learn.
“At its broadest, financial literacy is about making sure you’re doing everything in your power to make your dreams come true,” says Eaqub. “People don’t all need to be experts, but you need to equip them with enough to be cautious, so they know what’s being presented to them, and don’t just let the currents of life take them wherever they might go.”
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