Financial Literacy In NZ
by Louise O'Brien
Staples Rodway
Auckland
Teaching financial know-how is more about mind over matter rather than
a textbook approach.
Teaching young New Zealanders financial literacy seems to require the
same approach as teaching kids about nutrition. The fundamental
principle is to recognise the difference between wants and needs and
not scoff everything in front of you. The greatest demon in both cases
is that familiar human trait greed.
All the lessons in the world about budgeting and the benefits of
compound interest will be a waste of time if you can't master the
basic behaviour of delayed gratification. going without something
today in order to have a better tomorrow how hard can that be?
Very hard in fact. There's no doubt that children struggle with this
and so do adults. Some are just better at it than others.
The famous Stanford marshmallow experiment, a 1972 study on deferred
gratification by psychologist Walter Mischel, is a great example. one
by one, four-year-old children were led into a room where their treat
of choice (oreo, marshmallow or pretzel stick) was placed on a table
by a chair. The children were told that they could eat the
marshmallow, but if they waited 15 minutes, without giving in to
temptation, they would be rewarded with a second marshmallow.
Over 600 children took part in the experiment with a minority eating
the marshmallow immediately. of those who attempted to delay, only one
third deferred gratification long enough to get the second marshmallow.
However, it was the results of the follow-up study that took place
many years later that surprised Mischel. Mischel discovered there
existed an unexpected correlation between the results of the
marshmallow test and the success of the children many years later.
The first follow-up study, in 1988, showed that "preschool children
who delayed gratification longer in the self-imposed delay paradigm
were described more than 10 years later by their parents as
adolescents who were "significantly more competent". A second
follow-up study, in 1990, showed that the ability to delay gratif-
ication also correlated with higher scores in academic achievement.
What I'd like to know is whether the kids who waited for the second
marshmallow ended up as adults with a higher net worth than the
other participants. Did the inherent ability to delay gratification
make these kids better savers as adults? I'd also like to know, if you
carried out a similar test on 600 four-year-olds today (40 years
after the original study), would you have a different percentage of
them willing or able to wait?
In addition to willpower, a person's environment must surely play a
part. The issue for our kids today is one of abundant supply. There
is just so much stuff out there.
Advertisers with access to decades of observations and lessons
about consumer behaviour have wrapped up their "buy" messages
in a captivating mix of music, colour and special effects. Just like
the poor kid stuck in an empty room in front of the marshmallow,
it is nigh on impossible for children today to avoid temptation.
During the experiment in the 1970s, Mischel observed that some kids
would "cover their eyes with their hands or turn around so that they
couldn't see the tray. Others would start kicking the desk, or tug on
their pigtails. Some would stroke the marshmallow as if it were a tiny
stuffed animal".
If your child owns a cell phone or an iPod or iPad, you can be sure
they are receiving messages constantly about one-day deals that are
not to be missed. Their willpower is being sorely tested every day.
If the spending versus saving decision is just a matter of willpower,
however, why is our government so keen on raising the level of
financial literacy in New Zealand and will it make any difference
to improving our financial well being?
The NZ Network for Financial literacy defines "financial literacy" as:
"The ability to make informed judgements and take effective decisions
regarding the use and management of money throughout life." Let's
think about that for a bit . . .
Those people who lost money in failed finance companies must have
managed to save it in the first place which means that willpower and
the ability to go without was not the issue here. To be in a position
to invest in anything, those individuals are likely to have progressed
beyond the first layer of the diagram above, which "reflects the range
of information and different levels of skill and knowledge that
everyone needs to live in a modern economy".
Is it logical to think that if we were financially smarter, we wouldn't
have lost so much money through bad investments in failed financial
companies? and, by the way, if you are in any doubt as to just how
much money was lost and how many people were affected, read this
statement from a recent publication for the Financial Markets Authority:
Since March 2006, 65 New Zealand finance companies have failed,
closed, been placed in liquidation; receivership; moratorium or have
been suspended. An estimated $3.1 billion has already been lost and
around $8.6 billion is still at risk. Approximately 205,000 people have
been directly affected as a result."
- Inquiries Investigations & Enforcement Report 2012, FMA
Some of you will have either been directly affected, or know family
members, friends or acquaintances, who have lost money. At a total of
$11.7 billion of money either lost or locked up, that's an average of
$57,000 each for those 205,000 people affected. That's a lot of future
spending on holidays, replacement cars, furniture, treats, that just
isn't going to happen.
I think we're talking about two quite distinct issues here. The first
is about teaching kids how to say no today in order to save for
tomorrow. The second is to give New Zealanders the financial know-how
to be able to make good decisions about what to do with their savings.
So, given that we are on a mission to improve New Zealanders' level of
financial literacy, how do we rate now? Well, not too bad it seems.
The benchmark/gauge of financial literacy in New Zealand is the ANZ
Retirement Vommission Survey. This survey was first carried out in
2006 and again more recently in 2009. It was conducted by Colmar
Brunton and involved one-hour interviews with more than 850 people,
who were asked 42 questions testing their financial knowledge, and 51
questions on attitudes and behaviours.
Diana Crossan, in her role as Retirement Commissioner, is pleased with
the improvement observed since the original survey in 2006. It's great
news that overall 43 per cent of New Zealanders are now scoring highly
on financial knowledge, and that women and low income households are
among the groups with the biggest improvements."
Crossan also commented that "the survey shows that there has been
little improvement in the past three years in the number of New
Zealanders with the lowest level of financial knowledge. It's going to
take a concerted effort to lift the knowledge of this group. Perhaps
this survey demonstrates that a basic level of numeracy and literacy
is required, on which to build strong financial knowledge".
Enter the role of our education system. Teaching kids while they are
still at school is one area our government is concentrating on, and
they are not alone. with $10 million allocated for 2011/2014 for
'helping our kids understand finances', Australia is one of the
leaders in taking financial literacy education into its schools. The
old 'three Rs' are being augmented with the 'three cs': credit card
debt, compound interest and cell phone plans.
One of the biggest challenges in introducing financial literacy to the
school curriculum is that many teachers don't feel confident teaching
it. A joint venture between Massey University and Westpac Bank has
led to the recent launch of the NZ centre for personal Financial
Education. This centre has designed a certificate programme for
personal Financial Educators in an effort to teach the teachers.
Visa has also come to the party and is funding a pilot programme of 15
tutors from Whitireia Polytechnic in porirua to attend an advanced
course that will develop the content and skills they need to deliver
financial education. The course aims to improve the financial planning
and management advice delivered to New Zealand students.
This pilot programme provides a unique opportunity to develop a best
practice programme that can be rolled out across other tertiary
education providers, ultimately having an impact on thousands of kiwi
students," says Ms Crossan. Only time will tell whether these
initiatives improve
a) our ability to save, and
b) the decisions we make about what to do with our savings.
KiwiSaver has gone a long way to improving our understanding by
introducing thousands of New Zealanders to the world of investing.
as with all things, the best way to learn is to do. Only then can you
witness firsthand the highs and lows of saving and investing.
As a Financial Advisor and mother of three young teenagers, I think
it would be remiss of me to end this article on financial literacy
without contributing my tuppence-worth of advice.
Here is my list of do's and don'ts when it comes to managing your money:
do
• join kiwiSaver
• save something (no matter how small) every time you get paid
• keep a rainy day fund for unexpected costs
• be aware of the property Relationship Act and what it means for couples
• diversify your investments
don't
• impulse buy. Walk away and think about it for a day at least
• "help out" friends or family by funding their bad choices
• borrow money to buy things that lose value over time
• expect anyone else to look after your financial security
• forget about risk when evaluating a return
Reproduced with permission
Comment