tag:theconversation.com,2011:/fr/topics/what-is-financial-literacy-45200/articlesWhat is financial literacy – The Conversation2024-01-25T20:45:23Ztag:theconversation.com,2011:article/2181142024-01-25T20:45:23Z2024-01-25T20:45:23ZWhat do I need to know before investing in ETFs and what are the risks?<p>Exchange-traded funds (ETFs) are tradeable units that have different types of investments all bundled by a professional fund manager into a single investment. In the “bundle” you might have shares, bonds, property investment and other types of investments. </p>
<p>That means people who hold ETFs are investing in a diverse collection of assets across various sectors, markets, companies and regions. With a single ETF you can own a piece of multiple companies or bonds.</p>
<p>They are issued by financial services companies, such as Blackrock, Vanguard, and State Street, and managed by professional fund managers. You can buy and sell units in an ETF fund through a stockbroker; many people use an online broker such as CommSec, CMC Markets, eToro or others.</p>
<p>ETFs can be traded on the Australian Securities Exchange (ASX), or another exchange. The market price of an ETF, which is disclosed daily, will typically follow other benchmarks in the market such as the ASX200 or the S&P500.</p>
<p>ETFs have grown very <a href="https://www.investordaily.com.au/markets/54140-how-australia-s-etf-industry-grew-from-100k-to-over-150b">popular</a> over the last two decades, especially among <a href="https://www.asx.com.au/investors/learn-about-our-investment-solutions/etfs-and-other-etps/20-years-of-etfs-on-asx">younger investors</a>. But what are the potential <a href="https://www.asx.com.au/investors/learn-about-our-investment-solutions/etfs-and-other-etps/benefits-and-risks">benefits and risks</a> of ETFs?</p>
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Read more:
<a href="https://theconversation.com/what-is-an-etf-and-why-is-it-driving-bitcoin-back-to-record-high-prices-170095">What is an ETF? And why is it driving Bitcoin back to record high prices?</a>
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<h2>What are the potential benefits?</h2>
<p>In traditional shares investing, you might research one company and if you believe it will do better, you buy shares in it in the hope its share price rises.</p>
<p>With ETFs, you buy a “bundle” (a number of units) of shares and other securities, that is put together and managed by a professional fund manager. If the market goes up, the value of the ETF should too. </p>
<p>This means investing in ETFs can allow you to spread your risk across a lot of different regions and different markets (such as shares, bonds, property, companies and so on). You aren’t putting all your eggs in one basket. And you can let a professional fund manager worry about selecting the various investments and managing them. You don’t need to be an expert on one particular company or industry.</p>
<p>ETFs also offer flexibility to respond to market trends. They are usually easier to sell quickly than many other types of investments, such as property. This offers freedom to adjust your investment portfolio often and as you like.</p>
<p>Many ETFs that distribute dividends allow the investor to reinvest these dividends automatically to benefit from compound growth over time. </p>
<p>ETFs can also be cost-effective, because the administration is handled by the exchange (such as the ASX).</p>
<h2>What are the risks?</h2>
<p>Like any investment, ETFs carry risk.</p>
<p>A lot depends on the type of ETF and underlying assets in the “bundle”.</p>
<p>If you aren’t careful, you can end up buying a higher-risk ETF without realising it. So it pays to know what types of investments and in what proportions are in your “bundle” (which is known as your asset allocation).</p>
<p>Asset allocation should be aligned with your risk tolerance. Investors have different tolerances for risk depending on their age, financial goals, investment time horizon, preferences and personal comfort with market volatility. Knowing your risk tolerance helps you manage your emotional reactions during market downturns. </p>
<p>A retiree with a likely low tolerance to taking risks might choose an asset allocation that exposes them to low-risk assets. Someone saving for retirement might have more riskier share investments as they aim to grow their nest egg.</p>
<p>Just like shares, ETFs are subject to market fluctuations. If the market experiences a downturn, then the value of the ETF may decline too (depending on what’s in your ETF). Much of the risk depends on what type of assets the ETFs hold.</p>
<p>And in times of market stress, ETFs may not be as easy as they normally are to convert into cash. </p>
<p>Some financial products bought and sold every day on the market include debts or derivatives (futures and options investments). If your ETFs contain in the “bundle” some debts or derivatives, there is always the risk the party on the other side of a financial transaction may default on their debt obligations.</p>
<p>Growth in Australian exchange-traded funds under the management of a professional ETF manager has been robust in recent years. Market capitalisation stood at <a href="https://www.asx.com.au/content/dam/asx/issuers/asx-investment-products-reports/2023/pdf/asx-investment-products-oct-2023.pdf">A$145.83 billion</a> in October 2023, up 13.55% since October 2022.</p>
<p>But before you dive in, remember that ETFs come with their own risks.</p>
<p>Carefully research and select ETFs that are aligned with your investment goals, preferences, time horizon and risk tolerance or see a professional for advice.</p>
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<img src="https://counter.theconversation.com/content/218114/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Angelique Nadia Sweetman McInnes has received funding from the Accounting and Finance Association of Australia and New Zealand, Central Queensland University. She is a member of Accounting and Finance Association of Australia and New Zealand, the Financial Advice Association of Australia, the Society for Trusts and Estate Planning, the Financial Planning Academic Forum, Cooperative Research Australia, the Association of Computing Machinery, the Health Informatics Knowledge Management Steering Committee, and the Australasian Society for Computers in Learning in Tertiary Education.</span></em></p>Exchange-traded funds allow you to spread your risk across many different regions and markets (such as shares, bonds, property and companies). You aren’t putting all your eggs in one basket.Angelique Nadia Sweetman McInnes, Academic in Financial Planning, CQUniversity AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2019502023-04-04T03:01:19Z2023-04-04T03:01:19ZShould I put more money into my super? What are the benefits and can I take it out before retirement if I need it?<figure><img src="https://images.theconversation.com/files/515682/original/file-20230316-255-780950.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C5511%2C3663&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Sutterstock</span></span></figcaption></figure><p>Superannuation is never far from the headlines lately, with the government recently calling for <a href="https://treasury.gov.au/consultation/c2023-361383">views</a> from the public on what the objective of super should be. </p>
<p>The basic idea behind super is you set aside a portion of your pay over your working life, so you can build up a nest egg to see you through your retirement years. </p>
<p>But what if you’re worried you might not have enough super by the time you retire? Yes, you could top up your super now and watch the nest egg grow through the magic of <a href="https://moneysmart.gov.au/saving/compound-interest">compound returns</a> – but what are the downsides?</p>
<p>If you’re considering putting more money into your super, and want to know more about how the whole system works, here are the basics.</p>
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Read more:
<a href="https://theconversation.com/tax-free-super-for-the-super-rich-is-a-bad-deal-for-the-rest-of-us-and-morrison-said-it-first-200706">Tax-free super for the super rich is a bad deal for the rest of us – and Morrison said it first</a>
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<h2>What are the rules about putting more money into my super?</h2>
<p>First, make sure you know where your superannuation actually is and how much you’ve got so far. This <a href="https://www.ato.gov.au/forms/searching-for-lost-super/">page</a> from the Australian Tax Office explains how to search for any lost super.</p>
<p>The next thing to know is there are <a href="https://www.ato.gov.au/individuals/super/in-detail/growing-your-super/super-contributions---too-much-can-mean-extra-tax/?page=2#Understanding_contribution_caps">limits</a> to how much you can contribute into superannuation. </p>
<p>There are two types of super contributions you can make.</p>
<p>The first category is called “<a href="https://moneysmart.gov.au/grow-your-super/super-contributions">concessional contributions</a>”. These are taxed at 15%, which may be lower than the tax you’d otherwise have to pay on that money. So making these super top-ups can not only grow your nest egg, but save you tax.</p>
<p>The amount of concessional contributions you can make is A$27,500 per annum. That figure includes all the super your employer puts in your super account and any extra contributions you make under a salary sacrifice scheme or where you are claiming an income tax deduction.</p>
<p>The second category, known as “non-concessional contributions”, means money you pay into your super <em>without</em> claiming a tax deduction. This could be, for example, money from savings, an inheritance or a lottery win.</p>
<p>There is a limit of $330,000 over three years (or $110,000 per year), for these contributions.</p>
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<a href="https://images.theconversation.com/files/515690/original/file-20230316-26-zbiobu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A man looks at a computer with concern." src="https://images.theconversation.com/files/515690/original/file-20230316-26-zbiobu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/515690/original/file-20230316-26-zbiobu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/515690/original/file-20230316-26-zbiobu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/515690/original/file-20230316-26-zbiobu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/515690/original/file-20230316-26-zbiobu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/515690/original/file-20230316-26-zbiobu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/515690/original/file-20230316-26-zbiobu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Do you know where your super is?</span>
<span class="attribution"><a class="source" href="https://unsplash.com/photos/4-EeTnaC1S4">Photo by Wes Hicks on Unsplash</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
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<h2>What are the benefits of topping up my super?</h2>
<p>Two words: compound returns.</p>
<p>Compound returns are where you earn returns not only on the original investment you put in, but also on any returns on that investment. As the government’s <a href="https://moneysmart.gov.au/saving/compound-interest">Moneysmart</a> website puts it, “you get interest on your interest”.</p>
<p>Over the years, this means you could earn a lot more than you would if you didn’t top up your super. </p>
<p>How much more? Well, it depends on the investment return and fees of your fund.</p>
<p>But as an example: thanks to compound returns, putting an extra $100 per month into your super from age 30 could <a href="https://www.calc.help/industrysuper/add-extra-to-your-super">mean you retire</a> with an extra $65,000 in your account (here, I’ve assumed investment returns of 7.5%, accumulation inflation of 4% and salary inflation of 4%).</p>
<p>And the longer it is there, the more it will grow – so starting top-ups early might pay off. </p>
<p>This is particularly important for <a href="https://theconversation.com/spirals-and-circles-snakes-and-ladders-why-womens-super-is-complex-103763">women</a>, whose super balances may look a bit feeble if they take parental leave or cut their hours while raising a family.</p>
<p>Then there’s the tax benefits of super top-ups. If you would normally pay a net tax rate higher than 15% on investments such as shares, your money will grow more quickly inside superannuation than shares.</p>
<p>You may also be eligible for government co-contributions that add to your balance if you make a non-concessional contribution during the year and your income is less than $57,016. </p>
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<span class="caption">Starting top-ups early might pay off, so don’t ignore super until you are close to retirement.</span>
<span class="attribution"><a class="source" href="https://www.pexels.com/photo/young-female-friends-using-mobile-and-laptop-in-modern-cafe-4350214/">Photo by Ketut Subiyanto/Pexels</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
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<h2>So what’s the downside? Can I access my superannuation before retirement?</h2>
<p>Basically, no. You must meet a “<a href="https://www.ato.gov.au/individuals/super/in-detail/withdrawing-and-using-your-super/withdrawing-your-super-and-paying-tax/?page=2#Conditionsofrelease">condition of release</a>” before being able to access your superannuation.</p>
<p>The most common is retirement, defined as reaching the age of 65 or leaving work after reaching “preservation age” (which is 60 for anyone born after July, 1964).</p>
<p>There are some <a href="https://www.ato.gov.au/Individuals/Super/Withdrawing-and-using-your-super/Early-access-to-your-super/">special circumstances</a> where you may be able to access your superannuation early.</p>
<p>These are very narrow, and include serious financial hardship or necessary medical treatment that cannot be funded any other way. </p>
<p>Death or terminal illness also qualify for release. </p>
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Read more:
<a href="https://theconversation.com/should-i-pay-off-the-mortgage-asap-or-top-up-my-superannuation-4-questions-to-ask-yourself-170470">Should I pay off the mortgage ASAP or top up my superannuation? 4 questions to ask yourself</a>
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<h2>But what if I need a deposit for a house?</h2>
<p>This is a dilemma for non home-owners. After compulsory superannuation guarantee deductions and HECS-HELP, it may be hard to save a deposit.</p>
<p>One of the few circumstances where you access your superannuation early is through the <a href="https://www.ato.gov.au/individuals/super/withdrawing-and-using-your-super/first-home-super-saver-scheme/">First Home Super Savers Scheme</a>. </p>
<p>If you make voluntary contributions, you may be able to withdraw these contributions for a home deposit. </p>
<p>However, this scheme is very tightly regulated. You can read more about the rules for this scheme <a href="https://www.ato.gov.au/individuals/super/withdrawing-and-using-your-super/first-home-super-saver-scheme/">here</a>.</p>
<h2>So… should I put more money into my super?</h2>
<p>It depends. If you do, make sure you understand you will not be able to access that money until retirement.</p>
<p>If you own your home (or intend to rent until retirement) you may want to put more into superannuation while you can afford it, knowing it is contributing to a secure retirement. </p>
<p>But if home ownership is your goal, you should think carefully about choosing between superannuation and saving for a home deposit.</p>
<p><em>Note: the contribution caps and rates used in this article are for the year ending June 30, 2023.</em></p><img src="https://counter.theconversation.com/content/201950/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Helen Hodgson has received funding from the ARC, AHURI and CPA Australia. Helen is the Chair of the Social Policy Committee and a Director of the National Foundation for Australian Women (NFAW) and on the Gender and Career Progression Committee of CPA Australia (WA Division). Helen was a Member of the WA Legislative Council in WA from 1997 to 2001, elected as an Australian Democrat. She is not a current member of any political party. She is a Registered Tax Agent and a member of the SMSF Association, CPA Australia and The Tax Institute.</span></em></p>If you’re considering putting more money into your super, and want to know more about how the whole system works, here are the basics.Helen Hodgson, Professor, Curtin Law School and Curtin Business School, Curtin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2023312023-03-26T19:12:37Z2023-03-26T19:12:37ZAre you financially literate? Here are 7 signs you’re on the right track<figure><img src="https://images.theconversation.com/files/516886/original/file-20230322-26-t0tjld.jpg?ixlib=rb-1.1.0&rect=0%2C32%2C5378%2C3604&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.pexels.com/photo/woman-in-brown-coat-holding-a-bank-card-3784391/">Photo by Andrea Piacquadio/Pexels</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>With the cost of living and interest rates rising, a growing number of Australians are struggling to manage their <a href="https://www.smh.com.au/money/planning-and-budgeting/almost-half-of-australia-is-financially-stressed-here-s-one-way-to-fix-it-20221011-p5bowq.html">finances</a>. Many are experiencing real <a href="https://www.anu.edu.au/news/all-news/australians-under-increasing-financial-stress#:%7E:text=The%2520level%2520of%2520financial%2520stress,say%2520they%2520are%2520struggling%2520financially">financial stress</a>.</p>
<p>But even in the best of times, managing your finances is hard. Every day, you’re making complex financial decisions (some of which carry huge ramifications) and there are more financial products and services available than ever before. Navigating this minefield can be overwhelming and lead to financial anxiety. </p>
<p>Being financially literate helps. But what does “financial literacy” mean in practice?</p>
<p>Here are seven signs you’ve got the basics covered.</p>
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Read more:
<a href="https://theconversation.com/kids-and-money-five-ways-to-start-the-conversation-193632">Kids and money: five ways to start the conversation</a>
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<h2>1. You track your cashflow</h2>
<p>By tracking your cashflow on a regular basis, you’re ensuring your expenses don’t exceed your income. In other words, you make sure you’re earning more than you spend.</p>
<p>A good sign you’ve successfully managed your cashflow is that you have a surplus or a buffer.</p>
<p>These left-over funds can be used to boost savings, pay off debt or meet other financial commitments. </p>
<p>Cashflow management allows you to assess whether there are opportunities to increase your savings and/or reduce spending. Being able to manage your earnings and spending is a key financial skill.</p>
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<span class="caption">Do you know where your money goes?</span>
<span class="attribution"><a class="source" href="https://www.pexels.com/photo/woman-in-blue-denim-jeans-holding-silver-iphone-6-5076514/">Photo by cottonbro studio/Pexels</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
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<h2>2. You have a budget – and you follow it</h2>
<p>Setting and following a budget requires financial discipline, which is a key part of financial literacy. </p>
<p>By following a budget, you’re putting a measure in place to live within your means and reduce the risk of overspending. </p>
<p>With all the competing demands that come with managing money, your budget can be a tool to keep you on track. And developing this habit over time can empower you to make wise financial decisions.</p>
<h2>3. You understand the difference between good debt and bad debt</h2>
<p>Love it or hate it, debt forms part of our financial portfolios and sustains the financial institutions we interact with. Knowing how to make debt work for you is a skill and a sign of good financial knowledge. It is crucial to understand the difference between good debt and bad debt.</p>
<p>Good debt is debt used to improve your long-term financial position or net worth, such as a home loan.</p>
<p>Bad debt tends to be consumption-driven and doesn’t have lasting value. Examples include payday loans or retail accounts.</p>
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<a href="https://images.theconversation.com/files/517076/original/file-20230322-22-r5besf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A woman does calculations" src="https://images.theconversation.com/files/517076/original/file-20230322-22-r5besf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/517076/original/file-20230322-22-r5besf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/517076/original/file-20230322-22-r5besf.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/517076/original/file-20230322-22-r5besf.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/517076/original/file-20230322-22-r5besf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/517076/original/file-20230322-22-r5besf.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/517076/original/file-20230322-22-r5besf.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Do you have a budget to keep you on track?</span>
<span class="attribution"><a class="source" href="https://www.pexels.com/photo/woman-uses-calculator-7491011/">Photo by RODNAE Productions/Pexels</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
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</figure>
<h2>4. You have your money in various places</h2>
<p>One of the key concepts of financially literacy is understanding the importance of diversification.</p>
<p>By having your money spread across various places (such as a savings account, property, the share market, superannuation and so on), you’ve reduced the concentration of risk.</p>
<p>This helps protect your wealth in tough economic times.</p>
<h2>5. You understand how financial assets work, along with their pros and cons</h2>
<p>Financial assets refers to things like cash, shares and bonds. It’s important to understand how financial assets work and how they can either help or hurt your financial position.</p>
<p>For instance, savings accounts are a safe financial instrument that earn interest on the amount accumulated within the account. But the fact they’re so safe also means that they won’t outperform inflation. </p>
<p>This type of knowledge is an imperative part of financial literacy.</p>
<h2>6. You’re aware of your financial strengths and weaknesses</h2>
<p>Financially literate people reflect on their capabilities. </p>
<p>When you can appreciate where your financial strengths and weaknesses lie, you can make better financial decisions and prioritise your needs.</p>
<p>On the other hand, being oblivious to your strengths and weaknesses means you miss opportunities to improve your financial health.</p>
<p>For example, perhaps you buy unnecessary stuff when you feel sad. Or maybe you panic when faced with tough financial choices and make quick decisions just to make the problem go away.</p>
<p>Neglecting to reflect on patterns of behaviour can lead to serious and possibly irreversible financial mistakes.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/517075/original/file-20230322-20-f6yeod.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/517075/original/file-20230322-20-f6yeod.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/517075/original/file-20230322-20-f6yeod.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=421&fit=crop&dpr=1 600w, https://images.theconversation.com/files/517075/original/file-20230322-20-f6yeod.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=421&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/517075/original/file-20230322-20-f6yeod.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=421&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/517075/original/file-20230322-20-f6yeod.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=529&fit=crop&dpr=1 754w, https://images.theconversation.com/files/517075/original/file-20230322-20-f6yeod.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=529&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/517075/original/file-20230322-20-f6yeod.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=529&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Understanding debt is important.</span>
<span class="attribution"><a class="source" href="https://www.pexels.com/photo/stressed-woman-looking-at-documents-6963054/">Photo by Mikhail Nilov/Pexels</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
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</figure>
<h2>7. You set financial goals and put measures in place to meet them</h2>
<p>Financially literate people plan for their finances. This involves setting goals for either earnings, savings, investments, and debt management or putting measures in place to protect wealth (via, for example, insurance to protect your wealth against loss). </p>
<p>Setting goals is one thing, but it’s also important to have a system and habits in place to achieve them. </p>
<p>Make sure you understand what you’re trying to achieve with your goals, why the goals are important and how you’ll achieve them.</p>
<p>Boosting your financial literacy can feel tough at first. But tackling your finances head on, controlling spending, participating in financial markets, handling debt, being able to understand financial assets and working towards financial goals can help you feel in control of your financial situation. </p>
<p>Everyone’s financial situation is unique, so none of what I’ve said here should be taken as financial advice. You can find <a href="https://moneysmart.gov.au/managing-debt/financial-counselling">free financial counsellors</a> via the government’s MoneySmart site and if you need help with debt, contact the <a href="https://ndh.org.au/about-national-debt-helpline/contact-us/">National Debt Helpline</a> on 1800 007 007.</p>
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<strong>
Read more:
<a href="https://theconversation.com/borrowing-money-isnt-always-a-bad-thing-debt-can-be-a-sensible-way-to-build-wealth-192630">Borrowing money isn't always a bad thing – debt can be a sensible way to build wealth</a>
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<img src="https://counter.theconversation.com/content/202331/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Bomikazi Zeka does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Even in the best of times, managing your finances is hard. We’re told to make sure we are financially literate but what does that mean in practice? Here are seven signs you’ve got the basics.Bomikazi Zeka, Assistant Professor in Finance and Financial Planning, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1117572019-02-24T09:28:26Z2019-02-24T09:28:26ZMost black South Africans don’t save for retirement. How to change this<figure><img src="https://images.theconversation.com/files/258981/original/file-20190214-1717-1dxlgl0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Saving for retirement is crucial, but people think about this in different ways.</span> <span class="attribution"><span class="source">Atomazul/Shutterstock</span></span></figcaption></figure><p>Saving for retirement simply isn’t seen as a priority by many South Africans. This is borne out by data in the <a href="http://www.oldmutual.co.za/docs/default-source/default-document-library/omsim-2016-july_lynette-n.pdf?sfvrsn=0">Old Mutual Savings and Investment Monitor</a> 2016 which reported that those who do save consider putting money aside for funerals to be more important than saving for retirement. </p>
<p>The reason for this is probably that funerals often constitute a financial emergency in South Africa: they can cost <a href="http://www.portfoliosofthepoor.com/">up to seven times</a> an individual’s monthly income. This phenomenon is particularly common among black South Africans; culturally, the more prominent the deceased was in society, the larger the funeral will be. This makes funerals an emotionally and financially stressful time. </p>
<p>But there is plenty of evidence to suggest that black South Africans can and do save money – just not for retirement. Research <a href="https://www.oldmutual.co.za/media-centre/upfront-publication/upfront-august-2016/stokvels-remain-a-popular-savings-vehicle">has found</a> that 88% of “informal savers” (those who do not necessarily make use of savings accounts or share portfolios) belong to grocery schemes, burial societies, and savings clubs colloquially known as “stokvels” or “umgalelo”. The estimated value of savings in stokvels in 2018 was <a href="https://www.businessinsider.co.za/stockvels-could-buy-pick-n-pay-and-still-get-change-2018-2">R44 billion, with approximately 11 million members</a>.</p>
<p>So what’s stopping black South Africans, who make up <a href="http://www.statssa.gov.za/publications/P0302/P03022018.pdf">80.9%</a> of the country’s population, from planning for retirement?</p>
<p>Two things are especially key when planning for retirement, no matter where in the world you live. The first is financial literacy. The second are personal savings.</p>
<p>Research <a href="https://ideas.repec.org/p/sek/iacpro/4006374.html">I conducted</a> among black South Africans in the country’s Eastern Cape province suggests that these two factors played a role in the decisions people made. </p>
<h2>Saving and planning</h2>
<p>Financial literacy is a broad concept. Generally, it refers to an individual’s knowledge of financial concepts and the possession of skills and attitudes to translate this knowledge into behaviours that result in good financial outcomes.</p>
<p><a href="http://kw.wharton.upenn.edu/phila-teachers-seminar-2013/files/2013/11/Financial_Literacy_and_Retirement_Planning.pdf">Previous research</a> has found that those who are financially illiterate are likely to make uninformed decisions that may lead to the accumulation of high levels of debt. They often have few or no savings and do not plan at all for retirement.</p>
<p>In my study, I interviewed 130 people living in urban areas of the Eastern Cape. </p>
<p>The respondents were all aware that saving for retirement was important. But most had no formal, documented retirement plan – they simply believed they would have adequate savings when the time came.</p>
<p>They also understood the concepts of financial literacy, personal savings and retirement planning through particular lenses.</p>
<p>The respondents believed that financial literacy was not just about the application of financial concepts to achieve financial welfare. They felt that a financially literate person should be able to meet their financial obligations and use their financial resources in a way that would allow them to maintain their lifestyle. </p>
<p>The respondents displayed positive financial behaviours by emphasising the importance of paying bills on time, considering purchases before spending money and avoiding making impulsive purchases. Above all, they understood that the sooner they saved for retirement, the more money they would have at retirement age. This is significant because it’s generally thought that people who are financially illiterate don’t plan for retirement and worry about coping financially in retirement.</p>
<p>Traditionally, when we think of personal savings, we tend to consider investments in financial instruments. Yet the respondents also considered their livestock to be a form of investment and would use the proceeds from the sale of their livestock to finance their retirement needs.</p>
<p>Finally, when it came to retirement planning, the respondents believed that educating themselves about retirement-related matters formed part of the process of planning for retirement. This means that people believe that reading material (such as books and online articles) on retirement planning was just as important as making contributions towards a retirement fund. </p>
<h2>Personal savings</h2>
<p>When it comes to savings, South Africans often complain that it’s tough to save in a country with high debt levels and high unemployment rates. However, <a href="https://ideas.repec.org/p/sek/iacpro/4006374.html">research shows</a> that saving is possible even in a precarious financial climate. As long as a person saves conscientiously during their working years from the beginning of their working life, they’ll be able to create an adequate stream of income during retirement.</p>
<p>It was clear from my research that respondents believed that they were making a conscious effort to save for retirement and consistently monitoring their savings. But the respondents did not know whether their savings would be enough for retirement. </p>
<h2>Lessons</h2>
<p>So what does all of this tell us? First, financial planners and advisers need to be cognisant of how black South Africans define financial concepts. Financial plans should include savings vehicles that are used predominantly by black South Africans, such as informal savings clubs and assets in the form of livestock. These financial plans should be tailored to meet the needs of clients and include traditional savings techniques used by black South Africans.</p>
<p>Second, financial literacy is essential in achieving financial independence. An advanced level of financial literacy is required to properly plan for retirement. This is not just about making savings, but also considering the impact of tax and inflation on one’s savings. </p>
<p>That being said, financial literacy classes should be introduced early in the South African education system – for example, in primary schools – to teach school children the basics of personal finance. Introducing such classes can encourage and teach children to start saving from a young age; in this way, a savings culture can be cultivated and carried into adulthood.</p><img src="https://counter.theconversation.com/content/111757/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Bomikazi Zeka does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Evidence suggests that black South Africans can and do save money – just not for retirement.Bomikazi Zeka, Assistant Professor in Finance and Financial Planning, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/853272017-10-25T19:06:31Z2017-10-25T19:06:31ZTeaching kids about maths using money can set them up for financial security<figure><img src="https://images.theconversation.com/files/191138/original/file-20171020-1082-atxtty.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">There are plenty of opportunities when you are out shopping to include your child in discussions about financial decisions.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p><em>As the world of finance becomes more complex, most of us aren’t keeping up. In this series we’re exploring <a href="https://theconversation.com/au/topics/what-is-financial-literacy-45200">what it means to be financially literate</a>.</em></p>
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<p>One of the most common complaints children have about learning maths is its lack of relevance to their lives outside school. When they fail to see the importance of maths to their current and future lives, they often <a href="https://link.springer.com/article/10.1007/s13394-011-0020-5">lose interest</a>. </p>
<p>This results in opting out of mathematics study as soon as they can, and proclaiming they are <a href="https://theconversation.com/saying-im-not-good-at-maths-is-not-cool-negative-attitudes-are-affecting-business-53298">“not good at maths”</a>.</p>
<p>Financial literacy – learning about budgeting, saving, investing and basic financial decision making – taught by both parents and teachers can help keep them engaged.</p>
<h2>Three strategies for teachers</h2>
<p><a href="http://www.aamt.edu.au/">The Australian Association of Mathematics Teachers</a> promote the teaching of financial literacy through maths with the help of contemporary teaching and learning resources that reflect students’ interests. These include lesson plans, units of work, children’s literature, and interactive digital resources such as games.</p>
<p>A wide range of resources are available from websites such as <a href="https://www.moneysmart.gov.au/">MoneySmart</a> and <a href="http://finlit.org.au/resources/programs-and-information/">Financial Literacy Australia</a>. These are an excellent way to begin teaching financial literacy concepts, with some units of work specifically designed with a mathematics focus. However, these units can and should be adjusted to suit the specific needs of the students in your classroom.</p>
<p>Additionally, teachers should consider using resources that are familiar to students’ everyday lives. These could include items that are in the news media, shopping catalogues, television commercials etc. Keep watch for interesting photographs or misleading advertisements. They are great for starting discussions about maths. Questions such as “is this really a good deal?”, “what is the best deal?” or even “what mathematics do we need to know and understand to work out if this advertisement is offering a bargain?” could begin discussions. </p>
<p>There are also a range of apps that could be used alongside maths and financial literacy explorations, including budgeting apps and supermarket apps such as <em>TrackMySpend</em>, <em>Smart Budget</em>, or <em>My Student Budget Planner</em> . If you like using picture books to introduce and teach concepts, the <a href="http://moneyandstuff.info/books/">Money & Stuff website</a> has an extensive list of books relating to financial literacy.</p>
<h2>The money connection</h2>
<p>One way to improve engagement with mathematics is for schools to teach it in ways that children are familiar with. Most children are familiar with money, and many are already consumers of financial services from a young age. <a href="https://www.acer.org/files/PISA_2012_Financial_Literacy.pdf">Research</a> has found that it’s not uncommon for children to have accounts with access to online payment facilities or to use mobile phones during the primary school years. It’s clear that financial literacy and mathematics skills would be beneficial when using such products.</p>
<p><a href="http://www.bea.asn.au/cms/files/cms_files/content/Financial_literacy/NationalConsumerFinancialLiteracyFramework_2011.pdf">Financial education</a> programs for young people can be essential in nurturing sound financial knowledge and behaviour in students from a young age. <a href="https://eric.ed.gov/?id=ED572577">Using real-life contexts</a> involving financial literacy can help children learn a range of mathematical concepts and numeracy skills like lending and borrowing, budgeting, and interest rates. They are more likely to remember and understand what they have learned because they applied mathematics to something they’re interested in and something that they can use in their lives. </p>
<p><a href="https://www.moneysmart.gov.au/media/560516/moneymathematicsengagement_final_report_14_september_2016-assoc-prof-catherine-attard.pdf">Research</a> into the teaching of financial literacy combined with mathematics in primary schools shows how important it is for all children to understand the importance and value of money and recognise the maths that underpins consumer and financial literacy. </p>
<p>They also need to engage in real world projects and investigations relating to consumer and financial literacy to understand how mathematics is applied in everyday decisions that could influence life opportunities.</p>
<h2>Shopping is a teaching opportunity for parents</h2>
<p>Many young children don’t understand where money comes from. It’s important that they begin to develop some understanding of how our economy works, even from a young age. <a href="https://www.moneysmart.gov.au/media/560516/moneymathematicsengagement_final_report_14_september_2016-assoc-prof-catherine-attard.pdf">Research</a> has found a pattern emerging where children whose parents talk to them about money develop an earlier understanding of its importance. They are also provided with more opportunities to deal with making decisions about money. </p>
<p>If you have young children in primary school, it’s a great time to start their financial literacy and mathematics education. There are plenty of opportunities when you are out shopping to include your child in discussions and decisions where appropriate, or explain the financial decisions you make on their behalf. Talk about the mathematics involved in financial decision-making. Where possible, encourage children to make their own financial decisions with things like pocket money or savings. If you feel you need to improve your own financial literacy first, there are many <a href="https://www.moneysmart.gov.au/">resources</a> available for adults. </p>
<p>Teaching children about money through mathematics helps children learn. It helps them use mathematics in real-life scenarios and, more importantly, can help set them up for future financial security.</p><img src="https://counter.theconversation.com/content/85327/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Catherine Attard received a grant from Financial Literacy Australia in 2014 to investigate the use of financial literacy education to improve student engagement with mathematics in primary schools from low socio-economic areas. </span></em></p>Learning about real-life money decisions from a young age helps kids learn maths and improves their financial literacy.Catherine Attard, Associate Professor, Mathematics Education, Western Sydney UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/848362017-10-24T23:00:53Z2017-10-24T23:00:53ZThere are serious problems with the concept of ‘financial literacy’<figure><img src="https://images.theconversation.com/files/190951/original/file-20171019-32378-cu1yd5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Being financially literate is not as simple as applying a set of skills.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p><em>As the world of finance becomes more complex, most of us aren’t keeping up. In this series we’re exploring <a href="https://theconversation.com/au/topics/what-is-financial-literacy-45200">what it means to be financially literate</a>.</em></p>
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<p>The federal government’s <a href="http://www.financialliteracy.gov.au/strategy-and-action-plan/financial-literacy-strategy">financial literacy strategy</a> shows how serious the idea of improving financial decision-making is. But the concept of what it means to be “financially literate” may be problematic. </p>
<p>It is certainly tempting to think that <a href="http://jcacs.journals.yorku.ca/index.php/jcacs/article/view/34299">simply learning</a> about money management could improve financial well-being. But the reality is there are a whole host of economic, political and <a href="https://link.springer.com/chapter/10.1007/978-981-10-3130-4_9">cultural</a> issues that play into whether someone fits the definition of “financially literate”. </p>
<p>This ranges from simply not earning enough to save or qualify for favourable bank terms, to cultures that incentivise the collective well-being over the individual. </p>
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Read more:
<a href="https://theconversation.com/cutting-through-political-spin-requires-a-new-approach-to-financial-literacy-59240">Cutting through political spin requires a new approach to financial literacy</a>
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<h2>What is financial literacy anyway?</h2>
<p>The Australian government <a href="http://www.financialliteracy.gov.au/strategy-and-action-plan/financial-literacy-strategy">defines</a> financial literacy as:</p>
<blockquote>
<p>A combination of financial knowledge, skills, attitudes and behaviours necessary to make sound financial decisions, based on personal circumstances, to improve financial well-being. </p>
</blockquote>
<p>However, <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1745-6606.2010.01169.x/epdf">there is doubt</a> about what aspects of financial decision making and well-being are a result of being financially literate. The ability to make sound financial decisions and improved financial well-being are two very problematic aspects of the widely used definitions.</p>
<p>These definitions of financial literacy fail to consider the increasingly complex financial environment, or factor in significant life events. Someone could be considered financially illiterate for reasons beyond their control, let alone their knowledge or skills. </p>
<p>For example, some <a href="https://pdfs.semanticscholar.org/47c1/8df72a1da9c7f547ad392283dcff3c476e9f.pdf">researchers have proposed</a> that those on low incomes have the same “attitudes and natural
proclivities, weaknesses and biases” as those from other walks of life, their margin for error is just lower. </p>
<p>Someone living in poverty <a href="http://journals.sagepub.com/doi/abs/10.2304/csee.2012.11.3.163">may also find it hard</a> to change their financial circumstances (by landing a higher paying job, for instance) despite being financially literate. </p>
<p><a href="https://eric.ed.gov/?id=ED473576">Other researchers</a> found that individuals on low income may be adversely affected by financial products as they fall into the “bank fee poverty trap,” as they do not hold mortgages or have the minimum bank balances for fees to be waived.</p>
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Read more:
<a href="https://theconversation.com/two-million-aussies-are-experiencing-high-financial-stress-64367">Two million Aussies are experiencing high financial stress</a>
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<p><a href="https://link.springer.com/chapter/10.1007/978-981-10-3130-4_9">Certain cultures</a> also promote behaviour that could lead to individuals being deemed financially illiterate. For example, <a href="https://search.proquest.com/openview/aa1bb59a5367c192937b24faa0e5d8ff/1?pq-origsite=gscholar&cbl=38873">sharing food and money</a> with those in need, even if there is little to be shared. </p>
<p>Indeed, researchers in <a href="http://rsa.tandfonline.com/doi/abs/10.1080/08111146.2012.673483">Australia</a> and the <a href="https://search.proquest.com/openview/aa1bb59a5367c192937b24faa0e5d8ff/1?pq-origsite=gscholar&cbl=38873">United States</a> have found some Indigenous communities associate “wealth” or “success” with strong family networks, shelter and food; rather than lots of money in the bank. </p>
<p>What is also lacking from conventional definitions of financial literacy is <a href="https://books.google.com.au/books?hl=en&lr=&id=TSY_CgAAQBAJ&oi=fnd&pg=PR5&dq=info:5Nc2SxbVbZIJ:scholar.google.com&ots=k5PcdwqbOW&sig=pKb_U649WzyPKzZmqDeq5F9kemM&redir_esc=y#v=onepage&q&f=false">how others are affected</a> by an individual’s financial decision-making. For instance, supporting a local store or market could mean the continued employment of local staff and wider benefits for the community. Shopping online may be a more financially sound decision in the short run, but it could have knock on effects to individuals and others. </p>
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Read more:
<a href="https://theconversation.com/almost-3-million-adult-aussies-lack-basic-financial-services-7335">Almost 3 million adult Aussies lack basic financial services</a>
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<p>Perhaps, <a href="https://link.springer.com/article/10.1007/s13394-017-0223-5">financial literacy</a> should be thought of as more about an individual’s capacity to acquire financial knowledge, critically reflect on what influences their financial decision-making and their ability to apply their knowledge to “<a href="https://figshare.com/articles/Connecting_social_and_mathematical_thinking_Using_financial_dilemmas_to_explore_children_s_financial_problem-solving_and_decision-making/4684288">financial dilemmas</a>”, such as unemployment or a sudden expense.</p>
<p>In fact, <a href="https://books.google.com.au/books?hl=en&lr=&id=UkxZqpKNpLYC&oi=fnd&pg=PA213&dq=effective+budgeters+just+living+in+poverty&ots=Urr5Ytph_h&sig=41D6dJbnYJJY80pCx7nooEjD9Js#v=onepage&q&f=false">research has shown</a> that people living on low incomes both in Australia and overseas are among the “best budgeters” because it is a practised survival skill.</p>
<p>Definitions of financial literacy also need to <a href="https://www.griffith.edu.au/__data/assets/pdf_file/0009/930699/financial-literacy-education-with-aboriginal-people-blue.pdf">reflect on what influences financial decision-making</a>, as well as how others may be affected by the decision. These factors could be socio-economic status, educational level, personal and <a href="https://www120.secure.griffith.edu.au/rch/items/db89cd96-ca38-4878-ab1d-195e04fa70d9/1/">cultural values</a>, life stages, social standing and professional associations, media and marketing, and/or the environment. </p>
<p>For example, a financial decision affecting others could be about the choice between <a href="http://home.cc.umanitoba.ca/%7Ethompso4/Pay_the_rent_article.pdf">paying the rent or feeding the family</a>. A lack of knowledge may not be the problem for the individual deciding between rent and food but a low income often is. </p>
<p>Thus, the <a href="https://search.informit.com.au/documentSummary;dn=328117807491509;res=IELBUS">limits of financial literacy</a> need to be exposed. And, a move towards a <a href="https://books.google.com.au/books?hl=en&lr=&id=TSY_CgAAQBAJ&oi=fnd&pg=PR5&dq=info:5Nc2SxbVbZIJ:scholar.google.com&ots=k5PcdwqbOW&sig=pKb_U649WzyPKzZmqDeq5F9kemM&redir_esc=y#v=onepage&q&f=false">compassionate approach</a> to financial education should be adopted <a href="http://www.emeraldinsight.com/doi/pdfplus/10.1108/SSRP-08-2017-0041">in schools</a>, so that financial worth is not equated with self worth.</p><img src="https://counter.theconversation.com/content/84836/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Levon Ellen Blue does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The federal government is trying to make Australians more financially literate, but it’s using a definition that ignores many political, economic and cultural factors.Levon Ellen Blue, Research fellow, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/846992017-10-23T19:07:29Z2017-10-23T19:07:29ZHow to teach your kids to think more critically about money<figure><img src="https://images.theconversation.com/files/190719/original/file-20171018-30379-1n5k35i.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Use questions to stimulate critical thinking about money.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p><em>As the world of finance becomes more complex, most of us aren’t keeping up. In this series we’re exploring <a href="https://theconversation.com/au/topics/what-is-financial-literacy-45200">what it means to be financially literate</a>.</em></p>
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<p>Advice on money often boils down to <a href="http://www.smh.com.au/money/planning/what-aussies-get-wrong-about-money-and-schools-dont-help-20170522-gwa4hm.html">simplistic messages</a> about budgeting, understanding compound interest and avoiding debt. But <a href="http://www.fsa.gov.uk/pubs/consumer-research/crpr69.pdf">research</a> suggests financial decision-making depends as much on our values, expectations, emotions and family experiences as information taught at school.</p>
<p>In short, the way people interact with money is highly complex and so the way we teach our kids needs to catch up.</p>
<p>It’s time for a shift from teaching children rote-learned financial rules of thumb to instilling dispositions and a thinking process that underlies good financial decision-making.</p>
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Read more:
<a href="https://theconversation.com/why-is-australian-15-year-olds-financial-literacy-declining-78332">Why is Australian 15-year-olds' financial literacy declining?</a>
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<p>Funnily enough, the debate over “<a href="https://theconversation.com/the-smashed-avo-debate-misses-inequality-within-generations-70475">smashed avocadoes</a>” illustrates two concepts that can make all the difference to how we approach financial decisions. The first is a future orientation and the second is self-regulation.</p>
<p>Thinking about the future, or a “future orientation” is incredibly important when it comes to managing money. This is a tendency to consider future consequences and a willingness to delay gratification in favour of longer term goals. </p>
<p>Self-regulation is the process by which we control our thoughts, feelings and behaviours. Being aware of our financial motivations and having the ability to critically analyse our decisions is also important.</p>
<p>These are the kinds of thought processes necessary for good financial decision-making. </p>
<h2>Money is a limited resource</h2>
<p><a href="http://www.sciencedirect.com/science/article/pii/S0167487005000577">Research shows</a> that both parental behaviour (like discussing financial matters with children) and dispositions (such as future orientation) have an impact on their children’s financial behaviour into adulthood. </p>
<p>This means that simply discussing money can help children build financial independence by practising making decisions. For example, parents and children can discuss what they want to do with any money they receive, and maybe encouraging them to bank and save.</p>
<p>Giving children pocket money is another strategy for accomplishing this. Although not everyone has the means or the inclination to pay their children for helping out around the home. And you don’t have to. </p>
<p><a href="http://journals.sagepub.com/doi/pdf/10.1177/0038038516668125">Research also shows</a> that financial hardship - living on a limited income and going without – can be just as useful in shaping financial understandings as the experience of growing up rich. In fact, there are things that children observe and experience – like problematic gambling and the financial fallout of marriage separation - that can influence them to think and feel more conservatively about money.</p>
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Read more:
<a href="https://theconversation.com/students-low-financial-literacy-makes-understanding-fees-loans-debt-difficult-45088">Students' low financial literacy makes understanding fees, loans, debt difficult</a>
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<p>As part of my <a href="https://www.merga.net.au/publications/counter.php?pub=pub_conf&id=2148">ongoing</a> <a href="https://link.springer.com/article/10.1007/s13394-016-0184-0">research</a>, I have spent time working with parents, teachers, and 10-12 year old students. I’ve found that the experience of financial hardship is not lost on children. During interviews some have described the importance of working to earn an income. Others have told me that their parents work multiple jobs to make ends meet and money is stressful.</p>
<p>Some children suggested <a href="https://www.merga.net.au/publications/counter.php?pub=pub_conf&id=2148">selling a car to save money</a>, or competently described sophisticated economic concepts (supply, demand and market equilibrium) in relation to buying and selling second-hand goods, particularly electronic games.</p>
<p>These examples show that children for whom money is a limited resource bring valuable insights to their financial literacy education at school. There are ways that parents and teachers can sensitively tap into these insights during lessons.</p>
<h2>Promoting critical thinking and financial independence</h2>
<p>We live in a world that sells immediacy and makes it easy to tap and go. Figuring out how to balance short term desires with longer term financial goals that may seem out of reach - like funding higher education and purchasing a home - requires focus.</p>
<p>Ultimately, children need practice applying their literacy and numeracy skills to make financial decisions independently. This can take place both at home and in the classroom. </p>
<p>For instance, instead of giving children values-laden advice about what makes a wise financial decision (such as avoiding debt), use questioning techniques to stimulate and guide their thinking.</p>
<p>These <a href="https://www.questia.com/read/1P3-1447133181/critical-thinking-the-art-of-socratic-questioning">could include</a>:</p>
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<li> <strong>Reasons:</strong> What are your reasons for making that decision?</li>
<li> <strong>Evidence:</strong> Can you convince me that is the best decision?</li>
<li> <strong>Argument:</strong> What would someone who disagreed with you say?</li>
<li> <strong>Impact on others:</strong> Will your decision affect anybody else?</li>
<li> <strong>Consequences:</strong> What might happen next?</li>
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<p>These questions engage children to think about what drives them and what all their available choices might be. </p>
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Read more:
<a href="https://theconversation.com/economics-and-the-brain-how-people-really-make-decisions-in-turbulent-times-5445">Economics and the brain: how people really make decisions in turbulent times</a>
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<p>As painful as it can be, it can also be productive to let go and allow children to experience the odd financial misadventure and mistake. Later, you might ask…</p>
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<li><strong>Reflection:</strong> How did that work out? What might you do differently next time?</li>
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<p>These questions have the potential to promote critical thinking, a future orientation and self-regulation - without seeming to be too judgemental or interfering.</p><img src="https://counter.theconversation.com/content/84699/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Carly Sawatzki serves as Treasurer on the Executive of the Mathematics Education Research Group of Australasia (MERGA). </span></em></p>Good financial decision making is about more than avoiding debt or having a budget, it’s about critically analysing your options.Carly Sawatzki, Lecturer, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/846952017-10-22T19:04:28Z2017-10-22T19:04:28ZFinancial literacy is a public policy problem<figure><img src="https://images.theconversation.com/files/190960/original/file-20171019-30520-1j2dzoq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Financial illiteracy contributed to the last financial crisis. </span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p><em>As the world of finance becomes more complex, most of us aren’t keeping up. In this series we’re exploring <a href="https://theconversation.com/au/topics/what-is-financial-literacy-45200">what it means to be financially literate</a>.</em></p>
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<p>It’s pretty common nowadays to see the likes of the <a href="http://www.rba.gov.au/publications/fsr/2017/oct/pdf/financial-stability-review-2017-10.pdf">Reserve Bank of Australia</a> or the <a href="http://www.abs.gov.au/ausstats/abs@.nsf/Lookup/by%20Subject/6523.0%7E2015-16%7EMain%20Features%7EKey%20Findings%7E1">Australian Bureau of Statistics</a> issue warnings about the size of Australian household debt. The reason is that the consequences of poor financial decisions often reach far wider than an individual or family.</p>
<p>The global financial crisis showed us <a href="https://www0.gsb.columbia.edu/faculty/moehmke/papers/BrunnermeierOehmkeHandbookSystemicRisk.pdf">how rapidly financial contagion can spread</a> - one person’s debt is another person’s asset, so when the debt is written off so is the asset. However, there has been <a href="https://www.anz.com/resources/5/4/54720a2d-a540-49f0-b0a7-62f1ffb922e6/adult-financial-literacy-survey-summary.pdf?MOD=AJPERES">little improvement</a> in financial literacy in the wake of the financial crisis, the lack of which was one of the underlying causes.</p>
<p>For instance, <a href="https://books.google.com.au/books?id=ndnxlIqRJ7QC&pg=PA226&lpg=PA226&dq=subprime+borrowers+did+not+understand+the+terms+of+their+loans&source=bl&ots=5dwfRFbOUF&sig=FOrFhb79lF0EEY002Ka_PJyoy4w&hl=en&sa=X&ved=0ahUKEwjvp5j35frWAhWBrJQKHZbcCvkQ6AEIZjAJ#v=onepage&q=subprime%20borrowers%20did%20not%20understand%20the%20terms%20of%20their%20loans&f=false">surveys just prior to the global financial crisis</a> revealed that many Americans taking out home loans either did not read their loan documents or did not understand them. This meant that, in many cases, they did not understand that they were signing <a href="http://www.investopedia.com/terms/t/teaser-loan.asp">teaser loans</a> where the interest rate starts out very low but increases after a few years. </p>
<p>This lack of financial literacy <a href="http://www.nber.org/papers/w19550">combined with predatory lending</a> caused the <a href="http://www.investopedia.com/articles/basics/07/subprime_basics.asp">subprime loan crisis</a>, the precursor to the full blown financial crisis.</p>
<h2>What is financial literacy?</h2>
<p>Financial literacy <a href="http://www.financialliteracy.gov.au/strategy-and-action-plan/financial-literacy-strategy">refers to</a> the ability to make sound financial decisions based on knowledge, skills and attitudes, taking into account personal circumstances. </p>
<p>Low financial literacy is particularly concerning in home loans. In an alarming parallel to the United States before the financial crisis, <a href="https://www.eurekareport.com.au/articles/141622/interest-only-borrowers-fail-literacy-test">roughly one third</a> of interest-only mortgagees do not understand that their repayments make no inroads into their debt, and that their interest rates will jump considerably after the interest-only period of the loan has expired. </p>
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Read more:
<a href="https://theconversation.com/financial-crises-101-could-provide-lessons-for-all-10432">Financial crises 101 could provide lessons for all</a>
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<p>But it isn’t just that low financial literacy increases risk. It is also important for achieving a productive economy. Economic efficiency requires borrowers to not only have good information but to understand it. This allows them to weigh up the costs of borrowing with the benefits that they expect to receive. </p>
<p>If the information is distorted, either deliberately by lenders or through the misunderstanding of borrowers, they will miscalculate the benefits and capital in the economy will be misallocated. Economists call this <a href="http://www.investopedia.com/terms/m/marketfailure.asp?optly_redirect=integrated&lgl=term-video-baseline">market failure</a>, a lot of which occurred in the housing market in the United States before the global financial crisis.</p>
<h2>Financial literacy isn’t improving</h2>
<p>Evidence suggests that financial literacy has not improved since the global financial crisis, and may have gotten worse. </p>
<p>A <a href="https://www.anz.com/resources/5/4/54720a2d-a540-49f0-b0a7-62f1ffb922e6/adult-financial-literacy-survey-summary.pdf?MOD=AJPERES">survey of adult financial literacy</a> in Australia found that in 2014 the number of people who could actually recognise an investment was “too good to be true” - for example a financial asset promising to pay a return much higher than the going return on similar assets and for no greater risk - had actually declined, to 50% from 53% just three years earlier.</p>
<p>The survey also found that those who recognised that good investments (something with relatively low risk) may fluctuate in value fell to 67% from 74%. </p>
<p>But financial literacy education must also go hand in hand with general literacy and numeracy. The <a href="http://www.pc.gov.au/research/supporting/literacy-numeracy-skills/literacy-numeracy-skills.pdf">Productivity Commission</a> found that 14% of the adult population had relatively low literacy skills in 2011-12. This is defined as being able to, at best, locate basic information from simple texts but being unable to evaluate truth claims or arguments.</p>
<p>The report also found 22% of the population had low numeracy skills, meaning that they can count, add and subtract and do other basic arithmetic. But they cannot understand statistical ideas, mathematical formula or analyse data.</p>
<p>In other words, a significant proportion of the Australian adult population are not equipped to understand the effect of an interest rate increase on their loan repayments, or understand a loan document that includes an interest rate increase after an initial period. </p>
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Read more:
<a href="https://theconversation.com/students-low-financial-literacy-makes-understanding-fees-loans-debt-difficult-45088">Students' low financial literacy makes understanding fees, loans, debt difficult</a>
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<p>Fixing the problem of financial illiteracy cannot wait until people are in the throes of negotiating home loans and credit cards. And it should definitely take place before Australians resort to pay day loans. </p>
<p>This was the aim of the Australian Government’s <a href="http://www.financialliteracy.gov.au/media/546585/report-403_national-financial-literacy-strategy-2014-17.pdf">National Financial Literacy Strategy</a>, that ends this year. The strategy proposes a number of educational initiatives including embedding financial literacy in the school curriculum, a formal teacher training program, and development of educational resources and tools.</p>
<p>The strategy draws on <a href="http://www.oecd.org/finance/National-Strategies-Financial-Education-Policy-Handbook.pdf">similar steps</a> that have been adopted by other countries and recommended by the Organisation for Economic Cooperation and Development (OECD).</p>
<p>The problem is that the curriculum is a crowded space. Financial literacy must compete with the latest fashions in school education as well as traditional curriculum content. </p>
<p>Fighting for curriculum space for financial literacy is a political exercise which governments must play hard. For example, by attaching serious funding to the achievement of financial literacy indicators at the school level, and training and certification for teachers. Increasing financial literacy isn’t just in the best interest of individuals, we all benefit from a more literate population.</p><img src="https://counter.theconversation.com/content/84695/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ross Guest has in the past received funding from the Australian Research Council.</span></em></p>It’s not just individuals who pay for low financial literacy. It also increases financial risks and holds back the economy.Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.