Financial literacy is a hot topic, given the European crises and the tepid-to-torrid state of economies around the world. Could these problems be avoided if the average person had a better understanding of his or her part in what causes financial meltdowns – whether of a global, national or individual sort? Most of the recent – and not so recent – financial woes are the result of property or share speculation fuelled by excessive debt. Blame greed – and not just on the part of the “shiny suits” who convince supposedly innocent people to invest their money. It is also greed, although of a more modest kind, that makes ordinary investors seek an extra few per cent interest from finance companies rather than sticking with lower but more secure bank deposits.
The people who take on too much debt (aided by banks that are also guilty of greed) to buy a fancier house, or to upgrade their existing one, or to spend on cars and holidays, also play a part. The trouble starts for them when either the value of their assets falls or they can’t meet their commitments. If enough people are in the same position, the economy slows, the job market sinks and banks start to worry about their balance sheets. The problems New Zealanders have been facing for the past few years have some similarities to those confronting Europeans. Lured by the promise of a life in the sun in Spain or Greece, many invested in dodgy property developments. Banks got in on the act, ignoring rules about exposing too much of their money to one overheated sector. The same thing happened here in the 1980s when the BNZ and other financial and investment entities became overexposed to property on the back of inflated valuations. Over-indebted companies collapsed as confidence evaporated.
If we keep making the same mistakes, maybe it is because a lot of naive or ignorant (or greedy) people don’t think through the consequences of their financial decisions, or don’t know what questions to ask. Some families use pocket money to teach kids the basics of financial literacy. Children are left to manage their allowance, letting them learn they can’t have everything their friends have and encouraging them to work and save for the things they want. But not all families do this, maybe because the parents were never taught. Although not a core subject, some primary schools run financial literacy programmes, with a focus on basic budgeting. Secondary schools struggle to fit this subject into an already crowded curriculum.
Massey University has set up a centre for personal financial education run by Pushpa Wood, previously education manager at the Retirement Commission. Wood is a member of the Qualifications Authority’s project advisory group reviewing financial literacy. One of her first jobs is to study on why so many New Zealanders struggle with personal finances. She is also designing a teaching certificate for educators. Wood thinks financial literacy is as important as reading or maths, and comes from a standpoint that would be music to our parents’ ears – a world in which people paid for what they bought from savings, rather than with a credit card or a bigger mortgage.
In the absence of financial literacy as a core subject, the solution seems to be integrating it in an applied way into what kids are already being taught. When studying maths, for instance, they could learn about interest rates and how mortgages work. During history, they could be given an economics lesson by discussing the cause of the Great Depression (or the crashes of 1987 or 2008), with reference to recent financial trends. A basic grasp of money management provides an introduction to understanding investment, the trade-offs between risk and returns and taking charge of our financial future.