As far as financial literacy goes, I am a dummy.
I have no knowledge when it comes to managing money and making proper investments, I have not developed the skills needed to invest and make my money work for me – and even if I did, I am, to quote Kees, “wotless,” so I may not be doing the right thing anyway.
And I am not alone in this regard.
At the National Financial Literacy Programme (NFLP) executive meeting last Thursday at the Central Bank conference room, Port of Spain, among the many statistics shared by Financial Services Ombudsman Dominic Stoddard, about 44 per cent of the nation’s adults cannot manage their money because they have a low capacity to utilise skills and knowledge to support financial well-being.
This has serious implications on the nation as a whole because the better each citizen’s financial choices are, the more money they would have to invest in the nation, thereby boosting the national economy. In contrast, if citizens constantly make bad decisions financially it would eventually result in the entire nation’s financial ruin. On that basis alone it could be concluded that having a plan to educate the nation on financial literacy is critical.
It might seem ironic that a financial dummy like me would be writing about the importance of financial literacy and how it affects each household and the nation as a whole – that would be like getting advice on being a graceful ballerina from a drunk seal.
Instead, take the word of Dan Iannicola, CEO of the Financial Literacy Group and former deputy assistant secretary for financial education at the US Department of the Treasury.
Iannicola was one of the speakers at the NFLP meeting, and broke down the specifics of developing a financial literacy plan.
Using the 2008 financial crisis, which started in the US and got so bad that it caused a chain reaction across the world, he explained that some of the worst and most recent financial crises sparked from nationwide effects of spending by individuals who were not financially literate.
Prior to 2007, Iannicola explained, when American banks began filing for bankruptcy, 20 per cent of Americans were buying homes at rates that were one price when they were qualified, but different when the actual bill came.
“At that time, everyone got qualified so basically if you had a pulse you had a loan. Twenty per cent of the people would go for mortgages, and most of the time they were adjustable rate mortgages. So, they would walk away with the loan and when they get their first requirement to pay, it’s different and usually it is higher. And of course, because it is an adjustable rate product the difference could be drastic.”
But that wasn’t the only bad financial decision made at the that time, Iannicola said. About 24 per cent did not shop around for a mortgage, and half of Americans did not have enough emergency money to cover expenses for three months, while only 40 per cent used monthly budgets.
Another startling statistic was that almost half (46 per cent) of Americans failed to pay their credit card balances in full, and 29 per cent paid the minimum. Along with this, Iannicola pointed out, at the time, 78 per cent of Americans felt they were good with credit cards.
“So even while Americans were having so much credit issues at the time, (a lot of people) were saying, ‘I’m not doing well but I think I am. I got this.’ No, you don’t. (Prior to the crisis) the stock market was going up and everyone felt like a financial genius and everything was basically on autopilot ... when the music stopped, everything went bad for those folks.”
If this sounds familiar it’s because, according to Iannicola, the same symptoms could be seen in all countries operating without a national financial literacy plan.
In contrast, countries with an actionable financial literacy plan had positive impacts on the individual and the nationwide bottom line.
Iannicola gave examples of countries like Japan and Mongolia, which made the connection with individual education in financial literacy and the impact it had on a macroeconomic level. In Mongolia, it was discovered that people who were taught financial literacy made higher incomes, and were more likely to use financial products, including forms of savings and insurance policies which would increase their credit.
Even in America, the effects of creating financially literate individuals could have been seen.
Iannicola said students from high schools in three states that had financial literacy programmes as a requirement in their curriculum were compared with three neighbouring states that didn’t and it was discovered that years after financial education was instilled in them, they did better in terms of accruing and managing their credit.
Iannicola said when making a national financial literacy plan one should look at five points:
1. People involved should have a healthy bias toward action.
When making a national financial literacy plan a community of focused groups and individuals is key. “It is not to create a document, it is to create change,” Iannicola explained.
To this point he added that community is also important and a contractual approach, where interested stakeholders decide what role they want to take, is best. The committee should also take into consideration that opinions may differ and should build their strategy around a consensus of what is needed and what each stakeholder is willing to do.
2. Goals should be actionable and practical.
The goals for the financial literacy plan should be clear, and there should be no lofty plans. Having a practical set of goals may not be as impressive or newsworthy, but it is ultimately more impressive to accomplish a modest list of goals than to not accomplish an impressive list. When you complete these goals your next set of goals will be further developed.
3. Inclusiveness is key.
It is important that all stakeholders get involved in developing the policies and goals in the financial literacy plan. This may vary in difficulty, depending on the budget given to the stakeholders and how they plan to use it. Not all groups would be focused on at once but it is important that all groups are treated with and equal focus is given over time.
4. Goals should be quantifiable.
When making a financial literacy plan, the goals put in the plan should be able to be audited. Additionally, people should be informed about the progress of each goal in the plan, even if it means that you are not doing well in that aspect. “People appreciate your candour and that gives you the opportunity to adjust.”
5. Goals should be relative.
Policymakers in the national financial literacy plan should focus on the most important things. While some groups may be neglected in one year for the more important group to be focused on, they can always be included another year. Also, it was also advised that policymakers should presume the indifference of citizens.
“A lot of people who get excited on financial literacy realise that people need this and they are right, but that doesn’t mean that people want it.”
Policymakers should remember the value of the effects of peer encouragement and repetition of messages. “You may have heard it ten times before but on the 11th time you act. So, it wasn’t ten times wasted because it was the eleventh time you got them.”
Iannicola pointed out the necessity for developing a financial plan, or budget in the home, and noted that there could also be room in the national financial literacy plan to call for tools that would make that easier.
Online calculators, for example, which would project the numbers needed for retirement or getting a home, usually help people with good estimates and could contribute to a monthly plan.
“Once you know those numbers (for retirement, etcetera) you can’t un-know them. And knowing that number, you will start to think twice when you spend.”
In the same way it is necessary for all stakeholders in a national financial literacy plan to be on the same page, it is also important that all members of the household come to a consensus with their budgets and how it should be spent. As far as implementing what one would have learned in a financial literacy session, it could only go so far if other family members are not on board.
“And money is not just money,” Iannicola added. “It represent goals, dreams, power. And we learn how to manage it from what we saw our parents doing.”
Iannicola said one strategy used when counselling someone on spending money, is to talk to them about their home life and find out who is influencing their spending.
One’s peers also influence how one spends money, just the same way peers influence people when managing their health.
“In health, if your friends eat poorly and do not exercise then you will too. It is the same with money. This is not to say stop hanging out with them but just understand that when you go out and run a bar tab you are making an expenditure decision.”