tag:theconversation.com,2011:/global/topics/financial-literacy-44984/articlesFinancial literacy – The Conversation2024-02-15T13:35:12Ztag:theconversation.com,2011:article/2232742024-02-15T13:35:12Z2024-02-15T13:35:12ZStock indexes are breaking records and crossing milestones – making many investors feel wealthier<figure><img src="https://images.theconversation.com/files/575391/original/file-20240213-30-trav60.jpg?ixlib=rb-1.1.0&rect=0%2C120%2C5751%2C3362&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Major stock indexes were hitting or nearing records in February 2024, as they were in early 2020 when this TV chyron appeared. </span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/FinancialMarketsWallStreet/1d60b3c58f8149a6bf9f1c9b48dfb189/photo?Query=S&P%20500=&mediaType=photo&sortBy=&dateRange=Anytime&totalCount=9&digitizationType=Digitized&currentItemNo=1&vs=true">AP Photo/Richard Drew</a></span></figcaption></figure><p><em>The S&P 500 stock index topped 5,000 for the first time on Feb. 9, 2024, exciting some investors and garnering a flurry of <a href="https://www.cnbc.com/2024/02/09/what-the-sp-500-at-5000-means-for-your-money.html">media coverage</a>. The Conversation asked <a href="https://scholar.google.com/citations?user=JfUEmSUAAAAJ&hl=en&oi=ao">Alexander Kurov</a>, a financial markets scholar, to explain what stock indexes are and to say whether this kind of milestone is a big deal or not.</em> </p>
<h2>What are stock indexes?</h2>
<p><a href="https://www.investopedia.com/terms/i/index.asp">Stock indexes</a> measure the performance of a group of stocks. When prices rise or fall overall for the shares of those companies, so do stock indexes. The number of stocks in those baskets varies, as does the system for how this mix of shares gets updated.</p>
<p>The <a href="https://www.investopedia.com/terms/d/djia.asp">Dow Jones Industrial Average</a>, also known as the Dow, includes shares in the 30 U.S. companies with the largest <a href="https://www.investopedia.com/terms/c/capitalization.asp">market capitalization</a> – meaning the total value of all the stock belonging to shareholders. That <a href="https://www.cnbc.com/dow-30/">list currently spans companies from Apple</a> to Walt Disney Co.</p>
<p>The <a href="https://corporatefinanceinstitute.com/resources/equities/sp-500-index/">S&P 500</a> tracks shares in 500 of the <a href="https://www.investopedia.com/terms/p/publiccompany.asp">largest U.S. publicly traded</a> companies.</p>
<p>The <a href="https://www.investopedia.com/terms/n/nasdaqcompositeindex.asp">Nasdaq composite</a> tracks performance of more than 2,500 stocks listed on the <a href="https://www.investopedia.com/terms/n/nasdaq.asp">Nasdaq stock exchange</a>.</p>
<p>The DJIA, <a href="https://guides.loc.gov/this-month-in-business-history/may/djia-first-published">launched on May 26, 1896</a>, is the oldest of these three popular indexes, and it was one of the first established.</p>
<p>Two enterprising journalists, Charles H. Dow and Edward Jones, had created a different index tied to the railroad industry a dozen years earlier. Most of the 12 stocks the DJIA originally included wouldn’t ring many bells today, such as Chicago Gas and National Lead. But one company that only got booted in 2018 had <a href="https://www.investopedia.com/ask/answers/100214/who-were-original-dow-jones-industrial-average-djia-companies.asp">stayed on the list for 120 years</a>: General Electric.</p>
<p>The S&P 500 index was introduced in 1957 because many investors wanted an option that was more representative of the overall U.S. stock market. The <a href="https://www.investopedia.com/terms/n/nasdaqcompositeindex.asp">Nasdaq composite</a> was launched in 1971. </p>
<p>You can <a href="https://www.investopedia.com/terms/i/indexfund.asp">buy shares in an index fund</a> that mirrors a particular index. This approach can diversify your investments and make them less prone to big losses.</p>
<p>Index funds, which have only existed since Vanguard Group founder <a href="https://www.investopedia.com/terms/j/john_bogle.asp">John Bogle launched the first one in 1976</a>, now <a href="https://www.cnbc.com/2024/01/18/passive-investing-rules-wall-street-now-topping-actively-managed-assets-in-stock-bond-and-other-funds.html">hold trillions of dollars </a>.</p>
<p><iframe id="YWdBN" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/YWdBN/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<h2>Why are there so many?</h2>
<p>There are <a href="https://www.investing.com/indices/world-indices">hundreds of stock indexes</a> in the world, but only about <a href="https://www.investing.com/indices/major-indices">50 major ones</a>.</p>
<p>Most of them, including the Nasdaq composite and the S&P 500, are value-weighted. That means stocks with larger market values account for a larger share of the index’s performance.</p>
<p>In addition to these <a href="https://www.investopedia.com/terms/b/broad-basedindex.asp">broad-based indexes</a>, there are many less prominent ones. Many of those <a href="https://www.spglobal.com/spdji/en/index-family/equity/us-equity/sp-sectors/#overview">emphasize a niche</a> by tracking stocks of companies in specific industries like energy or finance.</p>
<p><iframe id="UFzX2" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/UFzX2/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<h2>Do these milestones matter?</h2>
<p>Stock prices move constantly in response to corporate, economic and political news, as well as changes in investor psychology. Because company profits will typically grow gradually over time, the market usually fluctuates in the short term, while increasing in value over the long term.</p>
<p>The DJIA first <a href="https://www.spglobal.com/spdji/en/landing/topic/djia-125-milestones/">reached 1,000 in November 1972</a>, and it crossed the 10,000 mark on March 29, 1999. On Jan. 22, 2024, it surpassed 38,000 for the first time. Investors and the media will treat the new record set when it gets to another round number – 40,000 – as a milestone. </p>
<p>The S&P 500 index had never hit 5,000 before. But it had already been breaking records for several weeks.</p>
<p>Because there’s a lot of randomness in financial markets, the significance of round-number milestones is mostly psychological. There is no evidence they portend any further gains.</p>
<p>For example, the Nasdaq composite <a href="https://www.nasdaq.com/articles/nasdaq-composite-hits-5000-2015-03-03">first hit 5,000 on March 10, 2000</a>, at the end of the <a href="https://www.investopedia.com/terms/d/dotcom-bubble.asp">dot-com bubble</a>.</p>
<p>The index then plunged by almost 80% by October 2002. It took 15 years – <a href="https://www.cnbc.com/2015/03/02/us-stocks-open-narrowly-mixed-ahead-of-data.html">until March 3, 2015</a> – for it return to 5,000.</p>
<p>By mid-February 2024, the Nasdaq composite was <a href="https://finance.yahoo.com/quote/%5EIXIC?p=%255EIXIC">nearing its prior record high of 16,057</a> <a href="https://www.nasdaq.com/market-activity/statistical-milestones">set on Nov. 19, 2021</a>.</p>
<p>Index milestones matter to the extent they pique investors’ attention and <a href="https://www.investopedia.com/terms/m/marketsentiment.asp">boost market sentiment</a>.</p>
<p>Investors afflicted with a <a href="https://www.investopedia.com/how-fear-of-missing-out-will-push-bull-market-to-new-records-4682566">fear of missing out</a> may then invest more in stocks, pushing stock prices to new highs. Chasing after stock trends may destabilize markets by <a href="https://theconversation.com/wall-street-isnt-just-a-casino-where-traders-can-bet-on-gamestop-and-other-stocks-its-essential-to-keeping-capitalism-from-crashing-154154">moving prices away from their underlying values</a>.</p>
<p>When a stock index passes a new milestone, investors become more aware of their growing portfolios. Feeling richer can lead them to spend more. </p>
<p>This is called the <a href="https://www.investopedia.com/terms/w/wealtheffect.asp">wealth effect</a>. Many economists believe that the consumption boost that arises in response to a buoyant stock market can make the economy stronger.</p>
<p><iframe id="Th7ws" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/Th7ws/1/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<h2>Is there a best stock index to follow?</h2>
<p>Not really. They all measure somewhat different things and <a href="https://www.cnbc.com/2023/07/21/difference-between-the-sp-the-dow-and-the-nasdaq.html">have their own quirks</a>.</p>
<p>For example, the S&P 500 tracks many different industries. However, because it is value-weighted, it’s heavily influenced by only seven stocks with very large market values.</p>
<p>Known as the “<a href="https://www.investopedia.com/magnificent-seven-stocks-8402262">Magnificent Seven</a>,” shares in Amazon, Apple, Alphabet, Meta, Microsoft, Nvidia and Tesla now account for <a href="https://www.blackrock.com/us/individual/investment-ideas/what-is-factor-investing/factor-commentary/andrews-angle/factors-and-magnificent-seven">over one-fourth</a> of the S&P 500’s value. Nearly all are in the tech sector, and they played a big role in pushing the S&P across the 5,000 mark.</p>
<p>This <a href="https://www.nasdaq.com/glossary/n/narrow-based">makes the index more concentrated</a> on a single sector than it appears.</p>
<p>But if you check out several stock indexes rather than just one, you’ll get a good sense of how the market is doing. If they’re all rising quickly or breaking records, that’s a clear sign that the market as a whole is gaining.</p>
<p>Sometimes the smartest thing is to not pay too much attention to any of them.</p>
<p>For example, after hitting <a href="https://www.cnbc.com/2020/02/19/stock-market-wall-street-in-focus-amid-coronavirus-outbreak.html">record highs on Feb. 19, 2020</a>, the <a href="https://www.thestreet.com/dictionary/covid-19-stock-market-crash-of-2020">S&P 500 plunged by 34%</a> in just 23 trading days due to concerns about what COVID-19 would do to the economy. But the market rebounded, with stock indexes hitting new milestones and notching new highs by the end of that year.</p>
<p>Panicking in response to short-term market swings would have made investors more likely to sell off their investments in too big a hurry – a move they might have later regretted. This is why I believe advice from the immensely successful investor and <a href="https://www.cnbc.com/2023/04/21/how-much-youd-have-if-you-invested-in-the-s-and-p-500-a-decade-ago.html">fan of stock index funds</a> Warren Buffett is worth heeding.</p>
<p>Buffett, whose <a href="https://www.investopedia.com/articles/investing/012715/5-richest-people-world.asp">stock-selecting prowess has made him one of the world’s 10 richest people</a>, likes to say “<a href="https://www.cnbc.com/2016/03/04/warren-buffett-buy-hold-and-dont-watch-too-closely.html">Don’t watch the market closely</a>.”</p>
<p>If you’re reading this because stock prices are falling and you’re wondering if you should be worried about that, consider <a href="https://www.cnbc.com/2018/12/17/warren-buffett-says-read-this-poem-when-the-market-is-tanking.html">something else Buffett has said</a>: “The light can at any time go from green to red without pausing at yellow.”</p>
<p>And the opposite is true as well.</p><img src="https://counter.theconversation.com/content/223274/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alexander Kurov does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The S&P 500 topped 5,000 on Feb. 9, 2024, for the first time. The Dow Jones Industrial Average will probably hit a new big round number soon too.Alexander Kurov, Professor of Finance and Fred T. Tattersall Research Chair in Finance, West Virginia UniversityLicensed as Creative Commons – attribution, no derivatives.tag: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>
<hr>
<p>
<em>
<strong>
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>
</strong>
</em>
</p>
<hr>
<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>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/fintok-and-finfluencers-are-on-the-rise-3-tips-to-assess-if-their-advice-has-value-161406">FinTok and 'finfluencers' are on the rise: 3 tips to assess if their advice has value</a>
</strong>
</em>
</p>
<hr>
<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/2177792024-01-17T19:07:47Z2024-01-17T19:07:47ZWhat are ‘good’ and ‘bad’ debts, and which should I pay off first?<p>With the cost of living soaring and many struggling to get a pay rise, it’s not surprising people are using debt to navigate life’s financial twists and turns.</p>
<p>Owing money can sometimes feel challenging, but not all debts should keep you awake at night.</p>
<p>So which debts are good and which are bad? And in what order should you pay them off? As it all depends on your personal circumstances, all I can offer is general information and not financial advice. Ideally, you should seek guidance from an accredited financial adviser. But in the meantime, here are some ideas to consider.</p>
<hr>
<p>
<em>
<strong>
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>
</strong>
</em>
</p>
<hr>
<h2>What is a ‘good debt’?</h2>
<p>Good debts can be strategic tools and help build a solid foundation for your future. They usually increase your net worth by helping you generate income or buy assets that increase in value. </p>
<p>With good debts, you usually get back more than what you pay for. They usually have lower interest rates and longer repayment terms. But personal finance is dynamic, and the line between good and bad debt can be nuanced. If not managed properly, even good debts can cause problems. </p>
<p>Some examples of “good debts” might include:</p>
<p><strong>Mortgages</strong>: A mortgage allows you to buy a house, which is an asset that generally increases in value over time. You may potentially get tax advantages, such as <a href="https://www.ato.gov.au/forms-and-instructions/rental-properties-2023/other-tax-considerations">negative gearing</a>, through investment properties. However, it’s crucial not to overstretch yourself and turn a mortgage into a nightmare. As a rule of thumb, try avoid spending <a href="https://www.cnbc.com/select/mortgage-affordability/">more than 30% of your income</a> per year on your mortgage repayments.</p>
<p><strong>Student loans</strong>: Education is an investment in yourself. Used well, student loans (such as <a href="https://www.studyassist.gov.au/help-loans/hecs-help">HECS-HELP</a>) can be the ticket to a higher-paying job and better career opportunities.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/560928/original/file-20231122-4580-k0yfz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A woman in a hijab looks at her phone." src="https://images.theconversation.com/files/560928/original/file-20231122-4580-k0yfz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/560928/original/file-20231122-4580-k0yfz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/560928/original/file-20231122-4580-k0yfz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/560928/original/file-20231122-4580-k0yfz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/560928/original/file-20231122-4580-k0yfz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/560928/original/file-20231122-4580-k0yfz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/560928/original/file-20231122-4580-k0yfz.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>
<figcaption>
<span class="caption">Review the terms and conditions of any loans carefully.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/young-muslim-woman-wears-hijab-black-2252700881">Shutterstock</a></span>
</figcaption>
</figure>
<h2>What is a ‘bad debt’?</h2>
<p>“Bad debts” undermine your financial stability and can hinder your financial progress. They usually come with high interest rates and short repayment terms, making them more challenging to pay off. They can lead to a vicious cycle of debt. </p>
<p>Examples of bad debts include:</p>
<p><strong>Payday loans</strong>: A payday loan offers a quick fix for people in a financial tight spot. However, their steep interest rates, high fees and tight repayment terms often end up worsening a person’s financial problems. The interest and fee you may end up paying can get close to the loan amount itself.</p>
<p><strong>Credit card debt:</strong> Credit cards can be like quicksand for your finances. If you don’t pay off your purchase on time, you’ll be subject to an annual interest rate of around <a href="https://www.rba.gov.au/statistics/tables/">19.94%</a>. For a A$3,000 credit card debt, for example, that could mean paying nearly $600 annual interest. Carrying credit card debt from month to month can lead to a seemingly never-ending debt cycle.</p>
<p><strong>Personal loans:</strong> People usually take personal loans from a bank to pay for something special, such as a nice holiday or a car. They often come with higher interest rates, averaging around <a href="https://www.finder.com.au/personal-loans">10%</a>. Spending money that you don’t have can lead to prolonged financial headaches.</p>
<p><strong>Buy-now-pay-later services:</strong> Buy-now-pay-later services often provide interest-free instalment options for purchases. This can be tempting, but the account fees and late payment fees associated with buy-now-pay-later services can lead to a long-term financial hangover. The convenience and accessibility of buy-now-pay-later services can also make it easy to get further and further into debt.</p>
<h2>So in what order should I pay off my debts?</h2>
<p>There is no one right answer to this question, but here are three factors to consider.</p>
<p><strong>Prioritise high-interest debts</strong>: Start by confronting the debts with the highest interest rates. This typically includes credit card debt and personal loans. Paying off high-interest debts first can save you money and reduce your total debt faster.</p>
<p><strong>Negotiate interest rates or switch lenders:</strong> Don’t be shy. A simple call to your lender requesting a lower rate can make a significant difference. You may also take advantage of sign-on offers and refinancing your loan with a new lender. In the banking business, customers are not usually rewarded for their loyalty.</p>
<p><strong>Consider different repayment strategies:</strong> Choose a debt repayment strategy that aligns with your preferences. Some people get a psychological boost from paying off smaller debts first (this is often called the “<a href="https://www.wellsfargo.com/goals-credit/smarter-credit/manage-your-debt/snowball-vs-avalanche-paydown/#:%7E:text=The%20%22snowball%20method%2C%22%20simply,all%20accounts%20are%20paid%20off.">snowball method</a>”). Others focus on high-interest debts (often known as the “<a href="https://www.wellsfargo.com/goals-credit/smarter-credit/manage-your-debt/snowball-vs-avalanche-paydown/#:%7E:text=The%20%22snowball%20method%2C%22%20simply,all%20accounts%20are%20paid%20off.">avalanche method</a>”). Find what works for you. The most important thing is to have a plan and stick to it.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/560927/original/file-20231122-15-l1oafq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="An older man speaks on the phone." src="https://images.theconversation.com/files/560927/original/file-20231122-15-l1oafq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/560927/original/file-20231122-15-l1oafq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/560927/original/file-20231122-15-l1oafq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/560927/original/file-20231122-15-l1oafq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/560927/original/file-20231122-15-l1oafq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/560927/original/file-20231122-15-l1oafq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/560927/original/file-20231122-15-l1oafq.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>
<figcaption>
<span class="caption">Don’t be afraid to call your lender and ask for a lower interest rate.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/pensive-mature-man-communicating-someone-over-1656926761">Shutterstock</a></span>
</figcaption>
</figure>
<p>Review the terms of each debt carefully. Certain loans offer flexibility in repayment schedules, while others may impose penalties for early settlement. Take note of these conditions as you develop your repayment plan.</p>
<p>Debt can be a useful tool or a dangerous trap, depending on how you use it. By understanding the difference between good and bad debts, and by having a smart strategy for paying them off, you can take charge of your financial future.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/many-students-dont-know-how-to-manage-their-money-here-are-6-ways-to-improve-financial-literacy-education-177918">Many students don't know how to manage their money. Here are 6 ways to improve financial literacy education</a>
</strong>
</em>
</p>
<hr>
<img src="https://counter.theconversation.com/content/217779/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Angel Zhong 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>Feel like you’re drowning in debt? Owing money can sometimes be challenging, but not all debts should keep you awake at night.Angel Zhong, Associate Professor of Finance, RMIT UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2202792024-01-14T19:04:44Z2024-01-14T19:04:44ZWhen should you start? How much should you give? How to make sure pocket money teaches your kids financial skills<figure><img src="https://images.theconversation.com/files/568798/original/file-20240111-21-axxbv4.jpg?ixlib=rb-1.1.0&rect=6%2C31%2C4252%2C2807&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/selective-focus-photo-of-australian-dollar-coins-7186388/">Karen Laårk Boshoff/ Pexels </a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>Giving kids pocket money can be a really challenging decision for families. It raises questions about when to start it, how much to give and whether it should be tied to chores. </p>
<p>As a finance researcher and parent, it’s also important to view pocket money as an educational opportunity. You can use it to teach children how to make informed financial decisions, set meaningful goals and develop responsible spending habits. </p>
<p>Here’s how you can approach it. </p>
<h2>When should you start?</h2>
<p>There is no one “right age” but you could reasonably consider pocket money when children start school and begin learning to add and subtract. </p>
<p>This means your child will be old enough to start grasping concepts like saving and spending. </p>
<p>As your child grows, you can move on from basic arithmetic and tailor your discussions to what your child is learning in maths.</p>
<figure class="align-center ">
<img alt="A young girl puts a coin in a money box shaped like a Kombi van." src="https://images.theconversation.com/files/568802/original/file-20240111-19-slenfh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/568802/original/file-20240111-19-slenfh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/568802/original/file-20240111-19-slenfh.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/568802/original/file-20240111-19-slenfh.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/568802/original/file-20240111-19-slenfh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/568802/original/file-20240111-19-slenfh.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/568802/original/file-20240111-19-slenfh.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Pocket money can teach your child how to spend and how to save.</span>
<span class="attribution"><a class="source" href="https://unsplash.com/photos/girl-wearing-black-sweatshirt-playing-toy-car-flVuw7nbzmM">Annie Spratt/Unsplash</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>How much should it be?</h2>
<p>How much you give will depend on your family situation and finances. </p>
<p>A useful starting point is working out what the pocket money will be used for. Is it simply to give your child a bit of autonomy over spending (for example, buying an ice block from the canteen)?. Is it to try to save for something special? Or is it to be used for all entertainment, clothes and on-trend desires like fancy water bottles? </p>
<p>A long-held rule of thumb is giving $1 per week relating to your child’s age (so $5 for a five-year-old). But of course amounts tying pocket money to a child’s raw age may not work with today’s economic conditions. Three years ago, $10 bought a lot more than it does today. </p>
<p>Of course you will also need to consider pocket money within the context of your wider household budget. Down the track, there’s nothing wrong with talking to your child about adjusting their pocket money if your household budget needs changing.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-do-i-tell-my-kids-we-are-currently-short-on-money-without-freaking-them-out-208008">How do I tell my kids we are currently short on money – without freaking them out?</a>
</strong>
</em>
</p>
<hr>
<h2>Cash or direct debit?</h2>
<p>When your child is little, giving them pocket money in cash is a good way to help them start to understand money. It’s something they can see and hold in their hands. </p>
<p>As they get older and the amounts get larger, direct debits will become more convenient and can teach them about handling their money online. </p>
<p>Since getting your hands on cash is difficult these days, when they’re young you can also give your kids pocket money electronically but give them monopoly money or a similar representative of what they have earned. You can then progress to a spreadsheet as they get older. </p>
<h2>What about tying it to chores?</h2>
<p>Many parents like to provide pocket money in exchange for chores as they feel it might instil a work ethic in their kids and the idea you don’t get money for nothing. </p>
<p>If you are tying pocket money to chores, be very clear about what will be done for what money and when chores need to be reviewed. Follow-through is important for this structure to be effective, so if they don’t do the work, they don’t get paid. You can also give them bonuses for jobs that are particularly well done.</p>
<p>Personally, I find this process to be more work for parents than it’s worth. I prefer the children to simply help around the house because it’s a core family value rather than tying it to finances.</p>
<figure class="align-center ">
<img alt="A young boy washes dishes in a sink." src="https://images.theconversation.com/files/568800/original/file-20240111-15-axxbv4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/568800/original/file-20240111-15-axxbv4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/568800/original/file-20240111-15-axxbv4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/568800/original/file-20240111-15-axxbv4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/568800/original/file-20240111-15-axxbv4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/568800/original/file-20240111-15-axxbv4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/568800/original/file-20240111-15-axxbv4.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">
<figcaption>
<span class="caption">If pocket money is tied to chores, make sure they actually do the chores.</span>
<span class="attribution"><a class="source" href="https://www.pexels.com/photo/industrious-boy-cleaning-the-dishes-6481586/">Kampus Production</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>The bigger picture</h2>
<p>However you structure pocket money in your family, it’s important to consider it an opportunity to learn about finances. </p>
<p>You might start with simple discussions around “do I have enough money to buy this packet of textas and that toy car?” or “how many weeks until I can afford that book?”. Then as your child develops, you can introduce concepts such as cash flow, interest rates and banking products. </p>
<p>For example, cash flow lessons can start with talking about the importance of spending less than you earn. </p>
<h2>Teaching kids about goals</h2>
<p>Pocket money is also a fantastic way to help kids learn how to save. Help them set a <a href="https://doi.org/10.1287/mnsc.2017.2819">realistic goal</a> to save up for something that matters to them. A pair of sneakers they want or a particular video game is likely to be more achievable than a new bike. This will help motivate and challenge your child, without overwhelming them. </p>
<p>As your child gets older, you can introduce more sophisticated notions of saving and funds. </p>
<p>For example, when my child started high school we talked about setting up an emergency fund. As she was going to catch buses, we worked out the fund should be $50 (based on missing the bus and needing a taxi home). This became her new “baseline” before spending on non-essential items such as food from the school canteen. </p>
<p>Barefoot Investor author Scott Pape <a href="https://www.barefootinvestor.com/kids">recommends</a> starting with physical buckets with “splurge” for every day little things, “save” for big goals, “give” for acts of kindness and “grow” for investing. </p>
<figure class="align-center ">
<img alt="Three single sneakers in a shop window." src="https://images.theconversation.com/files/568799/original/file-20240111-21-eoy580.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/568799/original/file-20240111-21-eoy580.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/568799/original/file-20240111-21-eoy580.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/568799/original/file-20240111-21-eoy580.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/568799/original/file-20240111-21-eoy580.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/568799/original/file-20240111-21-eoy580.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/568799/original/file-20240111-21-eoy580.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Encourage your child to save for something significant but realistic.</span>
<span class="attribution"><a class="source" href="https://www.pexels.com/photo/three-unpaired-multicolored-leather-sneakers-on-display-2300334/">Adrian Dorobantu/ Pexels</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>Shopping skills</h2>
<p>Once your child has their own money to spend, a trip to the shops takes on a whole new significance. </p>
<p>Smart shopping is not just about comparing prices or where to find the best bargains. It is also <a href="https://doi.org/10.1111/joca.12565">learning</a> what is worth spending your money on and when. </p>
<p>You can talk to your child about what they value and their emotional responses around buying decisions. For example, “how long was it before the excitement of your new T-shirt wore off?” Or “Did you feel differently when you spent your money on going to that movie (an experience) versus that box of Lego (a tangible product)?”</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/we-dont-need-banks-teaching-kids-about-money-schools-have-it-covered-151093">We don't need banks teaching kids about money. Schools have it covered</a>
</strong>
</em>
</p>
<hr>
<p>There are lots of things to consider (and no perfect formula) when it comes to pocket money. But if it means you can integrate financial skills into everyday life, it’s a fantastic investment in your kids’ education.</p><img src="https://counter.theconversation.com/content/220279/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Robyn McCormack 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>However you structure pocket money in your family, it is important to consider it an opportunity to learn about finances.Robyn McCormack, Marketing and Finance Academic, Bond UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2181262023-12-28T20:37:40Z2023-12-28T20:37:40ZCould you cope with a shock to your bank balance? 5 ways to check you are financially resilient<p>Imagine the dentist has just said you urgently need a A$2,000 dental crown. A week later, a pipe in your bathroom bursts, causing $8,000 worth of damage. Suddenly, you’ve been hit with a $10,000 financial shock.</p>
<p>As the cost-of-living crisis plunges more households into financial uncertainty and at least <a href="https://melbourneinstitute.unimelb.edu.au/data/taking-the-pulse-of-the-nation-2022/2023/australians-face-challenging-budgetary-constraints#:%7E:text=Over%20the%20past%20six%20months,has%20increased%20to%2060%20percent.">one-third</a> of Australians struggle to make ends meet, it’s more important than ever to ask yourself: how financially resilient am I?</p>
<p>Being financially resilient means you aren’t left financially devastated when an expensive emergency creeps up on you. Here are five key signs of financial resilience.</p>
<hr>
<p>
<em>
<strong>
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>
</strong>
</em>
</p>
<hr>
<h2>1. You have a plan for what you’d do if you suddenly lost your salary</h2>
<p>Financial resilience means having a plan to fall back on during tough times. This extends to how you’d make money if you lost your job.</p>
<p>In practice, that means things like making sure your skills and contacts are kept up to date so you can more easily find a new job. You might also consider whether a “side hustle” job such as tutoring could work for you in the short term, and how you’d put that plan into practice if needed. Perhaps you have a spare room in your home you could rent out for a period of time if you lost your salary. </p>
<p>Those examples won’t work for everyone, of course, but it’s still worth asking yourself the question: what would I do if I lost my salary tomorrow?</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/563490/original/file-20231204-15-i1rzz2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A worried father looks at his phone while his daughter sits in the background." src="https://images.theconversation.com/files/563490/original/file-20231204-15-i1rzz2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/563490/original/file-20231204-15-i1rzz2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/563490/original/file-20231204-15-i1rzz2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/563490/original/file-20231204-15-i1rzz2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/563490/original/file-20231204-15-i1rzz2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=504&fit=crop&dpr=1 754w, https://images.theconversation.com/files/563490/original/file-20231204-15-i1rzz2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=504&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/563490/original/file-20231204-15-i1rzz2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=504&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">It’s good to think about how you’d handle a difficult financial situation – well before disaster strikes.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/worried-father-looking-smart-phone-holding-482556850">Shutterstock</a></span>
</figcaption>
</figure>
<h2>2. You have enough liquid assets to meet an unexpected financial expense</h2>
<p>Liquid assets means money that can be accessed quickly and easily to overcome an unplanned financial expense. Savings are a good example. They provide a buffer so you can cope in the short term if a financial shock strikes. The federal government’s Moneysmart website suggests you aim to have enough in your emergency savings fund to cover <a href="https://moneysmart.gov.au/saving/save-for-an-emergency-fund">three months of expenses</a>.</p>
<p>Having an <a href="https://moneysmart.gov.au/glossary/offset-account">offset account</a> as part of a mortgage is another option that provides a buffer. Putting money in an offset account helps you save while reducing the amount of interest on a home loan. You can still access the money in an offset account at any time.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1712058155063022023"}"></div></p>
<h2>3. You have bought the right financial products, such as insurance</h2>
<p>Financial products, such as insurance, hedge against potential losses.</p>
<p>Personal insurance is important because it provides income in the event of death, illness or injury. Examples include:</p>
<ul>
<li><p>life insurance (which pays out to your beneficiaries, such as your partner or children, when you die)</p></li>
<li><p>total and permanent disability insurance (which means you may get some money if you acquire a disability that prevents you from working)</p></li>
<li><p>income protection (which provides you with an income if you can no longer work)</p></li>
<li><p>trauma cover (which covers a life-changing illness or injury, such as cancer or a stroke).</p></li>
</ul>
<p>Check if your superannuation has any of these insurances included in it. <a href="https://www.griffith.edu.au/__data/assets/pdf_file/0030/295770/FPRJ-V4-ISS1-pp-53-75-insurance-literacy-in-australia.pdf">Research</a> has found that many Australians are underinsured.</p>
<h2>4. You can still pay your debts when times are tough</h2>
<p>Being able to borrow money can help when you’re in a tight spot. But knowing where to borrow from, how much to borrow and how to manage debt repayments is crucial.</p>
<p>Financially resilient people use debt responsibly. That means: </p>
<ul>
<li><p>not using debt for frivolous expenses like after-work drinks </p></li>
<li><p>staying away from private money lenders</p></li>
<li><p>being cautious about buy-now-pay-later services</p></li>
<li><p>watching out for debts with high interest rates, such as payday loans and credit card debt</p></li>
<li><p>maintaining debt repayments consistently.</p></li>
</ul>
<p>If you’re having debt problems, talk to your lender about renegotiating your repayment arrangements, or contact the <a href="https://ndh.org.au/">National Debt Helpline</a> on 1800 007 007.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/563494/original/file-20231204-29-w1vfxx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A woman looks at her computer while holding a credit card." src="https://images.theconversation.com/files/563494/original/file-20231204-29-w1vfxx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/563494/original/file-20231204-29-w1vfxx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/563494/original/file-20231204-29-w1vfxx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/563494/original/file-20231204-29-w1vfxx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/563494/original/file-20231204-29-w1vfxx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/563494/original/file-20231204-29-w1vfxx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/563494/original/file-20231204-29-w1vfxx.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>
<figcaption>
<span class="caption">Credit card debt can come with high interest rates.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/concentrated-millennial-generation-african-multiracial-woman-1978757975">Shutterstock</a></span>
</figcaption>
</figure>
<h2>5. You are financially literate</h2>
<p>Being financially literate means you can assess the benefits and risks of using savings or taking out debt to meet an unplanned financial need. </p>
<p>As I have <a href="https://theconversation.com/are-you-financially-literate-here-are-7-signs-youre-on-the-right-track-202331">written</a> before on The Conversation, key signs of financial literacy include tracking your cashflow, building a budget, as well as understanding what debts you have and which to pay first. </p>
<p>It also means storing your money across different places (such as superannuation, savings accounts, property and the share market) and understanding how financial assets like cash, shares and bonds work.</p>
<p>Being aware of your financial strengths and weaknesses, and having financial goals is also important.</p>
<p>Nobody is born knowing how to make sound financial decisions; it’s a skill that must be learned. </p>
<p>It’s good to think about the resources you would draw upon to help get yourself out of a difficult financial situation – well before disaster strikes.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/battling-to-make-ends-meet-financial-planning-expert-offers-5-tips-on-how-to-build-your-budget-214861">Battling to make ends meet? Financial planning expert offers 5 tips on how to build your budget</a>
</strong>
</em>
</p>
<hr>
<img src="https://counter.theconversation.com/content/218126/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>Being financially resilient means you aren’t left financially devastated when an expensive emergency creeps up on you.Bomikazi Zeka, Assistant Professor in Finance and Financial Planning, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2130502023-11-29T13:40:27Z2023-11-29T13:40:27ZThere’s a financial literacy gender gap − and older women are eager for education that meets their needs<figure><img src="https://images.theconversation.com/files/557150/original/file-20231101-21-xv252p.jpg?ixlib=rb-1.1.0&rect=18%2C9%2C6211%2C4128&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Knowledge is power − especially where money is concerned.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/senior-woman-using-calculator-while-going-through-royalty-free-image/1672859584">Rockaa/E+/Getty Images</a></span></figcaption></figure><p>Every day, families across the U.S. have to make difficult decisions about budgeting, spending, insurance, investments, savings, retirement and on and on. When faced with these choices, financial literacy – that is, knowing how to make informed decisions about money – is key.</p>
<p>Yet, Americans in general <a href="https://gflec.org/wp-content/uploads/2021/10/TIAA-Institute_GFLEC_P-Fin-Index-Finacial-literacy-and-wellbeing-in-a-five-generation-America_TI_Yakoboski_October-2021.pdf">aren’t very financially literate</a>. And recent research suggests <a href="https://helpageusa.org/wp-content/uploads/2023/06/Report-V3-updated.pdf">women are less financially literate than men</a>, regardless of their schooling, income or marital status.</p>
<p>As a <a href="https://cesr.usc.edu/people/staff/lilarabi">social scientist</a> who studies aging and the social safety net, I recently took part in a large analysis of older women’s financial literacy. My team and I found that men’s financial literacy scores were 25% higher than women’s on average, even though the two groups showed no difference in math skills or overall cognitive ability. </p>
<p>Black and Hispanic women saw an even greater financial literacy gender gap, with scores that were, on average, 40% to 45% lower than those of white, non-Hispanic men.</p>
<h2>Why financial literacy matters later in life</h2>
<p>This gap is a big problem, especially as women approach older age. Because they tend to live longer – almost <a href="https://doi.org/10.1001/jamainternmed.2023.6041">six years</a> more than men, according to the latest figures – and <a href="https://www.nber.org/system/files/working_papers/w24429/w24429.pdf">leave the workforce earlier</a>, women face longer retirements. </p>
<p>And when they reach retirement age, women often have <a href="https://www.gao.gov/blog/growing-disparities-retirement-account-savings">inadequate savings</a>, in part because they face more <a href="https://eric.ed.gov/?id=EJ1232354">family-related career interruptions</a> and are concentrated in <a href="https://www.bls.gov/opub/mlr/2000/09/art3full.pdf">lower-paying jobs</a>.</p>
<p>Consider that in 2020, women who worked full time earned a median of <a href="https://www.bls.gov/opub/reports/womens-earnings/2020/home.htm">US$891 a week</a>, versus men’s $1,082. Their career interruptions, lower earnings and earlier retirements mean that female Social Security recipients get <a href="https://www.ssa.gov/news/press/factsheets/women-alt.pdf">only 80%</a> of the benefits that men do.</p>
<p>Financial education can’t erase the effects of decades of structural inequality, of course. But the evidence shows that it can <a href="http://dx.doi.org/10.2139/ssrn.2753510">make a difference</a> by helping women make more informed decisions for their future.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/swXHv0khiWY?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">A brief introduction to financial literacy concepts from New York University.</span></figcaption>
</figure>
<h2>Demand for financial education is high</h2>
<p>Only 16% of women ages 40 to 65 have ever received any financial education, according to <a href="https://helpageusa.org/wp-content/uploads/2023/06/Report-V3-updated.pdf">a survey of women my colleagues and I fielded in 2022</a>. Among African American, Native American and Asian American women, this figure falls to 8% to 10%.</p>
<p>Our survey also showed that behaviors that can help with financial security are patchy among respondents. Close to 30% never put money into an emergency fund or savings account, nearly 40% never put money into an investment or retirement account, and 60% have never talked to a financial professional. Tellingly, only 20% said they felt relaxed about their financial future.</p>
<p>But not all is doom and gloom: More than 70% of women in our survey said they were interested in receiving financial education. Demand was especially high among Hispanic/Latina (93%), Black (85%) and Asian American (80%) women.</p>
<p>Our survey respondents said they wanted to learn about long-term planning and other issues specific to their life stage, not just general money management principles. They also said they would prefer flexible programs that make it easy for busy people to participate, as well as those delivered by trusted agents in their communities, such as schools or community centers.</p>
<p>Right now, there aren’t many financial literacy programs specifically designed to address the needs of older women. But this research gives us a blueprint for future programs. Employers, financial service providers, community groups and national organizations all have an important role to play in empowering older women with the financial literacy skills they want and need.</p><img src="https://counter.theconversation.com/content/213050/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lila Rabinovich has received funding from the Robert Wood Johnson Foundation, the Michigan Retirement and Disability Research Center, and other foundations and agencies.</span></em></p>Only a small fraction of women have received any financial education at all.Lila Rabinovich, Social scientist, USC Dornsife College of Letters, Arts and SciencesLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2160482023-10-25T14:46:57Z2023-10-25T14:46:57ZWe quizzed 4,000 people on the economy – here’s who knew the most<figure><img src="https://images.theconversation.com/files/555781/original/file-20231025-28-cj401p.jpg?ixlib=rb-1.1.0&rect=33%2C25%2C5565%2C3707&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/not-sure-young-adult-businessman-have-700370347">Khosro/Shutterstock</a></span></figcaption></figure><p>People in the UK say the economy and inflation are <a href="https://www.ipsos.com/en-uk/economy-and-inflation-remain-countrys-biggest-concerns-closely-followed-nhs">currently</a> the most important issues facing the country. But do Britons actually know much about how the economy works?</p>
<p>My colleagues, Dan Kenealy and Hayley Bennett, and I used a survey to study public attitudes and knowledge about the UK economy and politics. We <a href="https://onlinelibrary.wiley.com/doi/full/10.1111/spol.12963">analysed the responses</a> of more than 4,400 adults, and found that many people answer fact-based questions about the economy, employment rights and benefits incorrectly. For example, only just under half knew that stock markets can rise even when the economy is not growing. </p>
<p>This is a problem because, as a general election nears, people may not be able to tell fact from fiction in upcoming policy debates. Our findings also show that there are political implications, with certain groups of people more likely to be informed about different topics. This correlates with support for specific policies or political parties – people who know more factually about welfare are more likely to support it, for example. </p>
<p>We found that older people, those with university degrees and men tend to show somewhat greater knowledge about the economy and welfare state in general. But when we analysed specific topics, important differences emerged. For example, men were more likely to answer questions about finance correctly then women – but women were more knowledgeable about benefits. And people from higher-income households answered more questions about finance correctly, but not about benefits or employment rights.</p>
<h2>Welfare and benefits</h2>
<p>One topic where people were particularly likely to get things wrong was welfare. Most respondents overestimated the amount of welfare spending on the unemployed and benefit fraud massively. <a href="https://www.gov.uk/government/statistics/public-expenditure-statistical-analyses-2022">Less than 5%</a> of the UK government’s welfare budget is spent directly on unemployment benefits, but the average public estimate was nearly 37%. And while less than <a href="https://www.gov.uk/government/statistics/fraud-and-error-in-the-benefit-system-financial-year-2021-to-2022-estimates/fraud-and-error-in-the-benefit-system-financial-year-ending-fye-2022">3%</a> of welfare benefits are claimed fraudulently, the UK public guessed that the figure was 28%.</p>
<p><a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/spol.12347">Previous studies</a> have highlighted deficiencies in public knowledge on this topic. But there has been no marked improvement in people’s ability to make good estimates over the past ten years.</p>
<p>While one might expect that those most affected by the benefits system would know more from experience, that is not always the case. People who had been receiving benefits already before the pandemic, for example, were just as likely to overestimate spending or fraud and did not do better or worse on fact-based questions than others. </p>
<p>You might also expect members of trade unions to be particularly knowledgeable, given that their organisations work on improving workers’ conditions. But, on average, they showed no difference in knowledge compared with non-members.</p>
<h2>How knowledge relates to political attitudes</h2>
<p>Major differences could be seen according to people’s political and policy preferences. People who favoured greater redistribution of wealth and more generous benefits answered more fact-based questions correctly, and gave more accurate spending and fraud estimates. </p>
<p>Similarly, people who supported greater direct state involvement in the delivery of public services, such as healthcare, education or transport, were more knowledgeable than people emphasising private-sector delivery. </p>
<figure class="align-center ">
<img alt="A woman sits on the floor resting her head in her hands, with financial papers around her feet" src="https://images.theconversation.com/files/555783/original/file-20231025-27-1oubvc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/555783/original/file-20231025-27-1oubvc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/555783/original/file-20231025-27-1oubvc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/555783/original/file-20231025-27-1oubvc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/555783/original/file-20231025-27-1oubvc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/555783/original/file-20231025-27-1oubvc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/555783/original/file-20231025-27-1oubvc.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">
<figcaption>
<span class="caption">Many people don’t know what support they are entitled to if they lose their job.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/depressed-stressed-young-asian-woman-meet-1701354034">KomootP/Shutterstock</a></span>
</figcaption>
</figure>
<p>Overall, people who favour a more comprehensive welfare state demonstrate higher levels of knowledge of how the economy and welfare system in the UK work. This was true even when controlling for socioeconomic and demographic characteristics. </p>
<p>This further translates into party political choices. Labour voters, on average, demonstrated a better overall understanding of benefits and the economy than Conservative voters.</p>
<h2>Why understanding the economy matters</h2>
<p>When the economy is struggling, it is important for people to know factual information about what they are personally entitled to. Only about half of our respondents knew that all UK citizens who are employees are entitled to unemployment benefits if they lose their job. This lack of knowledge may be a reason why over £18 billion in eligible benefits is <a href="https://policyinpractice.co.uk/wp-content/uploads/Missing-out-19-billion-of-support.pdf">estimated</a> to go unclaimed every year.</p>
<p>Knowledge is difficult to measure, and the economy is a particularly complex topic. But you certainly don’t need a business degree to know that many people are struggling with the high cost of living. As our findings show, some groups understand specific topics more than others, for a number of reasons. This can be useful for them in their day-to-day financial decisions, but is also important in informing their political choices. </p>
<p>What this tells us above all else is that politicians, government departments and the media have work to do to make sure that all people are well-informed and engaged. Other sources of political education, like trade unions and political parties, can play a role here too in increasing the public’s knowledge.</p><img src="https://counter.theconversation.com/content/216048/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The data collection for this project was funded by the School of Social and Political Science at the University of Edinburgh</span></em></p>Many people answer questions about the economy and benefits incorrectly.Jan Eichhorn, Senior Lecturer in Social Policy, The University of EdinburghLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2153892023-10-19T13:18:25Z2023-10-19T13:18:25ZFootball and big money: what some professional players in Ghana told us about handling their finances<p>Footballers are among the best paid sportsmen in most parts of the world. </p>
<p>The unfortunate reality, however, is that the retirement <a href="https://www.theghanareport.com/top-5-players-who-went-broke-after-making-millions-in-football/">experiences</a> of many former professional footballers have been awful. Within the sports media landscape, there have been <a href="https://www.moneynest.co.uk/bankrupt-footballers/">reported cases</a> of once-wealthy footballers who have gone bankrupt soon upon retirement. Notable examples in Ghana are former Black Stars players Sammy Adjei, John Naawu, Joe Odoi, Prince Addu Poku and Amusa Gbadamoshie. </p>
<p>According to some <a href="https://scholar.google.com/scholar?output=instlink&q=info:0Ha1K3SHR4kJ:scholar.google.com/&hl=en&as_sdt=0,5&scillfp=13443085754161180526&oi=lle">academics</a> this unfortunate situation stems in part from the fact that the danger of falling into a professional void is high. This is because, like most sports, football confers skills that are not easily transferable to non-sporting occupations. The availability of jobs in football is also very limited. So most footballers earn a very high income during their active career period and face a high degree of income uncertainty upon retirement.</p>
<p>The lifestyle of footballers (during the active playing period and upon retirement) has also been highlighted by several <a href="https://scholar.google.com/scholar?output=instlink&q=info:cxNwMuOE4DsJ:scholar.google.com/&hl=en&as_sdt=0,5&scillfp=5439326496234156066&oi=lle">reports</a> as a key driver of the financial mess that some footballers have got themselves into. </p>
<p>Again, there have been reported cases of footballers engaging in irresponsible financial behaviour. Examples include gambling, spending on luxurious brands, lavish parties and generally maintaining an expensive and unsustainable lifestyle. A lack of financial knowledge has often been associated with this kind of financial behaviour.</p>
<p>I am a <a href="https://ugbs.ug.edu.gh/ugbsfaculty/profile-faculty_member/godfred-matthew-yaw">professor</a> of accounting who, with others, has conducted a <a href="https://www.tandfonline.com/doi/pdf/10.1080/23750472.2023.2248150">study</a> to investigate the level of financial literacy of professional footballers in Ghana and ascertain its impact on their financial behaviour and financial wellbeing. </p>
<p>We found low levels of financial literacy, and poor financial behaviour, among footballers. The results suggest that to promote responsible financial behaviour among footballers, enhancing their financial literacy is key. We found very strong support for the argument that responsible financial behaviour, proxied in this study by savings and investment behaviour, is key to attaining financial wellness in life.</p>
<h2>The study design</h2>
<p>Financial literacy has been described as the ability to use the needed knowledge and skills to manage one’s financial resources effectively to improve welfare in the future. </p>
<p>Financial behaviour, on the other hand, can be <a href="https://www.grin.com/document/934971">described</a> as the “ability to regulate planning, budgeting, checking, managing, controlling, searching and storing daily funds”. It covers spending and saving habits, borrowing patterns, budgeting and access to financial products. </p>
<p>Using questionnaires, we surveyed 300 footballers who competed in the 2020 Ghana Premier League.</p>
<p>The questionnaire had two sections: one on the demographic details of the respondents; the other on their financial literacy, financial behaviours and financial wellbeing.</p>
<p>Currently, the Ghana Premier League has 18 registered clubs. At the time of the study, these clubs employed 480 registered footballers. Compared with clubs in Europe, England, Asia and even many other parts of Africa, the net worth of Ghanaian clubs is very <a href="https://www.fifa.com/en/media-releases/fifa-publishes-global-transfer-report-2021">low</a>. Revenues from international transfers – an important funding source for most Ghanaian clubs – have been very low over the years. For instance, the Federation of International Football Associations (FIFA) in its 2021 report on international transfers <a href="https://www.fifa.com/en/media-releases/fifa-publishes-global-transfer-report-2021">recorded</a> that Ghanaian football clubs together made a net profit of only US$50 million in the last decade.</p>
<h2>Footballers’ finances</h2>
<p>Our study revealed that the population of footballers was largely youthful. Nearly 90% were 30 years old or below, which is similar to footballers in other countries. This is expected as footballers are mostly active in their prime years. About 86% had some form of education, mainly up to senior high school level. The majority of the respondents were married and close to 58% of them had three or more dependants aside from their nuclear family. Thus, most of the footballers were providers for families although 39% said they lived with their parents or friends. On average, these footballers earned GHS2,000 net monthly income (US$177 at the time of the study), which, compared to other professionals, is low. </p>
<p>Overall, we found that the footballers had a low level of financial literacy. They ranked setting of long-term goals high but their interest in seeking financial knowledge was very low. It was therefore not surprising that most of the footballers seemed uncertain about where their money was spent.</p>
<p>We found that the footballers, generally, did not exhibit responsible financial behaviour. Very few had any interest in products such as bonds, stocks, mutual funds and insurance policies. But they seemed diligent in comparing prices when purchasing a product or service in a shop.</p>
<p>Interestingly, footballers were optimistic about their financial wellbeing. Most of those surveyed were confident in their capacity to meet current financial needs, had a very positive outlook on their future financing needs and made choices to enjoy life. The average footballer is always hopeful of securing lucrative contracts in future. </p>
<h2>Better performance</h2>
<p>Efforts to enhance the financial wellbeing of footballers can begin with investing in training programmes to make them financially literate. Second, football clubs can engage financial coaches to provide practical guidance to players during their active playing days to help shape their financial behaviour. </p>
<p>Given that financial wellbeing is closely <a href="https://www.emerald.com/insight/content/doi/10.1108/JHASS-05-2021-0101/full/pdf">associated</a> with psychological wellbeing, such initiatives could have a positive effect on the performance of players on the field.</p><img src="https://counter.theconversation.com/content/215389/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Godfred Matthew Yaw Owusu 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>Most Ghanaian footballers have poor levels of financial literacy and financial behaviour.Godfred Matthew Yaw Owusu, Professor of Accounting, University of GhanaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2138622023-09-21T20:07:08Z2023-09-21T20:07:08ZWhy you’re probably paying more interest on your mortgage than you think<figure><img src="https://images.theconversation.com/files/549499/original/file-20230921-27-8s1n9e.png?ixlib=rb-1.1.0&rect=480%2C448%2C3262%2C1775&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>For most things we buy, the price we are quoted is the price we pay.</p>
<p>That’s supposed to be the case even where taxes and fees are involved. Australian law requires anyone selling anything to display a <a href="https://www.accc.gov.au/business/pricing/price-displays">total price</a> that includes all “taxes, duties and all unavoidable or pre-selected extra fees”.</p>
<p>But our investigations, which compare the interest rate quoted on our mortgages with the fine print in our own mortgage documents, shows this is hardly ever the case for home loans.</p>
<p>Even though we are both trained as accountants, until recently we hadn’t bothered to check – even as interest rates climbed. We assumed the rates we were being told we were being charged (say 5% per year) were the rates we were actually paying.</p>
<p>This would be easy enough, and in our view the right thing, for banks to do.</p>
<h2>The price quoted usually isn’t the price paid</h2>
<p>Mortgage interest is usually charged monthly, but the rates are yearly. This means that each time interest is charged, the outstanding amount <a href="https://www.investopedia.com/terms/c/compoundinterest.asp">compounds</a> as interest is applied to interest.</p>
<p>That sounds bad enough. But this isn’t our main complaint.</p>
<p>It’s that there are two possible ways to calculate the amount of interest. Banks calculate interest on a daily basis.</p>
<p>The most reasonable would be to calculate the daily amount in a way that adds up to an annual amount that matches what was quoted. That way, a 5% rate would really be 5%. </p>
<p>Although there’s a bit of <a href="https://cdn.theconversation.com/static_files/files/2814/compound_example.pdf">calculation</a> involved, it’s easy enough for banks to do.</p>
<h2>How banks calculate mortgage interest</h2>
<p>The other, arguably less reasonable, way is what’s called the “<a href="https://www.investopedia.com/articles/investing/020614/learn-simple-and-compound-interest.asp">simple</a>” method. Our investigations show that this technique is used by all the big four banks, and probably many others too.</p>
<p>It’s called the simple method because it involves simply dividing the annual rate (say 5%) by 365 to determine the daily rate.</p>
<p>This seems to not be important, but because of compounding it means the amount charged over a year is more than the rate quoted.</p>
<p>Say you borrow $100,000 for one year at an annual rate of 5%, repaying the whole amount at the end of the year. </p>
<p>You might expect to pay back $105,000. Instead, the banks’ method of calculating interest results in a total repayment of $105,116.</p>
<p>This is because the daily interest rate (5% divided by 365) is applied to the outstanding balance <em>each day</em> and added to your balance once a month. These regular increases mean your interest compounds costing you more.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/fixed-or-variable-the-choice-of-mortgage-isnt-as-simple-as-it-seems-179960">Fixed or variable? The choice of mortgage isn't as simple as it seems</a>
</strong>
</em>
</p>
<hr>
<h2>Over decades, the difference matters</h2>
<p>In July 2023, the average size of a new mortgage in New South Wales was about A$750,000, with an average interest rate of about 5.95%.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/549500/original/file-20230921-19-v6cu46.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/549500/original/file-20230921-19-v6cu46.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/549500/original/file-20230921-19-v6cu46.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=964&fit=crop&dpr=1 600w, https://images.theconversation.com/files/549500/original/file-20230921-19-v6cu46.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=964&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/549500/original/file-20230921-19-v6cu46.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=964&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/549500/original/file-20230921-19-v6cu46.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1212&fit=crop&dpr=1 754w, https://images.theconversation.com/files/549500/original/file-20230921-19-v6cu46.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1212&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/549500/original/file-20230921-19-v6cu46.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1212&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">$27,000 over the life of a 30-year loan.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
</figcaption>
</figure>
<p>The method of calculation used by the banks and in the fine print of their mortgage contracts requires a monthly payment of $4,473 including the repayment of the amount originally borrowed over the life of a 30-year loan.</p>
<p>But if 5.95% were actually charged each year, the monthly payment would be $4,398 – a difference of $900 per year.</p>
<p>In this typical example, the difference over the life of the loan amounts to about $27,000. It means these borrowers will end up paying an effective interest rate of 6.11%.</p>
<h2>We had to read the fine print</h2>
<p>We checked the terms and conditions of each of the big four banks – Westpac, the Commonwealth, the National Australia Bank and the ANZ – as well as their biggest subsidiaries which include St George, The Bank of Melbourne, Bank SA and Bankwest. </p>
<p>They all charge interest using the “simple” method.</p>
<p>Mutual banks – the old credit unions and building societies owned by their members – have different reporting requirements, and we were unable to check the terms and conditions used by each one. But where we could, we found they used the same method as the big four.</p>
<p>You can find this small print yourself, usually in the middle of your mortgage document. It’s a formula, accompanied by a paragraph of explanation.</p>
<p>But you have to look carefully. Or you could call customer service, as we did, and ask the bank to explain the calculation. </p>
<p>You shouldn’t have to.</p>
<h2>The price quoted ought to be the price paid</h2>
<p>We think the price quoted for a product should be the price that’s actually charged, as the law <a href="https://www.accc.gov.au/business/pricing/price-displays">generally requires</a> for products other than mortgages.</p>
<p>This means if you are told you’ll be charged 5.95% interest per year, you should pay 5.95% per year – not 6.11% because of a quirk in the formula.</p>
<p>Mortgages are a larger financial commitment than most purchases. This means that honesty and clear communication are even more important.</p>
<p>It’s worth knowing what you are letting yourself in for when signing up for a mortgage. That way, when the bank or broker explains it to you and it’s not what was advertised, you can ask for a discount.</p><img src="https://counter.theconversation.com/content/213862/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>I currently have a mortgage that is impacted by the elements covered in this story (as do all mortgage holders in Australia).</span></em></p>The way banks calculate interest means that Australian borrowers who sign up to pay 5.95% per annum pay something closer to 6.11%.Sander De Groote, Lecturer, School of Accounting, Auditing and Taxation, UNSW SydneyKevin Li, Senior Lecturer, School of Accounting, Auditing and Taxation, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2097362023-08-02T15:22:26Z2023-08-02T15:22:26ZTo fight financial illiteracy, we mapped our money system as waterworks<figure><img src="https://images.theconversation.com/files/540809/original/file-20230802-28303-k4xo5p.jpg?ixlib=rb-1.1.0&rect=0%2C59%2C7988%2C5556&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">‘The Waterworks of Money’, an architectural map of the money system drawn by cartographer Carlijn Kingma.</span> <span class="attribution"><span class="license">Fourni par l'auteur</span></span></figcaption></figure><p>Over the past decade, the super-rich and large corporations have been able to borrow at <a href="https://www.reuters.com/breakingviews/interest-rates-have-broken-global-wealth-pump-2023-06-23/">record low interest rates</a>. This influx of easy money has shored up markets for <a href="https://www.ft.com/content/1a09d4e6-e3d6-40f9-903f-2771ad7e4e0a">yacht-backed-loans and securities</a>, <a href="https://cdn.janushenderson.com/webdocs/H050182_0522_English_Issue+34.pdf">dividends</a>, <a href="https://press.spglobal.com/2023-03-21-S-P-500-Q4-2022-Buybacks-Tick-up,-As-2022-Sets-A-Record-Proforma-Buyback-Tax-Would-Have-Reduced-Operating-Earnings-by-0-51-for-2022">share buy-backs</a>, and <a href="https://www.morganstanley.com/ideas/mergers-and-acquisitions-outlook-2022-continued-strength-after-record">merger and acquisition deals</a>. </p>
<p>Meanwhile, those not deemed “creditworthy” find themselves barred from credit, the powerless witnesses of ever surging rents and living costs. Time and again, the financial sector has flooded certain parts of the economy while other parts remained parched. The question is: Why is it so hard to fix the money system?</p>
<h2>Two parts of financial literacy</h2>
<p>Lack of financial literacy among most citizens is at least one of the causes – though there are competing definitions of the latter. On 7 June, the European Commission (EC) <a href="https://finance.ec.europa.eu/system/files/2023-06/european-financial-stability-and-integration-review-2023_en_0.pdf">lamented</a> that “levels of financial literacy in the EU are too low”, posing a threat to “personal and financial well-being, households and society more broadly.” </p>
<p>However, here the institution takes a rather narrow view of financial education, limited to personal finance – i.e., teaching people how to manage budgets, achieve saving goals, and understand different financial products. Earlier in March, Sigrid Kaag, the Dutch Minister of Finance, <a href="https://twitter.com/Minister_FIN/status/1640309155650060288">echoed</a> a similarly minimalist view of financial literacy: “By practising how to save, plan and make choices from a young age onwards, children learn how to make sound financial decisions.”</p>
<p>The other view of financial literacy, which we support, entails a far more ambitious understanding of the money system. We call it <em>systemic financial literacy</em>. “In the age of the CDS and CDO, most of us are financial illiterates”, <a href="https://www.rollingstone.com/politics/politics-news/how-wall-street-is-using-the-bailout-to-stage-a-revolution-177251/">wrote</a> US financial journalist Matt Taibbi in 2009, referring to the complex financial products that triggered the Great Recession. Fast forward fourteen years later, and most of us remain unfamiliar with the jargon of economists, bankers and tax experts. As in 2009, today’s democracies continue to be divided into what Taibbi describes as a “two-tiered state, one with plugged-in financial bureaucrats above and clueless customers below.”</p>
<p>With this in mind, we believe any project seeking to boost financial literacy ought to educate us on the roles of a central bank, but also payment infrastructure, the tax regime, and the investment of our pension savings. A number of questions ought to be raised, too, to this end: What do we consider public utilities? Which financial services can better be assigned to private companies? Who gets the power to create and allocate new money – and for what purposes? To answer these big questions requires not only a deeper understanding of the structures of finance, but continuous political engagement.</p>
<h2>The waterworks</h2>
<p>Together with cartographer Carlijn Kingma and investigative financial journalist Thomas Bollen, we sought to create a project that would inspire such questions and demystify the world of finance. For two and half years, we developed the “waterworks of money”, an architectural visualisation of our money system that bypasses the economic jargon.</p>
<p>Kingma spent 2,300 hours drawing this map by hand, based on in-depth research and interviews with more than 100 experts – from central bank governors and board members of pension funds and banks to politicians and monetary activists. In an animated video, we walk you through a metaphorical representation of our money system, its hidden power made manifest.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/IszXpzIo_ZQ?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
</figure>
<h2>What do we water?</h2>
<p>The metaphor of water was critical to the design of our map. Indeed, the financial sector is to the economy what an irrigation system is for farming lands. Just as irrigation helps crops grow, money allows the economy to flourish.</p>
<p>The architecture of our financial irrigation system and the way the sluices and floodgates are operated impacts us all. “What do we water, and what goes dry?” Kaag <a href="https://www.rijksoverheid.nl/documenten/toespraken/2022/06/07/toespraak-minister-kaag-bij-jubileum-10-jaar-sfl">asked economists, bankers and reporters</a> in June 2022. “Choices made by the financial sector determine what grows and what dies off. That’s where banks, pension funds, asset managers, and insurance firms can make a difference,” she said.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/540809/original/file-20230802-28303-k4xo5p.jpg?ixlib=rb-1.1.0&rect=0%2C59%2C7988%2C5556&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/540809/original/file-20230802-28303-k4xo5p.jpg?ixlib=rb-1.1.0&rect=0%2C59%2C7988%2C5556&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/540809/original/file-20230802-28303-k4xo5p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=422&fit=crop&dpr=1 600w, https://images.theconversation.com/files/540809/original/file-20230802-28303-k4xo5p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=422&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/540809/original/file-20230802-28303-k4xo5p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=422&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/540809/original/file-20230802-28303-k4xo5p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=531&fit=crop&dpr=1 754w, https://images.theconversation.com/files/540809/original/file-20230802-28303-k4xo5p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=531&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/540809/original/file-20230802-28303-k4xo5p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=531&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">‘The Waterworks of Money’, an architectural map of the money system drawn by cartographer Carlijn Kingma.</span>
<span class="attribution"><span class="license">Fourni par l'auteur</span></span>
</figcaption>
</figure>
<p>In our map, the long and complex process of financial irrigation starts at the top of the so-called tower of society, where big money keeps their reservoirs. The world’s largest companies, including big oil, big pharma and big retail, are lodged there. Open the floodgates and money flows downstream, setting the wheels of industry in motion. Salaries make their way through the waterworks, and trickle down into employee piggy banks. In return, everyone goes to work.</p>
<p>Money eventually seeps down into the lowest ranks of society, where the conveyor belt is always running, products are assembled and raw materials, mined. People then spend the wages they’ve earned, often in shops and businesses. Sale revenues get pumped up to the reservoir at the top, and the cycle starts all over again. Or at least, that is the idea.</p>
<p>In reality, the <a href="https://theconversation.com/explainer-trickle-down-economics-73062">trickle-down economics</a> popularised by US president Ronald Reagan and UK prime minister Margaret Thatcher, do not take place. Money circulates mainly between the top of the tower and the financial sector. Moreover, the huge growth of the financial sector over the last decades has dug the gap between the haves and have-nots deeper. The growing quantity of money is driving up share prices, house prices and management fees, but most of the money does not reach the everyday economy in the tower of society – where it can be used for productive investments, generates income and add social value.</p>
<p>The structure of our money system is not a natural phenomenon. The way the waterworks are put together is a political choice. In democracies, higher levels of systemic financial literacy are a prerequisite to change this architecture and make the financial sector serve society better.</p>
<hr>
<p><em>This article was co-written with investigative financial journalist Thomas Bollen and cartographer Carlijn Kingma.</em></p><img src="https://counter.theconversation.com/content/209736/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Martijn Jeroen van der Linden, Carlijn Kingma et Thomas Bollen a reçu des financements: Follow the Money, The Hague University of Applied Sciences, Stimuleringsfonds Creatieve Industrie, Brave New Works, Rabobank, Kunstmuseum Den Haag et Rijksmuseum Twenthe.</span></em></p>Far from the idea of “trickle-down economics”, a map illustrates how the waterworks of the financial system are parching certain sections of the real economy and producing vast inequality.Martijn Jeroen van der Linden, Professor of Practice in New Finance, Hague University of Applied SciencesLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2080082023-07-02T20:02:59Z2023-07-02T20:02:59ZHow do I tell my kids we are currently short on money – without freaking them out?<figure><img src="https://images.theconversation.com/files/534234/original/file-20230627-7269-19eu48.jpg?ixlib=rb-1.1.0&rect=0%2C31%2C5276%2C3480&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/a-father-talking-his-children-8763031/">Pexels/Pavel Danilyuk</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>I was a teenager during Australia’s 1990s “<a href="https://www.theguardian.com/business/2019/nov/17/remembering-the-recession-the-1990s-experience-changed-my-view-of-the-world">recession we had to have</a>”, and remember clearly a friend asking his dad for some money to go to the movies. </p>
<p>With equal parts frustration and resignation, the dad explained he’d been retrenched and wasn’t certain employment was on the horizon in his near future. So he really didn’t have any spare money for cinema tickets.</p>
<p>Rather than being scary or upsetting, as rather clueless teenagers this felt like something of a lightbulb moment. </p>
<p>Many kids learn about their parents financial difficulties this way. Something they’ve always been able to have is suddenly denied them. The penny drops. </p>
<p>But it’s not easy talking to your kids about the cost-of-living crunch. Many fear worrying their kids or leaving them with a lifelong “scarcity mindset”, where a person is forever cursed with a feeling spending money is always wrong. </p>
<p>So how can parents communicate the financial realities to their children? And how might the messaging be different with younger kids versus teens?</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/534235/original/file-20230627-27-1hrzvg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A man and child talk in a park." src="https://images.theconversation.com/files/534235/original/file-20230627-27-1hrzvg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/534235/original/file-20230627-27-1hrzvg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=382&fit=crop&dpr=1 600w, https://images.theconversation.com/files/534235/original/file-20230627-27-1hrzvg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=382&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/534235/original/file-20230627-27-1hrzvg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=382&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/534235/original/file-20230627-27-1hrzvg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=480&fit=crop&dpr=1 754w, https://images.theconversation.com/files/534235/original/file-20230627-27-1hrzvg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=480&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/534235/original/file-20230627-27-1hrzvg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=480&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Keep calm and don’t let your own anxieties rub off on your kids.</span>
<span class="attribution"><a class="source" href="https://www.pexels.com/photo/young-man-holding-and-talking-to-a-boy-in-the-park-13621144/">Pexels/Archer Hsu</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/are-you-and-your-partner-thinking-of-separating-heres-how-to-protect-the-kids-mental-health-194912">Are you and your partner thinking of separating? Here's how to protect the kids' mental health</a>
</strong>
</em>
</p>
<hr>
<h2>For younger kids, keep things calm and simple</h2>
<p>Most primary-aged children are oblivious to macro conditions outside their home and immediate community. They haven’t yet developed the ability to put sudden changes into perspective. </p>
<p>The key here is not to have your own anxieties rub off on your kids.</p>
<p>Children this age look to their parents as beacons of information and will very much <a href="https://jamanetwork.com/journals/jamanetworkopen/fullarticle/2794157">mirror</a> any fear or anxiety you express. They may even blow things out of proportion.</p>
<p>Keeping things calm and simple is key.</p>
<p>Provide a basic explanation that things cost money, and you don’t have as much money as normal right now, so as a family there are certain things you just can’t afford. </p>
<p>Very young children can be relentlessly narcissistic in their outlook – this is developmentally normal. </p>
<p>They might even demand you work more or harder so they can afford their desired items and activities. The best you can do is laugh it off and offer to try – but explain that for now, the kids will have to come up with something else to do.</p>
<p>Consider a plan to substitute their previous activities with free ones. For example, explain they can’t play their usual sport this season, but you are going to head to the local park every week to kick the ball around and have a picnic instead.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/534236/original/file-20230627-23-66qldg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/534236/original/file-20230627-23-66qldg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/534236/original/file-20230627-23-66qldg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/534236/original/file-20230627-23-66qldg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/534236/original/file-20230627-23-66qldg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/534236/original/file-20230627-23-66qldg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/534236/original/file-20230627-23-66qldg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/534236/original/file-20230627-23-66qldg.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>
<figcaption>
<span class="caption">Is there a free alternative to the things they want to buy and do?</span>
<span class="attribution"><a class="source" href="https://www.pexels.com/photo/black-boy-throwing-ball-to-father-5240426/">Pexels/Anete Lusina</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>Ask teens for their opinions and ideas</h2>
<p>Depending on their intrinsic interest in the news and understanding of maths, finance and economics, a sudden and unexpected drop in finances may also come as a shock to teenagers. </p>
<p>But at around 12 years of age, children undergo somewhat of an explosion in <a href="https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3621648/">frontal lobe function</a>. Their capacity to comprehend and process even complex information increases quite markedly.</p>
<p>So teens may not only understand your current situation, but be able to help out.</p>
<p>Giving teens a “role” to play in assisting the family builds a sense of competence and offers a team-based problem-solving approach to the emotional concerns they may be feeling. In other words, they’ll feel less powerless.</p>
<p>This approach is underpinned by what psychologists and researchers call “<a href="https://selfdeterminationtheory.org/theory/">self-determination theory</a>”.</p>
<p>This well-studied concept posits that most humans have an innate need to:</p>
<ul>
<li><p>experience and demonstrate autonomy (making your own choices, acting on your own volition)</p></li>
<li><p>competence (feeling like you’re good at something, have achieved something worthwhile) </p></li>
<li><p>relatedness (working well with others, especially people important to you). </p></li>
</ul>
<p>So working as a team towards a common goal is a great way for a family to pull together and help each others’ mental wellbeing.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/534240/original/file-20230627-21-k5oqyc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/534240/original/file-20230627-21-k5oqyc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/534240/original/file-20230627-21-k5oqyc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/534240/original/file-20230627-21-k5oqyc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/534240/original/file-20230627-21-k5oqyc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/534240/original/file-20230627-21-k5oqyc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/534240/original/file-20230627-21-k5oqyc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/534240/original/file-20230627-21-k5oqyc.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>
<figcaption>
<span class="caption">Ask your teen for suggestions and show you take their opinions seriously.</span>
<span class="attribution"><a class="source" href="https://www.pexels.com/photo/girls-sitting-on-the-floor-while-having-conversation-5999067/">Pexels/cottonbro studio</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>Discuss with your teens what activities, events and items might need to go on the backburner or be discontinued.</p>
<p>And don’t forget, teens have a very well-honed hypocrisy radar – there’s no point suggesting they cut back on recreational activities, for example, if you are not willing to do the same.</p>
<p>Use this as an opportunity to discuss the difference between “wants” and “needs” and ask them to sort family spending into those categories. Discuss points of disagreement calmly.</p>
<p>Ask your teens to brainstorm ways to improve your financial efficiency – and help you in doing so. They might enjoy coming up with ideas such as grocery shopping with a strict meal plan in cheaper stores, looking for specials, riding or walking to school where possible, getting a part time job or helping out with childcare.</p>
<p>Rather than fixating on what we have to go without, work with your teenagers to come up with proactive ideas on what you can do differently. Frame it as working together to achieve the same aim.</p>
<p>Teach your kids there can be challenges in life, but how you go about managing them is the key. This will help them develop into resilient adults.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/is-it-ok-to-prank-your-kids-do-they-get-it-and-wheres-the-line-195932">Is it OK to prank your kids? Do they get it? And where’s the line?</a>
</strong>
</em>
</p>
<hr>
<img src="https://counter.theconversation.com/content/208008/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rachael Sharman 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>It’s not easy talking to kids about the cost-of-living crunch. Many fear landing their kids with a lifelong ‘scarcity mindset’, where a person is cursed with a feeling spending money is always wrong.Rachael Sharman, Senior Lecturer in Psychology, University of the Sunshine CoastLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2079092023-06-22T20:06:40Z2023-06-22T20:06:40ZAlmost no one uses Bitcoin as currency, new data proves. It’s actually more like gambling<figure><img src="https://images.theconversation.com/files/533329/original/file-20230622-30-asaf73.jpg?ixlib=rb-1.1.0&rect=0%2C147%2C6134%2C3081&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Bitcoin boosters like to <a href="https://cointelegraph.com/explained/crypto-is-going-mainstream-heres-how-the-future-founders-will-build-on-it">claim</a> Bitcoin, and other <a href="https://www.rba.gov.au/publications/bulletin/2019/jun/cryptocurrency-ten-years-on.html">cryptocurrencies</a>, are becoming mainstream. There’s a good reason to want people to believe this. </p>
<p>The only way the average punter will profit from crypto is to sell it for <a href="https://www.scienceabc.com/social-science/greater-fool-theory-bitcoin-definition-examples.html">more than they bought it</a>. So it’s important to talk up the prospects to build a “fear of missing out”. </p>
<p>There are <a href="https://www.rba.gov.au/speeches/2021/sp-so-2021-11-18.html">loose claims</a> that a large proportion of the population – generally in the range of <a href="https://cointelegraph.com/news/world-population-reaches-8-billion-but-how-many-are-in-crypto">10% to 20%</a> – now hold crypto. Sometimes these numbers are based on <a href="https://www.grandviewresearch.com/industry-analysis/crypto-wallet-market-report">counting crypto wallets</a>, or on <a href="https://apnews.com/article/technology-business-bitcoin-f6d7ba724bf156fd5d603661c99fd5c2">surveying wealthy people</a>.</p>
<p>But the hard data on Bitcoin use shows it is rarely bought for the purpose it ostensibly exists: to buy things. </p>
<h2>Little use for payments</h2>
<p>The whole point of Bitcoin, as its creator “<a href="https://markets.businessinsider.com/news/currencies/who-is-satoshi-nakamoto-bitcoin-inventor-crypto-steve-jobs-apple-2023-4">Satoshi Nakamoto</a>” stated in the opening sentence of the 2008 <a href="https://bitcoin.org/bitcoin.pdf">white paper</a> outlining the concept, was that: </p>
<blockquote>
<p>A purely peer-to-peer version of electronic cash would allow online
payments to be sent directly from one party to another without going through a
financial institution.</p>
</blockquote>
<p>The latest data demolishing this idea comes from Australia’s central bank. </p>
<p>Every three years the Reserve Bank of Australia surveys a representative sample of 1,000 adults about how they <a href="https://www.rba.gov.au/publications/bulletin/2023/jun/consumer-payment-behaviour-in-australia.html">pay for things</a>. As the following graph shows, cryptocurrency is making almost no impression as a payments instrument, being used by no more than 2% of adults. </p>
<hr>
<p><strong>Payment methods being used by Australians</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/533397/original/file-20230622-23-nsj882.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Alternative payment methods, share of all respondents, 2022" src="https://images.theconversation.com/files/533397/original/file-20230622-23-nsj882.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/533397/original/file-20230622-23-nsj882.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=402&fit=crop&dpr=1 600w, https://images.theconversation.com/files/533397/original/file-20230622-23-nsj882.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=402&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/533397/original/file-20230622-23-nsj882.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=402&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/533397/original/file-20230622-23-nsj882.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=506&fit=crop&dpr=1 754w, https://images.theconversation.com/files/533397/original/file-20230622-23-nsj882.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=506&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/533397/original/file-20230622-23-nsj882.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=506&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Reserve Bank calculations of Australians' awareness vs use of different payment methods, based on Ipsos data.</span></span>
</figcaption>
</figure>
<hr>
<p>By contrast more recent innovations, such as “<a href="https://www.rba.gov.au/publications/bulletin/2021/mar/developments-in-the-buy-now-pay-later-market.html">buy now, pay later</a>” services and <a href="https://www.rba.gov.au/speeches/2022/pdf/sp-so-2022-05-03.pdf">PayID</a>, are being used by around a third of consumers. </p>
<p>These findings confirm 2022 data from the <a href="https://www.federalreserve.gov/publications/2023-economic-well-being-of-us-households-in-2022-banking-credit.htm">US Federal Reserve</a>, showing just 2% of the adult US population made a payment using a cryptocurrrency, and <a href="https://www.riksbank.se/en-gb/statistics/statistics-on-payments-banknotes-and-coins/payment-patterns/">Sweden’s Riksbank</a>, showing less than 1% of Swedes made payments using crypto.</p>
<h2>The problem of price volatility</h2>
<p>One reason for this, and why prices for goods and services are virtually never expressed in crypto, is that most fluctuate wildly in value. A shop or cafe with price labels or a blackboard list of their prices set in Bitcoin could be having to change them every hour. </p>
<p>The following graph from the Bank of International Settlements shows changes in the exchange rate of ten major cryptocurrencies against the US dollar, compared with the Euro and Japan’s Yen, over the past five years. Such volatility negates cryptocurrency’s value as a currency. </p>
<hr>
<p><strong>Cryptocurrency’s volatile ways</strong></p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/533346/original/file-20230622-17-6qb358.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/533346/original/file-20230622-17-6qb358.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=218&fit=crop&dpr=1 600w, https://images.theconversation.com/files/533346/original/file-20230622-17-6qb358.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=218&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/533346/original/file-20230622-17-6qb358.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=218&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/533346/original/file-20230622-17-6qb358.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=274&fit=crop&dpr=1 754w, https://images.theconversation.com/files/533346/original/file-20230622-17-6qb358.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=274&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/533346/original/file-20230622-17-6qb358.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=274&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">90-day rolling standard deviation of daily returns for major cryptocurrencies compared with the Euro and Yen.</span>
<span class="attribution"><a class="source" href="https://www.bis.org/publ/work1104.htm">The Crypto Multiplier, BIS Working Papers, No. 1104</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<hr>
<p>There have been attempts to solve this problem with so-called “stablecoins”. These promise to maintain steady value (usually against the US dollar). </p>
<p>But the spectacular collapse of one of these ventures, <a href="https://www.nber.org/papers/w31160">Terra</a>, once one of the largest cryptocurrencies, showed <a href="https://www.degruyter.com/document/doi/10.1515/rle-2022-0053/html">the vulnerability</a> of their mechanisms. Even a company with the enormous resources of Facebook owner Meta has <a href="https://www.bbc.com/news/technology-60156682">given up on its stablecoin venture</a>, Libra/Diem.</p>
<p>This helps explain the failed experiments with making Bitcoin legal tender in the two countries that have tried it: El Salvador and the <a href="https://www.bbc.com/news/world-africa-61565485">Central African Republic</a>. The Central African Republic has already <a href="https://www.imf.org/en/Countries/CAF/central-african-republic-qandas#crypto">revoked Bitcoin’s status</a>. In <a href="https://www.nber.org/papers/w29968">El Salvador</a> only a fifth of firms accept Bitcoin, despite the <a href="https://twitter.com/nayibbukele/status/1402446890466217985">law</a> saying they must, and only 5% of sales are paid in it.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/one-year-on-el-salvadors-bitcoin-experiment-has-proven-a-spectacular-failure-190229">One year on, El Salvador's Bitcoin experiment has proven a spectacular failure</a>
</strong>
</em>
</p>
<hr>
<h2>Storing value, hedging against inflation</h2>
<p>If Bitcoin’s isn’t used for payments, what use does it have?</p>
<p>The major attraction – one endorsed by mainstream financial publications – is as a store of value, particularly in times of inflation, because Bitcoin has a hard cap on the number of coins that will ever be “mined”. </p>
<p>As <a href="https://www.forbes.com/advisor/in/investing/cryptocurrency/advantages-of-cryptocurrency/">Forbes writers</a> argued a few weeks ago:</p>
<blockquote>
<p>In terms of quantity, there are only 21 million Bitcoins released as specified by the ASCII computer file. Therefore, because of an increase in demand, the value will rise which might keep up with the market and prevent inflation in the long run. </p>
</blockquote>
<p>The only problem with this argument is recent history. Over the course of 2022 the purchasing power of major currencies (US, the euro and the pound) dropped by about 7-10%. The purchasing power of a Bitcoin dropped by about 65%. </p>
<h2>Speculation or gambling?</h2>
<p>Bitcoin’s price has always been volatile, and always will be. If its price were to stabilise somehow, those holding it as a speculative punt would soon sell it, which would drive down the price. </p>
<p>But most people buying Bitcoin essentially as a speculative token, hoping its price will go up, are likely to be disappointed. A <a href="https://www.bis.org/publ/bisbull69.htm">BIS study</a> has found the majority of Bitcoin buyers globally between August 2015 and December 2022 have made losses.</p>
<p>The “<a href="https://www.statista.com/statistics/730876/cryptocurrency-maket-value/">market value</a>” of all cryptocurrencies peaked at US$3 trillion in November 2021. It is now about US$1 trillion. </p>
<p>Bitcoins’s highest price in 2021 was about US$60,000; in 2022 US$40,000 and so far in 2023 only US$30,000. Google searches show that public interest in Bitcoin also peaked in 2021. In the US, the proportion of adults with internet access holding cryptocurrencies fell from 11% in 2021 to 8% in 2022.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/what-is-bitcoins-fundamental-value-thats-a-good-question-171387">What is Bitcoin's fundamental value? That's a good question</a>
</strong>
</em>
</p>
<hr>
<p>UK <a href="https://www.gov.uk/government/publications/individuals-holding-cryptoassets-uptake-and-understanding">government research</a> published in 2022 found that 52% of British crypto holders owned it as a “fun investment”, which sounds like a euphemism for gambling. Another 8% explicitly said it was for gambling. </p>
<p>The UK parliament’s <a href="https://committees.parliament.uk/committee/158/treasury-committee">Treasury Committee</a>, a group of MPs who examine economics and financial issues, has <a href="https://publications.parliament.uk/pa/cm5803/cmselect/cmtreasy/615/summary.html">strongly recommended</a> regulating cryptocurrency as form of gambling rather than as a financial product. They argue that continuing to treat “unbacked crypto assets as a financial service will create a ‘halo’ effect that leads consumers to believe that this activity is safer than it is, or protected when it is not”. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/crypto-trading-politicians-who-say-it-should-be-treated-like-gambling-are-completely-wrong-206121">Crypto trading: politicians who say it should be treated like gambling are completely wrong</a>
</strong>
</em>
</p>
<hr>
<p>Whatever the merits of this proposal, the UK committtee’s underlying point is solid. Buying crypto does have more in common with gambling than investing. Proceed at your own risk, and and don’t “invest” what you can’t afford to lose.</p><img src="https://counter.theconversation.com/content/207909/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Hawkins was formerly a senior economist at the Reserve Bank of Australia and the Bank for International Settlements.
He has neither a long nor short position in any cryptocurrency.</span></em></p>Barely 2% of Australians or Americans use Bitcoin for its intended purpose: to buy things. Should we even call it a cryptocurrency?John Hawkins, Senior Lecturer, Canberra School of Politics, Economics and Society, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2076212023-06-18T22:45:37Z2023-06-18T22:45:37ZKnow thyself, know thy finances: which of the 5 money personalities are you?<figure><img src="https://images.theconversation.com/files/532311/original/file-20230616-13202-mzflma.jpg?ixlib=rb-1.1.0&rect=0%2C7%2C5071%2C3383&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Getty Images</span></span></figcaption></figure><p>When it comes to money, are you a big spender or a fearful saver? Do you give away all your money or ignore financial demands until they become urgent? </p>
<p>After decades of focus on financial literacy, it has become clear there is more to how we manage our money than access to information. Now new research has identified five distinct money personalities that drive how we spend.</p>
<p>Commissioned by Te Ara Ahunga Ora (Retirement Commission) for their free, independent personal finance site <a href="https://sorted.org.nz/">Sorted</a>, <a href="https://assets.retirement.govt.nz/public/Uploads/Financial-Capability-Research/Report-Money-Personality-Tool-Project-AUT-vFINAL.pdf">our study</a> included an extensive review of the research on personality traits, values and attitudes. We then created an online survey, completed by nearly 500 New Zealanders, exploring how people engaged with their money. </p>
<p>The research findings form the backbone of a <a href="https://sorted.org.nz/tools/money-personality-quiz">new online money personality quiz</a> designed to help people understand their money personality and inform their financial decisions and behaviour.</p>
<p>With New Zealand <a href="https://www.rnz.co.nz/news/business/492013/new-zealand-in-recession-as-gdp-falls-for-second-quarter">officially in a recession</a>, it has never been more important to understand money management. Despite our best intentions, we often struggle to make “good” financial decisions consistently – including saving enough, using debt wisely, and staying on top of insurance policies and KiwiSaver.</p>
<h2>Doing better with our money</h2>
<p>According to Te Ara Ahunga Ora, New Zealanders are <a href="https://assets.retirement.govt.nz/public/Uploads/Research/TAAO-RC-NZ-FinCap-Survey-Report.pdf">good with the basics of financial capability</a> – budgeting and keeping track of money. But we score lower than comparable countries like Canada, Norway, Australia and Ireland on more advanced financial capabilities like long-term savings. We also lack confidence when it comes to our cash.</p>
<p>There is a growing body of evidence that personality traits, money values and attitudes each play a crucial part in either aiding or hindering us making those “smart” financial decisions. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-coming-storm-for-new-zealands-future-retirees-still-renting-and-not-enough-savings-to-avoid-poverty-179661">The coming storm for New Zealand’s future retirees: still renting and not enough savings to avoid poverty</a>
</strong>
</em>
</p>
<hr>
<p>Attitudes towards saving, the degree to which we value material possessions, and how comfortable we are with risk, will all affect the financial decisions we make – and, as a result, our financial wellbeing. </p>
<h2>The 5 money personalities</h2>
<p>We identified five distinct money personalities, each with their own strengths and weaknesses: the enterpriser, socialite, minimalist, contemporary and realist.</p>
<p><strong>An enterpriser</strong> is a financially confident, future-orientated planner who enjoys looking after their finances and is proud of being money savvy. Their strengths include self-control, financial knowledge and making their money work for them. </p>
<p>An enterpriser is unlikely to make impulsive or emotional purchases. However, their aspirational approach – viewing money as a priority and a symbol of success – may pair badly with materialism, causing them to spend money to gain status rather than for value or utility. Enterprisers benefit from learning about investing and planning for the future.</p>
<p><strong>The minimalist</strong> is frugal, confident with their saving ability, and on top of their financial situation. Minimalists value a simpler life, scoring low on materialism and are not prone to impulsive or emotional purchases. </p>
<p>Their weakness is not always making their money work as hard for them as it could, as they are less likely to take financial risks – even where there is a potential for higher investment returns. Low-cost, passive investment strategies may appeal to minimalists.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/532312/original/file-20230616-19-kiyb4a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/532312/original/file-20230616-19-kiyb4a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/532312/original/file-20230616-19-kiyb4a.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/532312/original/file-20230616-19-kiyb4a.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/532312/original/file-20230616-19-kiyb4a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/532312/original/file-20230616-19-kiyb4a.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/532312/original/file-20230616-19-kiyb4a.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">
<figcaption>
<span class="caption">New research has identified five distinct money personalities that can help explain how different people manage their money.</span>
<span class="attribution"><span class="source">Jordi Salas/Getty Images</span></span>
</figcaption>
</figure>
<p><strong>A socialite</strong> is a joyful risk taker, outgoing, and confident with their money handling. A generous extrovert, they are more likely to be materialistic than other personality types and tend to live for today rather than plan for tomorrow. </p>
<p>Their high tolerance for risk suggests some socialites may take on unwise levels of financial risk. Those in this group who are also impulsive or prone to emotional purchases may find themselves overspending or vulnerable to over-extending themselves with consumer debt. </p>
<p>Socialites may like to explore active investment strategies and riskier investment classes, however. Taking calculated risks and building financial resilience is an important focus for them.</p>
<p><strong>A contemporary</strong> doesn’t enjoy managing their money and they lack confidence when it comes to financial matters. They are likely to say they’re a spender despite being less materialistic than others; living for today, they tend to engage in impulsive emotional spending and are generous to a fault. </p>
<p>For contemporaries, the focus is increasing financial resilience by paying down debt and building an emergency savings fund, enabling them to share their wealth with others without affecting their own financial well-being. Working on their money mindset and general financial knowledge may allow them to build confidence and savings, then take a passive or “set and forget” approach to their financial life.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/a-400-a-week-shortfall-people-in-their-40s-face-a-bleak-retirement-on-kiwisavers-current-trajectory-185576">A $400-a-week shortfall: people in their 40s face a bleak retirement on KiwiSaver's current trajectory</a>
</strong>
</em>
</p>
<hr>
<p><strong>A realist</strong> is future-focused, very conservative with risk, and values money highly. But they are not confident with their money handling, despite paying close attention to their financial situation. </p>
<p>The most introverted personality type, a more aspirational realist may be materialistic but is unlikely to make impulsive or emotional purchases a habit. This suggests building confidence and encouragement to take appropriate investment risks is important. Given they do not like making money decisions, automation of bill payments and savings may appeal. </p>
<h2>Know thy money self</h2>
<p>Each money personality offers different challenges when it comes to making financial decisions. </p>
<p>Taking Sorted’s money personality quiz is fun, but it’s also a useful financial decision you can make right now. </p>
<p>It’s not just about the label. Knowing your money personality can help you understand your strengths and weaknesses when it comes to financial decision making, giving you tools to improve your financial resiliency and security.</p><img src="https://counter.theconversation.com/content/207621/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Te Ara Ahunga Ora commissioned this research project in partnership with Sorted. Ayesha Scott has received funding from the Auckland University of Technology (AUT) and AUT Business School. Ayesha collaborates with Good Shepherd NZ and BNZ and has consulted for KiwiSaver providers as an independent expert reviewer.</span></em></p><p class="fine-print"><em><span> Te Ara Ahunga Ora commissioned Aaron Gilbert to conduct this research project in partnership with the Sorted team. He has also received research funding from the Auckland University of Technology (AUT) and AUT Business School. </span></em></p>A new study by the Retirement Commission has identified the different personality characteristics that influence how we manage our money – you can test your own with their online quiz.Ayesha Scott, Senior Lecturer - Finance, Auckland University of TechnologyAaron Gilbert, Professor of Finance, Auckland University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2034172023-05-14T20:08:17Z2023-05-14T20:08:17ZAre bigger super funds better? Actually no, despite what the industry is doing<figure><img src="https://images.theconversation.com/files/525754/original/file-20230511-38315-urv7zo.jpg?ixlib=rb-1.1.0&rect=444%2C0%2C5484%2C2693&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Australia’s superannuation funds are getting bigger – and fewer. There were <a href="https://www.theguardian.com/australia-news/2021/aug/29/australian-superannuation-mergers-cut-number-of-funds-by-half-in-a-decade">close to 400</a> funds in 2010. With mergers, it’s now <a href="https://www.investordaily.com.au/superannuation/53144-are-mega-funds-poised-to-dominate-the-super-industry">closer to 120</a>. By 2025, according to industry executives surveyed last year, there will be <a href="https://www.investordaily.com.au/superannuation/50971-rise-of-mega-funds-set-to-intensify-erasing-100-funds-by-2025">fewer than 50</a>.</p>
<p>The portfolios of the two biggest super funds, AustralianSuper and Australian Retirement Trust, are bigger than even the federal government’s Future Fund Management Agency, which oversees the A$194 billion <a href="https://yearinreviewfy22.futurefund.gov.au/performance-results.html">Future Fund</a> and several other funds worth a total $242 billion.</p>
<hr>
<p><iframe id="0wOBb" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/0wOBb/5/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>Underpinning this consolidation is the idea that larger scale is beneficial for superannuation fund members. But that’s not necessarily true. A bigger fund is no guarantee of better returns.</p>
<p>I’ve examined the issue of fund scale with Scott Lawrence, an investment manager with 35 year’s industry experience. Together we’ve written <a href="https://theconexusinstitute.org.au/wp-content/uploads/2023/03/Does-Size-Benefit-Super-Fund-Members-24-March-2023.pdf">a report</a> for the Conexus Institute, an independent research centre focused on superannuation issues. </p>
<p>Our conclusion: funds, large and small alike, succeed or fail depending on how well they formulate and execute their strategies. </p>
<h2>Managing assets in-house</h2>
<p>The first potential benefit of bigger size is that funds can manage assets using their own dedicated investment professionals, rather than outsourcing everything to external investment managers to invest on their behalf. </p>
<p>For example, UniSuper (the higher education industry fund) manages <a href="https://www.unisuper.com.au/investments/how-we-invest/investment-managers">70% of assets in-house</a>. AustralianSuper, with more than double UniSuper’s assets, manages <a href="https://www.australiansuper.com/-/media/australian-super/files/about-us/annual-reports/2022-annual-report.pdf">53% of assets</a> in-house.</p>
<p>This can be cheaper than paying fees as a percentage of assets to these external providers. It offers more control as the super fund can decide the assets in which they invest, rather than leaving the decision to someone else. </p>
<p>But fund members will only benefit if the internal team makes investment decisions that are as good as the service they are replacing. For this reason, there is no reliable correlation between performance and degree of in-house management. </p>
<h2>Investing in big-ticket items</h2>
<p>The second potential benefit is it becomes more possible to become successful direct investors in “big ticket” assets such as infrastructure and property, instead of just focusing on shares and other assets traded on stock exchanges.</p>
<p>For example, AustralianSuper owns <a href="https://www.australiansuper.com/-/media/australian-super/files/about-us/media-releases/australiansuper-increases-investment-in-westconnex.pdf">20.5% of WestConnex</a>, Australia’s biggest infracture project, having contributed $4.2 billion to the consortium that is building the mostly underground toll-road system linking western Sydney motorways.</p>
<p>Opportunities like this are easier to access by large funds, and can help to diversify their portfolios. </p>
<p>But such direct investment is costlier than buying shares and bonds. This limits the potential for fee reductions. </p>
<p>For members to benefit, these investments must deliver attractive returns. This requires a fund developing capability in what are specialised markets. Size alone won’t deliver on its own. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-do-i-find-out-what-my-superannuation-fund-invests-in-a-finance-expert-explains-188802">How do I find out what my superannuation fund invests in? A finance expert explains</a>
</strong>
</em>
</p>
<hr>
<h2>Economies of scale and scope</h2>
<p>The third potential benefit is that size brings economies of scale and scope. </p>
<p>Scale can reduce fees, by spreading the fund’s fixed costs over a larger member base.</p>
<p>Our review of the research literature confirms there are solid reasons to expect administration costs to reduce with size, as well as in-house management reducing investment costs. </p>
<hr>
<p><iframe id="26cxr" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/26cxr/3/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>Economies of scope involve an organisation being able to improve or increase services, say by investing in better systems and more staff.</p>
<p>But investing in better systems also brings potential pitfalls. Big visionary projects tend to run over time and over budget, and sometimes fail. </p>
<p>An example is the disastrous attempts of five industry funds (AustralianSuper, Cbus Super, HESTA, Hostplus and MTAA Super) to develop a shared administration platform, called Superpartners. It was meant to cost $70 million, but development costs blew out to $250 million before <a href="https://www.investmentmagazine.com.au/2016/12/link-group-completes-superpartners-integration/">they gave up</a>. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/should-i-put-more-money-into-my-super-what-are-the-benefits-and-can-i-take-it-out-before-retirement-if-i-need-it-201950">Should I put more money into my super? What are the benefits and can I take it out before retirement if I need it?</a>
</strong>
</em>
</p>
<hr>
<h2>Size brings its own challenges</h2>
<p>Large funds also face some unique challenges. Because they have more money to invest, they have more work to do in finding sufficient attractive assets to buy.</p>
<p>The risk is they need to accept some assets offering low returns to do so. They can also outgrow some market segments, such as owning shares in smaller companies. </p>
<p>Large organisations are typically more complex, more bureaucratic and less flexible. They can find it difficult to coordinate staff to work towards a common purpose. These elements may create dysfunction if not managed.</p>
<p>This may explain why, despite the potential increased scope of their offerings, surveys suggest large funds tend to deliver <a href="https://www.investmentmagazine.com.au/2022/08/members-willing-to-pay-for-better-service-post-retirement/">less personalised service</a>. </p>
<p>So the idea “bigger is better” is not necessarily true. Large size is not an automatic win. Whether the advantages outweigh the disadvantages and challenges ultimately depends on fund trustees and management doing their jobs well so that members benefit.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-to-choose-a-financial-adviser-6-expert-tips-to-find-the-best-one-for-you-199498">How to choose a financial adviser: 6 expert tips to find the best one for you</a>
</strong>
</em>
</p>
<hr>
<img src="https://counter.theconversation.com/content/203417/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Geoff Warren is research director of the Conexus Institute, a not-for-profit research organisation that assisted in sponsoring this research, which was conducted with Scott Lawrence of Lawrence Investment Consulting.</span></em></p>Superannuation funds keep merging, on the basis that bigger is better for members. But our research suggests this isn’t necessarily true.Geoff Warren, Associate Professor, College of Business and Economics, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2030542023-05-11T20:09:13Z2023-05-11T20:09:13ZStudying can be a costly choice. Universities should address young people’s financial literacy gaps<figure><img src="https://images.theconversation.com/files/524329/original/file-20230504-17-icu5sy.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C5982%2C3970&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Tima Miroshnichenko/Pexels</span></span></figcaption></figure><p><em>This article is part of our series on <a href="https://theconversation.com/au/topics/universities-accord-big-ideas-137143">big ideas for the Universities Accord</a>. The federal government is calling for ideas to “reshape and reimagine higher education, and set it up for the next decade and beyond”. A review team is due to finish a draft report in June and a final report in December 2023.</em></p>
<hr>
<p>Australians with a HECS-HELP debts are facing an <a href="https://www.theguardian.com/news/datablog/ng-interactive/2023/may/03/millions-of-australians-face-higher-help-and-hecs-debts-see-how-inflation-will-change-your-repayments">estimated 7.1% increase</a> on their debts come the middle of the year, thanks to inflation. Some students have been <a href="https://www.smh.com.au/politics/federal/they-tell-you-it-is-interest-free-cherish-feels-stuck-in-hecs-debt-trap-20230426-p5d3dz.html">expressing shock and dismay</a> as their loans are interest-free and they believed they would not grow. </p>
<p>Although it is not “interest”, the effect for borrowers is the same. Decades of low inflation have meant HECS-HELP indexation has been largely ignored – until now. </p>
<p>This comes on top of already-significant HECS-HELP debts. An arts and law undergraduate this year now pay <a href="https://theconversation.com/the-universities-accord-should-scrap-job-ready-graduates-and-create-a-new-multi-rate-system-for-student-fees-203910">more than A$15,000 per year </a> in fees as a full-time student. </p>
<p>The repayments (which do not start until a certain income threshold is reached) impact disposable income and <a href="https://www.mortgagechoice.com.au/guides/does-hecs-debts-affect-your-home-loan/">borrowing capacity</a> and <a href="https://theconversation.com/hecs-help-loans-have-become-unfair-for-women-but-there-is-a-way-to-fix-this-200546">may negatively impact women</a> disproportionately.</p>
<p>This is why universities should do more to help students better understand their HECS-HELP debt and make financial decisions in general. The Universities Accord is a prime opportunity to initiate this change. </p>
<p>The accord review is looking at how universities can meet the knowledge and skills needs of the future. On top of other generic skills learned at university, such as communication, collaboration, problem-solving and critical thinking, we need to add financial literacy. </p>
<h2>Studying is a financial decision</h2>
<p>It can be argued universities have a moral obligation to build financial literacy skills and educate students about how course fees are charged and then repaid when they start working. </p>
<p>Universities rely on student fees as a substantial part of their funding. And students accrue significant amounts while studying – often in the tens of thousands of dollars. </p>
<p>The 2021 ANZ <a href="https://www.anz.com.au/content/dam/anzcomau/documents/pdf/aboutus/esg/financial-wellbeing/anz-au-adult-financial-wellbeing-survey-2021.pdf">Financial Wellbeing Survey</a> found that 18–24 year olds struggle with financial planning, choosing products, understanding online risks and credit-trap awareness. </p>
<figure class="align-center ">
<img alt="A young woman works with a calculator and laptop with sheets of paper." src="https://images.theconversation.com/files/524325/original/file-20230504-17-q92t5q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/524325/original/file-20230504-17-q92t5q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/524325/original/file-20230504-17-q92t5q.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/524325/original/file-20230504-17-q92t5q.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/524325/original/file-20230504-17-q92t5q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/524325/original/file-20230504-17-q92t5q.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/524325/original/file-20230504-17-q92t5q.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">
<figcaption>
<span class="caption">Young Australians do not have good levels of financial literacy.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
</figcaption>
</figure>
<h2>What is financial literacy?</h2>
<p>Financial literacy is a <a href="https://dera.ioe.ac.uk/22325/1/doc_833.pdf">core life skill</a>. It includes lodging tax returns, managing superannuation and ensuring you have enough money to look after yourself and your family. </p>
<p>It requires you to be competent in many aspects of the financial decision-making process. It includes the person’s knowledge of financial concepts, their ability to gather and sift through information and compare products, and their confidence in making decisions involving money. </p>
<p>Although the concept is broad, there is a <a href="https://gflec.org/education/questions-that-indicate-financial-literacy/">set of five questions</a> about interest rates, the stock market and mortgages that are regularly used to measure an individual’s level of financial literacy. </p>
<p>The Household, Income and Labour Dynamics in Australia <a href="https://melbourneinstitute.unimelb.edu.au/hilda">survey</a> has asked these questions and shows a decline in <a href="https://www.smh.com.au/business/the-economy/our-financial-literacy-crisis-can-you-answer-these-5-money-questions-20230109-p5cb6c.html">average correct answers</a>. Between 2016 and 2020 men went from 4.1 to 4.0 and women went from 3.7 to 3.5. </p>
<p>More alarming than the overall decline and increasing gender gap is the decline in financial literacy for those aged 15 to 24. Average scores fell from 3.4 to just 2.9 out of a possible five points for young people. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/teaching-and-research-are-the-core-functions-of-universities-but-in-australia-we-dont-value-teaching-203657">Teaching and research are the core functions of universities. But in Australia, we don't value teaching</a>
</strong>
</em>
</p>
<hr>
<h2>Why should unis get involved?</h2>
<p>Nothing substantial is currently being done to address this knowledge gap among young Australians. </p>
<p>In its early iterations, the National Financial Literacy Strategy (later named the <a href="https://www.financialcapability.gov.au/strategy-2022">Financial Capability Strategy</a>) focused on driving improvement through formal education in schools. </p>
<p>However, the effort has <a href="https://theconversation.com/aussie-kids-financial-knowledge-is-on-the-decline-the-proposed-national-curriculum-has-downgraded-it-even-further-163110">not shifted the dial</a> on school performance in terms of financial literacy and there are <a href="https://theconversation.com/many-students-dont-know-how-to-manage-their-money-here-are-6-ways-to-improve-financial-literacy-education-177918">issues with the focus on maths</a> in the school curriculum over building specific financial literacy skills. </p>
<h2>The US example</h2>
<p>Making financial literacy classes compulsory is not an overly ambitious goal. In the United States, <a href="https://www.ngpf.org/state-of-financial-education-report/">19 states</a> either require or plan to require students to do a personal finance course to graduate from high school. </p>
<p>There are signs this may be mandated in colleges and universities. A 2019 <a href="https://home.treasury.gov/system/files/136/Best-Practices-for-Financial-Literacy-and-Education-at-Institutions-of-Higher-Education2019.pdf">US Treasury Department report</a> recommended universities and colleges “should require mandatory courses to teach students financial concepts and skills”. This would include:</p>
<ul>
<li><p>clear, timely and customised information to inform student borrowing</p></li>
<li><p>communicating importance of graduation and major on repayment of student loans</p></li>
<li><p>preparing students to meet financial obligations upon graduation.</p></li>
</ul>
<p>Many US universities already have financial literacy courses. The Ohio State University, for example, runs a <a href="https://swc.osu.edu/services/financial-coaching">financial coaching program</a> to assist thousands of students each year in setting financial goals, budgeting and banking, credit, debt repayment, saving and retirement planning. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/many-students-dont-know-how-to-manage-their-money-here-are-6-ways-to-improve-financial-literacy-education-177918">Many students don't know how to manage their money. Here are 6 ways to improve financial literacy education</a>
</strong>
</em>
</p>
<hr>
<h2>How can we improve financial literacy?</h2>
<figure class="align-left ">
<img alt="A young person works on a computer next to a cup, book and phone." src="https://images.theconversation.com/files/524331/original/file-20230504-27-v47tvu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/524331/original/file-20230504-27-v47tvu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=900&fit=crop&dpr=1 600w, https://images.theconversation.com/files/524331/original/file-20230504-27-v47tvu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=900&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/524331/original/file-20230504-27-v47tvu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=900&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/524331/original/file-20230504-27-v47tvu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1131&fit=crop&dpr=1 754w, https://images.theconversation.com/files/524331/original/file-20230504-27-v47tvu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1131&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/524331/original/file-20230504-27-v47tvu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1131&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Universities could mandate financial literacy courses as part of graduates. Specific information about student debts could also be provided before students take on a loan.</span>
<span class="attribution"><span class="source">Vlada Karpovich/Pexels</span></span>
</figcaption>
</figure>
<p>There are many opportunities for Australian universities to formalise financial education. </p>
<p>At the strategic level, they should add “developing financially capable students” to the list of graduate attributes. </p>
<p>They could then mandate all students complete a course on managing personal finances as part of graduation requirements. There could be flexibility about how this is done – online and cross-institutional study are both obvious options.</p>
<p>Student services can also provide workshops on tax, budgeting, superannuation, insurance, inflation and the economy and investing. </p>
<p>Finally, if students are electing to defer their fees via HECS-HELP, they should be required to complete a specific non-graded financial literacy module to better understand the implications of accruing the debt.</p><img src="https://counter.theconversation.com/content/203054/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Tracey West has received funding in the past from Ecstra Foundation, the Financial Basics Foundation and the Financial Planning Association to conduct research. </span></em></p>It can be argued universities also have a moral obligation to educate students about how course fees are charged and then repaid when they start working.Tracey West, Lecturer in Behavioural Finance, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2027462023-04-27T01:52:01Z2023-04-27T01:52:01ZWhat is a novated lease on a car and what do I need to know before signing up?<figure><img src="https://images.theconversation.com/files/522502/original/file-20230424-28-vcslb6.jpg?ixlib=rb-1.1.0&rect=0%2C29%2C6625%2C4373&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>If you’re thinking about getting a vehicle but don’t have enough money saved, you might be considering a choice between taking out a car loan or a novated lease (also known as “salary sacrificing” to get a car). </p>
<p>It’s important to know the difference, as there are plenty of tax implications and what’s right for one person won’t be for another. </p>
<p>So, what is a novated lease and how does it work?</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/522456/original/file-20230424-26-paq5g6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/522456/original/file-20230424-26-paq5g6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/522456/original/file-20230424-26-paq5g6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/522456/original/file-20230424-26-paq5g6.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/522456/original/file-20230424-26-paq5g6.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/522456/original/file-20230424-26-paq5g6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/522456/original/file-20230424-26-paq5g6.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/522456/original/file-20230424-26-paq5g6.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Ever thought of taking out a novated lease on a car?</span>
<span class="attribution"><a class="source" href="https://www.pexels.com/photo/person-holding-black-vehicle-steering-wheel-1392621/">Photo by Lisa Fotios/Pexels</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>A novated lease involves your employer</h2>
<p>Under a normal lease, you enter an agreement with a leasing company. They buy the vehicle you’ve chosen (and own it until the end of the lease) and you get to use it in return for making regular lease payments. At the end of the lease agreement period, you can choose to make an additional payment (called a residual or balloon payment) and take over ownership of the vehicle.</p>
<p>A novated lease includes another party in the agreement – your employer. </p>
<p>In this case, your employer makes the payments to the leasing company on your behalf, then reduces your wages by the amount of the payment.</p>
<p>This is called a salary sacrifice or salary packaging arrangement and it means you <a href="https://www.ato.gov.au/Individuals/Jobs-and-employment-types/Working-as-an-employee/Salary-sacrificing-for-employees/?=Redirected_URL">end up paying less tax</a> on your income.</p>
<p>To demonstrate the tax saving, see the example below, which is <a href="https://www.ato.gov.au/rates/individual-income-tax-rates/">based on</a> a vehicle expense of A$12,000 for the 2022-23 tax year.</p>
<hr>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/522490/original/file-20230424-28-d4qnos.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/522490/original/file-20230424-28-d4qnos.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/522490/original/file-20230424-28-d4qnos.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=418&fit=crop&dpr=1 600w, https://images.theconversation.com/files/522490/original/file-20230424-28-d4qnos.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=418&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/522490/original/file-20230424-28-d4qnos.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=418&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/522490/original/file-20230424-28-d4qnos.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=525&fit=crop&dpr=1 754w, https://images.theconversation.com/files/522490/original/file-20230424-28-d4qnos.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=525&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/522490/original/file-20230424-28-d4qnos.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=525&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Potential tax savings from using a novated lease.</span>
</figcaption>
</figure>
<hr>
<p>Bundled with the novated lease is the finance or interest component, at a rate similar to a car loan. However, it is easier to obtain finance through a novated lease as your employer is guaranteeing the payment out of your salary.</p>
<h2>Used or new car? What about running costs?</h2>
<p>You can purchase a new or used vehicle under a novated lease. </p>
<p>Also, you may be able to bundle not only the purchase price and the finance costs, but also the running costs such as fuel, servicing and insurance.</p>
<p>This means the total costs of owning a vehicle are bundled into a single payment and deducted from your before-tax salary. This is called a <a href="https://www.commbank.com.au/articles/business/what-is-a-novated-lease.html#:%7E:text=A%2520novated%2520lease%2520is%2520a,expenses%2520into%2520one%2520simple%2520payment">fully maintained novated lease</a>.</p>
<h2>How does it compare with a traditional car loan?</h2>
<p>A traditional loan involves borrowing money from a lender (such as a bank) to pay for your vehicle. </p>
<p>You become the owner of the vehicle straight away, but you have a debt (which is usually secured against the vehicle itself). You’ll need to make regular loan repayments plus interest.</p>
<p>If something goes wrong and you can’t make your regular repayments, you may be forced to sell the vehicle to cover the debt.</p>
<p>You’re also directly responsible for all the running costs, which you pay from your after-tax salary.</p>
<p>Since you own the vehicle, you may be able to claim some tax deductions if you use it for work.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/522503/original/file-20230424-23-lxouej.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/522503/original/file-20230424-23-lxouej.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/522503/original/file-20230424-23-lxouej.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/522503/original/file-20230424-23-lxouej.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/522503/original/file-20230424-23-lxouej.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/522503/original/file-20230424-23-lxouej.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/522503/original/file-20230424-23-lxouej.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/522503/original/file-20230424-23-lxouej.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>
<figcaption>
<span class="caption">Make sure you understand what you’re signing up for.</span>
<span class="attribution"><a class="source" href="https://www.pexels.com/photo/a-woman-buying-a-car-7144243/">Photo by Antoni Shkraba/Pexels</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>5 things to think about before you sign up for a novated lease</h2>
<ol>
<li><p>Check if the novated lease arrangement is tax effective for you. There may be other costs involved in salary sacrifice agreements such as <a href="https://www.ato.gov.au/Business/Fringe-benefits-tax/Types-of-fringe-benefits/FBT-on-cars,-other-vehicles,-parking-and-tolls/Cars-and-FBT/Car-leasing-and-FBT/">fringe benefits tax</a> (sometimes shortened to FBT), which your employer may also deduct from your wages. However, some types of employers – such as charities – are <a href="https://www.ato.gov.au/Business/Fringe-benefits-tax/FBT-concessions-for-not-for-profit-organisations/FBT-exempt-organisations/#:%7E:text=Your%20not%2Dfor%2Dprofit%20organisation%20is%20exempt%20from%20fringe%20benefits,and%20endorsed%20by%20the%20ATO">exempt</a> from this tax. It might be worth getting advice from your employer’s payroll officer or your accountant</p></li>
<li><p>Leasing companies often promote the savings on <a href="https://www.ato.gov.au/Business/GST/In-detail/Your-industry/Motor-vehicle-and-transport/GST-and-vehicles-purchased-under-novated-leases/">fleet discounts and on the GST component</a> of both the vehicle cost and the running costs when you enter a novated lease. You need to pay attention to the total package cost. Other costs, such as interest, administration charges and services fees might outweigh the fleet or GST savings. </p></li>
<li><p>Leasing companies often have online calculators that show savings on a novated lease when compared with a traditional car loan. However, these calculators often omit the employer’s <a href="https://www.ato.gov.au/Business/Fringe-benefits-tax/Types-of-fringe-benefits/FBT-on-cars,-other-vehicles,-parking-and-tolls/Cars-and-FBT/Car-leasing-and-FBT/">fringe benefits tax</a>, which may end up being passed onto you. So you need to factor in this additional cost</p></li>
<li><p>Make sure you understand what will happen if you quit, get fired or leave your current employer for the duration of the novated lease. If you change jobs, you may become responsible for the lease payments. Or, you might need to enter into another agreement with the leasing company (this usually means additional administration costs)</p></li>
<li><p>Check the residual value or “balloon payment” that applies to your novated lease (remember, this is the amount you can pay at the end of the lease to take ownership of the car). This amount is <a href="https://www.ato.gov.au/Business/Fringe-benefits-tax/Types-of-fringe-benefits/FBT-on-cars,-other-vehicles,-parking-and-tolls/Cars-and-FBT/Car-leasing-and-FBT/">set by the Australian Taxation Office</a>.</p></li>
</ol>
<h2>Advantages and disadvantages</h2>
<p>There are advantages and disadvantages to novated leases, just as there are to traditional car loans.</p>
<p>So it’s important to fully understand the choice you are making, and the risks involved.</p>
<p>If you’re planning on keeping your vehicle long term, a car loan may be the cheaper option.</p>
<p>If you want to upgrade regularly, a lease may be the convenient way to go.</p>
<p>Either way, make sure you get proper advice and make an informed decision.</p><img src="https://counter.theconversation.com/content/202746/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Prafula Pearce 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>Under a normal lease, you enter an agreement with a leasing company. A novated lease includes another party in the agreement – your employer.Prafula Pearce, Associate Professor of Law, Edith Cowan UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2028382023-04-20T03:48:35Z2023-04-20T03:48:35ZYou can’t beat the bank by paying $1 a day extra on your mortgage. Here’s how compound interest really works<figure><img src="https://images.theconversation.com/files/521497/original/file-20230418-24-64ml0m.jpg?ixlib=rb-1.1.0&rect=352%2C1750%2C6015%2C2716&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>By paying just $1 a day extra on your mortgage, you can hack the banking system and cut the time to repay your home loan from 20 years to just five years.</p>
<p>Sounds too good to be true? Of course it is. But that hasn’t stopped someone “good at finance” from claiming this in a TikTok video that’s garnered millions of views and spurred dozens of other “finfluencers” to amplify its claims.</p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/518108/original/file-20230329-14-j8ruvo.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/518108/original/file-20230329-14-j8ruvo.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=893&fit=crop&dpr=1 600w, https://images.theconversation.com/files/518108/original/file-20230329-14-j8ruvo.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=893&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/518108/original/file-20230329-14-j8ruvo.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=893&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/518108/original/file-20230329-14-j8ruvo.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1123&fit=crop&dpr=1 754w, https://images.theconversation.com/files/518108/original/file-20230329-14-j8ruvo.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1123&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/518108/original/file-20230329-14-j8ruvo.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1123&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The best way to get attention on social media is to make sensational claims.</span>
<span class="attribution"><a class="source" href="https://www.tiktok.com/">TikTok</a></span>
</figcaption>
</figure>
<p>According to the video: “The reason banks want you to pay interest monthly is because they rely on a thing called compound interest.” But if you pay the bank $1 every day you “will pay a big fat zero in interest”. </p>
<p>The video goes on to say “mortgage” is a Latin word, and the reason “they” stopped teaching Latin in schools is because “they” don’t want people understanding how the banking system works.</p>
<p>If this sounds like a conspiracy theory, it’s because it is. Like all conspiracy theories, this one is a falsehood built on a few grains of truth, taking advantage of people’s ignorance about complicated matters.</p>
<p>So let’s separate the facts from the fiction. </p>
<h2>What is compound interest?</h2>
<p>Compound interest, in a nutshell, is interest on interest. </p>
<p>Say you put $1,000 in a savings account that pays 10% interest. After the first year, you would have $1,100 ($1,000 + $100 in interest). At the end of the second year you will have $1,210 ($1,100 + $110 in interest). At the end of the third year you will have $1,331 (1,210 + $121 in interest). The interest compounds. </p>
<p>What if you’ve borrowed $1,000 at a 10% annual interest rate? Assuming you make no repayments, after one year you will owe $1,100 ($1,000 + $100 in interest), after two years $1,210 ($1,100 + $110 in interest), and after three years $1,331 ($1,210 + $121 in interest). Again, the interest compounds.</p>
<h2>How to avoid compound interest</h2>
<p>To minimise the amount of compound interest you pay, there is one effective strategy: pay off the loan as quickly as you can. </p>
<p>Let’s consider an example similar to the scenario mentioned in the TikTok video – a mortgage with a loan term of 20 years. To make the maths easy, let’s say the loan is for $500,000 with a 5% interest rate. To pay it off in the allotted time will require monthly repayments of about $3,300 – or $39,600 a year.</p>
<p>Over 20 years you will pay about $792,000 – with about $291,950 being interest. The following graph shows this. </p>
<hr>
<p><iframe id="Jnjx2" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/Jnjx2/4/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>Now let’s consider what would happen if, instead of paying $3,300 a month, you paid $1,650 a fortnight. At first glance that might seem like the same thing, but it isn’t.</p>
<p>In a year there are 12 months, but 26 fortnights (because only February is exactly four weeks’ long). Paying half your monthly repayment every fortnight will mean you pay $42,900 a year, instead of $39,600.</p>
<p>If you can afford to do that, it will take just 17 years and six months to repay the loan, and you will pay about $41,750 less interest. The following graph illustrates this.</p>
<hr>
<p><iframe id="cNptJ" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/cNptJ/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<h2>So what about paying daily?</h2>
<p>Paying more frequently, such as weekly or daily, won’t make any difference unless you’re paying more. </p>
<p>There’s no magic trick to stopping compound interest. The following graph shows what an extra $1 a day would achieve with our hypothetical $500,000 loan.</p>
<hr>
<p><iframe id="J80hs" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/J80hs/1/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>Rather than taking 20 years to repay the loan, it will take 19 years and nine months. You would save about $5,470 in interest (paying about $286,480 rather than $291,950).</p>
<p>To repay the loan in five years, as claimed, would require paying an extra $201 a day – or about $113,220 a year instead of $39,600. </p>
<h2>There are no secret hacks</h2>
<p>So there’s no magic hack to avoid compound interest.</p>
<p>There are strategies to improve your loan conditions, such as refinancing when interest rates are declining, or using an offset account facility where these are offered.</p>
<p>The only real way to minimise compound interest on your mortgage is to pay off what you owe as quickly as you can. </p>
<p>But before you do, check with your bank if there are fees involved if you make additional payments towards your home loan. </p>
<p>For instance, if you have a partially or fully fixed mortgage, there may be a limit on how much extra you’re allowed to pay off each year without penalty. </p>
<p>These penalties are intended to compensate the bank for the loss of interest income it would have received if the borrower had continued to make regular payments over the full loan term.</p><img src="https://counter.theconversation.com/content/202838/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sagarika Mishra 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>A viral TikTok video claims to reveal a banking hack so you’ll “pay a big fat zero in interest”. Sadly, it’s not true. But extra payments now can save you thousands, as a finance expert explains.Sagarika Mishra, Associate professor, Deakin UniversityLicensed 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>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1613038025499369474"}"></div></p>
<hr>
<p>
<em>
<strong>
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>
</strong>
</em>
</p>
<hr>
<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>
<figure class="align-center zoomable">
<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>
<figcaption>
<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>
</figcaption>
</figure>
<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>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/517335/original/file-20230324-20-9bg5cv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Three people look at their screens." src="https://images.theconversation.com/files/517335/original/file-20230324-20-9bg5cv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/517335/original/file-20230324-20-9bg5cv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/517335/original/file-20230324-20-9bg5cv.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/517335/original/file-20230324-20-9bg5cv.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/517335/original/file-20230324-20-9bg5cv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/517335/original/file-20230324-20-9bg5cv.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/517335/original/file-20230324-20-9bg5cv.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>
<figcaption>
<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>
</figcaption>
</figure>
<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>
<hr>
<p>
<em>
<strong>
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>
</strong>
</em>
</p>
<hr>
<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>
<hr>
<p>
<em>
<strong>
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>
</strong>
</em>
</p>
<hr>
<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>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/517074/original/file-20230322-18-7vh5sn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/517074/original/file-20230322-18-7vh5sn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/517074/original/file-20230322-18-7vh5sn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/517074/original/file-20230322-18-7vh5sn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/517074/original/file-20230322-18-7vh5sn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/517074/original/file-20230322-18-7vh5sn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/517074/original/file-20230322-18-7vh5sn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/517074/original/file-20230322-18-7vh5sn.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>
<figcaption>
<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>
</figcaption>
</figure>
<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>
<figure class="align-center zoomable">
<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>
<figcaption>
<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>
</figcaption>
</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>
<figcaption>
<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>
</figcaption>
</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>
<hr>
<p>
<em>
<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>
</strong>
</em>
</p>
<hr>
<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/1991042023-02-26T19:04:23Z2023-02-26T19:04:23ZWhat is trauma insurance and what do I need to know if I am considering getting it?<figure><img src="https://images.theconversation.com/files/509999/original/file-20230214-22-o9aoil.jpg?ixlib=rb-1.1.0&rect=0%2C18%2C4033%2C2113&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/short-haired-sick-asian-woman-opening-curtains-of-windows-in-hospital-6798569/">Photo by Michelle Leman/Pexels</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>Trauma insurance (also known as crisis cover or critical illness insurance) is not a widely understood cover. Many people <a href="https://www.griffith.edu.au/__data/assets/pdf_file/0030/295770/FPRJ-V4-ISS1-pp-53-75-insurance-literacy-in-australia.pdf">don’t even know</a> it exists.</p>
<p>So, what is trauma insurance, when does it pay out and how is it different to private health insurance? </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/what-is-income-protection-insurance-and-hows-it-different-to-total-and-permanent-disability-insurance-193535">What is income protection insurance – and how's it different to total and permanent disability insurance?</a>
</strong>
</em>
</p>
<hr>
<h2>A lump sum for life-threatening medical conditions</h2>
<p>Trauma insurance provides a benefit for life-threatening medical conditions that seriously compromise the insured person’s current and future quality of life. </p>
<p><a href="https://www.canstar.com.au/life-insurance/trauma-insurance/">Examples</a> of major trauma medical conditions include:</p>
<ul>
<li>cardiovascular conditions</li>
<li>cancer</li>
<li>stroke and</li>
<li>kidney failure.</li>
</ul>
<p>So the word trauma here doesn’t refer to what you might usually think of as traumatising events, such as a car accident or abuse. Rather, it refers to specific life-threatening medical conditions. </p>
<p>The exact conditions covered will vary from policy to policy and are always defined in the policy document – so make sure you read it carefully.</p>
<p>The payout received from this cover ideally should be enough to pay off the mortgage (if you have one), with money left over for medical expenses, rehabilitation and any living expenses. </p>
<p>The amount you get will depend on your policy and your circumstances but could be in the <a href="https://www.finder.com.au/how-much-trauma-insurance-do-i-need#:%7E:text=The%20average%20trauma%20insurance%20policy,both%20you%20and%20your%20family.">hundreds of thousands</a> or even <a href="https://www.nobleoak.com.au/trauma-insurance/faqs-trauma/#:%7E:text=Trauma%20Insurance%20can%20provide%20a,at%20the%20time%20of%20Application">millions</a>.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/509994/original/file-20230214-22-1avuqu.jpg?ixlib=rb-1.1.0&rect=0%2C9%2C6134%2C4065&q=45&auto=format&w=1000&fit=clip"><img alt="A cancer patient looks out the window." src="https://images.theconversation.com/files/509994/original/file-20230214-22-1avuqu.jpg?ixlib=rb-1.1.0&rect=0%2C9%2C6134%2C4065&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/509994/original/file-20230214-22-1avuqu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=398&fit=crop&dpr=1 600w, https://images.theconversation.com/files/509994/original/file-20230214-22-1avuqu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=398&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/509994/original/file-20230214-22-1avuqu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=398&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/509994/original/file-20230214-22-1avuqu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/509994/original/file-20230214-22-1avuqu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/509994/original/file-20230214-22-1avuqu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The exact conditions covered will vary from policy to policy.</span>
</figcaption>
</figure>
<h2>When can you make a trauma insurance claim?</h2>
<p>To be able to make a trauma insurance claim, the insured person does not have to die or be permanently disabled by severe medical trauma.</p>
<p>Instead, the benefit amount is payable if one of the “medical events” you’re insured against – a stroke, for example – occurs. However, you only get the payout if the definition of that event in your trauma insurance policy is satisfied.</p>
<p>It is important to understand what is covered and what is not.</p>
<p>Some insurance companies cover more than <a href="https://books.google.com.au/books/about/Guide_to_Life_Risk_Protection_and_Planni.html?id=H8IYkwEACAAJ&redir_esc=y">30 conditions</a>, but some limit themselves to just a few major ones.</p>
<h2>So how is trauma insurance different to other types of insurance?</h2>
<p>Trauma insurance pays a lump sum when a person becomes critically ill or injured. That’s regardless of whether or not the insured person can still work or will be able to work in future.</p>
<p>Unlike total and permanent disability insurance, the insured person does not need to be totally and permanently disabled.</p>
<p>Income protection insurance usually pays a percentage of the insured person’s income, so they can sustain the quality of life they had before illness or disability. Trauma insurance, on the other hand, pays out a lump sum.</p>
<p>And unlike trauma insurance, both total and permanent disability and income protection insurances can be purchased within a <a href="https://www.choice.com.au/money/financial-planning-and-investing/superannuation/buying-guides/insurance-in-super">superannuation account</a>. Superannuation funds are <a href="https://www.superguide.com.au/comparing-super-funds/insurance-super">not permitted</a> to offer trauma insurance, so if you want trauma insurance you have to pay for this cover from your own pocket.</p>
<p><a href="https://www.griffith.edu.au/__data/assets/pdf_file/0030/295770/FPRJ-V4-ISS1-pp-53-75-insurance-literacy-in-australia.pdf">Research</a> interviews I conducted with financial advisers and consumers revealed most people who see financial advisers do not know much about trauma insurance. In fact, 25 out of 40 (63%) consumers I interviewed said they had never heard of it. </p>
<p>Some of the consumers I spoke to were confused about the difference between trauma insurance and private health insurance. Many thought they were very similar, if not the same.</p>
<p>Many people do not realise private health insurance pays only for a hospital stay (and, if you have extras cover, may reduce the cost of certain non-hospital treatments). It doesn’t cover ongoing living costs. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/510265/original/file-20230215-23-3v4rtc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A woman looks at the fine print." src="https://images.theconversation.com/files/510265/original/file-20230215-23-3v4rtc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/510265/original/file-20230215-23-3v4rtc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/510265/original/file-20230215-23-3v4rtc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/510265/original/file-20230215-23-3v4rtc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/510265/original/file-20230215-23-3v4rtc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/510265/original/file-20230215-23-3v4rtc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/510265/original/file-20230215-23-3v4rtc.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>
<figcaption>
<span class="caption">Always read the fine print.</span>
<span class="attribution"><a class="source" href="https://www.pexels.com/photo/photo-of-woman-wearing-denim-jeans-4100294/">Photo by Matilda Wormwood/Pexels</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>Important things to check before you buy trauma insurance</h2>
<p>Most trauma insurance policies have a waiting period before you can claim anything (usually about 90 days).</p>
<p>Importantly, most self-inflicted injuries or illnesses will not be covered by the majority of trauma policies.</p>
<p>Death or disability caused by attempted suicide usually has a waiting period of 13 months, after which, in most cases, the insurer will pay out. If you die by suicide then your next of kin will get the lump sum.</p>
<p>Any pre-existing medical conditions must be disclosed at the time of application; the insurer may choose to exclude those conditions or apply a loading (which makes premiums more expensive). </p>
<p>If pre-existing conditions are not disclosed at the start, you run the risk of particular claims being rejected in future.</p>
<p>Trauma insurance does not cover <a href="https://moneysmart.gov.au/how-life-insurance-works/trauma-insurance">mental health conditions</a>. This is probably due to the fact people who claim for a mental health condition are <a href="https://fsc.org.au/resources/2235-fsc-kpmg-mental-health-analysis-summary-report-june-2021/file">likely</a> to claim again.</p>
<p>If you’ve got or are considering getting trauma insurance, make sure you check the definitions of what it covers, as well as the specific inclusions and exclusions.</p>
<p>Trauma insurance is relatively expensive. That’s chiefly because the possibility of a claim is higher than many other types of personal insurance.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/510267/original/file-20230215-26-isvwp0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A person does walking rehab exercises." src="https://images.theconversation.com/files/510267/original/file-20230215-26-isvwp0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/510267/original/file-20230215-26-isvwp0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/510267/original/file-20230215-26-isvwp0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/510267/original/file-20230215-26-isvwp0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/510267/original/file-20230215-26-isvwp0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/510267/original/file-20230215-26-isvwp0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/510267/original/file-20230215-26-isvwp0.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>
<figcaption>
<span class="caption">The payout received ideally should be enough to cover things like mortgage, medical expenses and rehabilitation.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
</figcaption>
</figure>
<h2>Possible peace of mind</h2>
<p>Overall, trauma insurance is expensive but may offer some people peace of mind they will have the money needed to pay privately for medical expenses and treatments if a serious medical event strikes.</p>
<p>If the cover is high enough to pay off a person’s outstanding debts, this may take the financial pressure away so they can concentrate on recovering from illness.</p>
<p>This will also reduce the financial burden on the government, as the insured person will not need to claim any payments from Centrelink.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-to-switch-health-insurers-if-youre-worried-about-cybersecurity-costs-or-claims-194248">How to switch health insurers if you're worried about cybersecurity, costs or claims</a>
</strong>
</em>
</p>
<hr>
<img src="https://counter.theconversation.com/content/199104/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Tania Driver 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>Trauma insurance provides a benefit for life-threatening medical conditions that seriously compromise the insured person’s current and future quality of life.Tania Driver, Lecturer in Financial Planning, James Cook UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1994982023-02-23T19:03:09Z2023-02-23T19:03:09ZHow to choose a financial adviser: 6 expert tips to find the best one for you<figure><img src="https://images.theconversation.com/files/511861/original/file-20230223-18-a28xry.png?ixlib=rb-1.1.0&rect=101%2C275%2C3873%2C2017&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Financial decisions can make an enormous difference to the rest of your life. </p>
<p>As an example, the difference between having superannuation in one of the top-performing quarter of funds compared to bottom-performing quarter can mean retiring
with about <a href="https://www.pc.gov.au/inquiries/completed/superannuation/assessment/report/superannuation-assessment-overview.pdf">A$1.1 million</a> instead of $610,000, according to calculations by the Productivity Commission. </p>
<p>Getting good advice can pay for itself many times over. But how do you find it? </p>
<p>It isn’t cheap. According to research commissioned by the Financial Planning Association of Australia (which represents financial advisers), the average cost is about $3,300 upfront, then <a href="https://fpa.com.au/financial-planning/">about $4,300 a year</a> if you sign up for ongoing advice. </p>
<p>It used to appear to be free. Financial advisers were paid by commissions sent their way by the makers of the products they steered their clients into and taken from the client’s funds. These commissions were not only upfront but also ongoing each year, meaning they ended up costing clients a lot.</p>
<p>Commissions have been <a href="https://asic.gov.au/regulatory-resources/financial-services/regulatory-reforms/future-of-financial-advice-fofa-reforms/">banned</a> since 2013. In 2018, the Hayne royal commission into misconduct in the financial services industry recommended the government go further and ban the payment of commissions to mortgage brokers, a recommendation the government <a href="https://cdn.treasury.gov.au/uploads/sites/1/2019/02/FSRC-Government-Response-1.pdf">rejected</a>, which is why mortgage brokers still don’t charge upfront.</p>
<p>Here are some tips about how to find the right adviser.</p>
<h2>1. Work out what matters to you</h2>
<p>What matters to you most? Do you care about maximising your returns no matter what, or do you value social and environmental responsibility? Are you interested in keeping risk to the absolute minimum, or are you happy to accept greater risk in pursuit of higher returns?</p>
<p>Your specific needs are also important. Some advisers offer guidance on a broad range of financial matters such as retirement planning, estate planning and the operation of a business. Others are more narrowly focused on managing money. </p>
<p>Another important consideration is the adviser’s approach to working with clients. Some adopt a more hands-on approach, providing regular updates and actively managing clients’ investments. Others may check in periodically. </p>
<p>Work out what you want first. This will help you narrow down options to one. </p>
<h2>2. Get a recommendation</h2>
<p>It is always good to talk to previous clients to get a sense of a adviser’s track record and approach. </p>
<p>The most practical way to do it is to get a referral from a friend or colleague or someone else you trust. </p>
<p>Otherwise, it is possible to search for registered advisers by postcode on the government’s MoneySmart <a href="https://moneysmart.gov.au/financial-advice/financial-advisers-register">financial advisers register</a></p>
<h2>3. Check qualifications and experience</h2>
<p>Only advisers with an Australian financial services (AFS) licence are able to give advice, and they are all listed on the <a href="https://moneysmart.gov.au/financial-advice/financial-advisers-register">financial advisers register</a>.</p>
<p>Putting the name of the adviser into the search bar will produce a page showing </p>
<ul>
<li><p>whether the licence is current </p></li>
<li><p>any disciplinary actions against the adviser</p></li>
<li><p>the adviser’s employment history</p></li>
<li><p>the adviser’s qualifications and training</p></li>
<li><p>what the adviser is licensed to provide advice about.</p></li>
</ul>
<p>Financial advisers are required to provide potential clients with a <a href="https://asic.gov.au/regulatory-resources/financial-services/giving-financial-product-advice/financial-services-guide/">financial services guide</a> that includes a description of the services they provide, including limits to the services provided, information about fees and charges, details of any conflicts of interest and information about the complaint resolution process. </p>
<p>There should be a copy on the adviser’s website, or you can ask for a copy. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-ftx-australia-was-able-to-claim-it-was-asic-licenced-196361">How FTX Australia was able to claim it was 'ASIC-licenced'</a>
</strong>
</em>
</p>
<hr>
<h2>4. Ask the right questions</h2>
<p>The next step is to ask enough questions over the phone to be sure it’s worth meeting in person. Start with the questions about priorities listed in point one.</p>
<p>If the answers are not satisfactory there’s no point proceeding to a meeting.</p>
<p>If the answers are good, it’s time for an open and honest conversation, probably in person. Don’t be afraid to ask more about their experience, values and approach.</p>
<p>Useful questions include:</p>
<ul>
<li><p>how do you assess my specific financial needs?</p></li>
<li><p>how will you manage my wealth?</p></li>
<li><p>how do you approach financial planning?</p></li>
</ul>
<p>Red flags include</p>
<ul>
<li><p>any answer that seems generic, one-size-fits all, not taking into account your specific needs and goals </p></li>
<li><p>any explanation that is vague and unclear </p></li>
<li><p>any hint of pressure to invest in a certain product or service</p></li>
<li><p>any claims or promises that seem too good to be true (such as a very high return without risk).</p></li>
</ul>
<h2>5. Review the plan</h2>
<p>If your meeting goes well, the adviser will put together a financial plan which will be set out in a <a href="https://asic.gov.au/regulatory-resources/financial-services/giving-financial-product-advice/statement-of-advice/">Statement of Advice (SOA)</a>.</p>
<p>The statement must detail the proposed strategy, any financial products being recommended and how they meet the client’s financial objectives and the risks associated with these products, what their advice covers (and does not cover), and the associated fees. </p>
<p>The statement is designed to help you make an informed decision. It can also serve as a point of reference in the event of misunderstandings.</p>
<h2>6. Don’t set and forget</h2>
<p>Coming up with a plan usually isn’t the end. Regular monitoring and review is the best way to achieve the best outcomes. </p>
<p>This is because circumstances, priorities and objectives change, as well as markets.</p>
<p>Generally, your adviser will recommend annual or two-yearly reviews to ensure that the plan remains aligned with changed circumstances. </p>
<p>If you have a more complex situation, more regular check-ins might be needed. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/australians-need-good-financial-advice-more-than-ever-to-pay-for-soaring-interest-rates-heres-how-to-get-it-199739">Australians need good financial advice more than ever to pay for soaring interest rates. Here's how to get it</a>
</strong>
</em>
</p>
<hr>
<img src="https://counter.theconversation.com/content/199498/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ama Samarasinghe 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>Getting good advice can pay for itself many times over. But how do you find it? And what questions should you ask before signing up with a financial adviser?Ama Samarasinghe, Lecturer, RMIT UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1989912023-02-02T19:16:33Z2023-02-02T19:16:33ZShort selling Adani: how an obscure US firm profited from triggering the Indian giant’s price plunge<figure><img src="https://images.theconversation.com/files/507763/original/file-20230202-3961-nxfh9e.jpeg?ixlib=rb-1.1.0&rect=0%2C134%2C733%2C392&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Sam Shere/Wikimedia Commons</span></span></figcaption></figure><p>A few weeks ago, Gautam Adani was indisputably India’s richest man. </p>
<p>Now his fortune is slipping away as the stocks of his many companies crash, thanks to the efforts of a relatively obscure US company named after the 1937 Hindenberg disaster (in which a hydrogen-filled airship caught fire, killing 98 people).</p>
<p>Adani’s personal fortune was an estimated <a href="https://www.forbes.com/india-billionaires/list/">US$150 billion</a> in 2022. He catapulted past the previous richest Indian, Mukesh Ambani, on the back of the meteoric rise of Adani Group, a multinational conglomerate with holdings in <a href="https://www.adanienterprises.com/businesses/mining-and-mdo/australia">mining</a>, energy, airports, <a href="https://www.adani.com/newsroom/media-release/adani-becomes-indias-second-largest-cement-player">cement</a>, <a href="https://www.adanienterprises.com/businesses/edible-oil-and-foods#:%7E:text=Besides%20oil%2C%20AWL%20has%20also,%2C%20Fryola%2C%20Alpha%20and%20Aadhar.">food processing</a> and <a href="https://www.adanidefence.com/small-arms">weapons manufacturing</a>. </p>
<figure class="align-center ">
<img alt="Gautam Adani is no longer India's richest person." src="https://images.theconversation.com/files/507785/original/file-20230202-18-5ckpcj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/507785/original/file-20230202-18-5ckpcj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/507785/original/file-20230202-18-5ckpcj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/507785/original/file-20230202-18-5ckpcj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/507785/original/file-20230202-18-5ckpcj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/507785/original/file-20230202-18-5ckpcj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/507785/original/file-20230202-18-5ckpcj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Gautam Adani is no longer India’s richest person.</span>
<span class="attribution"><span class="source">Aijaz Rahi/AP</span></span>
</figcaption>
</figure>
<p>Since January 25, Adani Group’s stock price has fallen 45%. The catalyst? An <a href="https://hindenburgresearch.com/adani-response/#_ftnref1">explosive report</a> published on January 24 by Hindenburg Research, alleging Adani Group engaged in “brazen stock manipulation and accounting fraud scheme over the course of decades”.</p>
<p>What complicates this report is that Hindenburg Research isn’t just a research company. It’s an “activist short seller”, with a financial incentive in seeing Adani’s stock price fall. </p>
<p>Hindenburg makes its profits by identifying “man-made disasters floating around in the market”. It bets on the stock falling, then publicises that company’s negatives – including doing so <a href="https://hindenburgresearch.com/adani/">in Adani’s case</a>:</p>
<blockquote>
<p>After extensive research, we have taken a short position in Adani Group Companies through US-traded bonds and non-Indian-traded derivative instruments. </p>
</blockquote>
<p>Adani’s <a href="https://www.adani.com/-/media/Project/Adani/Invetsors/Adani-Response-to-Hindenburg-January-29-2023.pdf">response</a> includes calling the report a “calculated attack on India” and “intended only to create a false market in securities to enable Hindenburg, an admitted short seller, to book massive financial gain through wrongful means at the cost of countless investors”.</p>
<p>Activist short selling is certainly controversial. But it’s not necessarily illegal, nor unethical.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/unpicking-the-labyrinth-that-is-indias-adani-74552">Unpicking the labyrinth that is India's Adani</a>
</strong>
</em>
</p>
<hr>
<h2>How does short selling work?</h2>
<p>Short selling (also known as having a “short exposure”, or “shorting”) is essentially betting on a company’s stock falling. </p>
<p>The process is more complicated than betting on a share price rising, for which all you have to do is buy the stock and wait for it to appreciate. </p>
<p>It can be done in several ways. The most common is to sell borrowed stock. The “short seller” makes a contract with a share owner to borrow shares for an agreed period. They then sell that stock, banking the proceeds. When the time comes to return the stock, they buy shares on the market to “repay” the loan. If the price has fallen in the meantime, they make a profit. </p>
<p>There are also methods that involve “derivatives”. These are financial instruments that allow investors to “bet” on financial outcomes. For example, a “put option” involves betting a stock’s price will fall below a specific level (called the strike price). Similarly, a futures contract pays out the difference between the current stock price and the future stock price. This allows the investor to effectively bet on price movements. </p>
<p>Investors might also invest via bonds. A corporate bond is much like a loan. Investors can short sell a bond like they would a stock. Alternatively, they can buy “credit default swaps”, which enable betting on a company defaulting on on its debt repayments.</p>
<p>There are even more complicated strategies than these. For fun explanations, check out the 2015 movie The Big Short, about the guys who bet on the collapse of the subprime mortgage market that led to the 2008 Global Financial Crisis. </p>
<hr>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/epb98OcFLZE?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Short selling explained by Margot Robbie in ‘The Big Short’.</span></figcaption>
</figure>
<hr>
<h2>Is short selling legal?</h2>
<p>There are two main legal issues arising with short selling.</p>
<p><strong>Market manipulation</strong>. It is illegal in most jurisdictions for activist short sellers to profit by spreading false or misleading information. This is the case in Australia and the US (where Hindenburg and some of its positions in Adani are based). But this is relatively easy to discover.</p>
<p><strong>Insider trading</strong>. it would be illegal to bet on a company’s future share price using information that is not generally available, then reveal that information.</p>
<p>On this, Hindenburg Research is skating on thin ice with some of its assertions. For example, its report says of Adani’s deals to build a rail line to transport coal in Queensland:</p>
<blockquote>
<p>None of the transactions were specifically disclosed in the Adani Enterprises annual reports. We uncovered them only by reviewing financials for the private Singaporean Carmichael Rail entity.</p>
</blockquote>
<p>If those financials were <strong>publicly</strong> available in a database or online, Hindenburg Research is in the clear. But if the financials were not generally available, it risks being accused of insider trading. </p>
<p>However, Hindenburg’s report contains many allegations involving a large volume of public information, which means it would be difficult to establish whether it also used any non-public information to assemble the report. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/vital-signs-asics-crusade-against-activist-short-sellers-will-be-bad-for-regular-folk-161906">Vital Signs: ASIC's crusade against activist short sellers will be bad for regular folk</a>
</strong>
</em>
</p>
<hr>
<h2>Is this ethical? Should we be concerned?</h2>
<p>There are some concerns about the ethics of profiting from a company’s demise. </p>
<p>Ethics can be arbitrary. However, we can consider some guidelines. These include: </p>
<ul>
<li><p>Does society benefit from information about fraud coming to light?</p></li>
<li><p>If there were no financial incentive, would a company really spend two years doing detailed forensic analysis?</p></li>
<li><p>Does anyone unfairly lose to justify rules or laws to discourage such profits?</p></li>
</ul>
<p>Exposing fraud is in the public interest. There must be some financial incentive to do such work. Existing shareholders are losing from Adani’s stock tumble, but that should properly be credited to the alleged fraud, not the report. </p>
<p>Ultimately, then, companies such as Hindenburg are generally a net positive if they comply with all relevant laws, securities regulations and privacy guidelines. </p>
<p>If the report is truthful, blaming Hindenburg for Adani’s crash is like blaming an alarm for a fire.</p><img src="https://counter.theconversation.com/content/198991/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mark Humphery-Jenner receives funding from the Australian Research Council and AFAANZ.</span></em></p>Activist short selling is certainly controversial. But it’s not necessarily illegal nor unethical.Mark Humphery-Jenner, Associate Professor of Finance, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1936322023-01-09T13:29:38Z2023-01-09T13:29:38ZKids and money: five ways to start the conversation<figure><img src="https://images.theconversation.com/files/492732/original/file-20221101-26-vu8s7f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Children feel empowered and learn more about financial independence when they understand basic concepts.</span> <span class="attribution"><span class="source">Prostock-studio/Shutterstock</span></span></figcaption></figure><p>When it comes to teaching young children about the world, parents may feel that some topics – like politics and religion – are too tough to broach. Money is another. Parents may not feel like they know how to approach the subject, <a href="http://www.multivu.com/players/English/7455231-t-rowe-price-financial-education/links/7455231-Please-Release-Parents-Kids-Money-Survey-PKM-Report-2015-FINAL.pdf">or worry</a> that they don’t set a good financial example for their kids. </p>
<p>But money talk shouldn’t be avoided. Talking about it is the first stepping stone towards financial knowledge and, ultimately, to financial independence. Holding off the conversations for too long can leave your children in the lurch later in life. For instance, in South Africa, only <a href="https://onlinelibrary.wiley.com/doi/full/10.1111/fima.12283?casa_token=-1JJXLBwP7AAAAAA%3AuKnEkeWvjfrrgG9xRbmrIUWAbf4lqI6xyEoXo5b5xyWJU1QBU8AcLsKwFAIR4ZVhK-HMxif2Uep8Q5sP">42% of adults are financially literate</a>. In Ghana <a href="https://gflec.org/wp-content/uploads/2015/11/Finlit_paper_16_F2_singles.pdf">the figure</a> is 32% and in Nigeria it’s 26%. This means a large number of adults in these countries do not know or understand financial concepts.</p>
<p>This highlights the importance of starting the money talk conversation early to ensure individuals possess the knowledge, skills and confidence to successfully manage their finances. </p>
<p>Perhaps your child receives an allowance and you feel this is enough to familiarise them with the concept of saving or about the value of money. But <a href="https://www.consumerfinance.gov/about-us/blog/heres-why-childhood-is-an-important-time-to-learn-about-money/">studies have found</a> that an allowance is most beneficial when it’s paired with guidance on savings and budgeting. </p>
<p>Children learn through numerous sources of influence, including school, friends and the media. But the greatest influence of their <a href="https://files.eric.ed.gov/fulltext/EJ1280281.pdf">financial socialisation</a> – that is, the values, knowledge, attitudes and behaviours that promote financial well-being – are their parents or primary caregivers. The earlier you start the conversation the better; the majority of children between the ages of <a href="https://www.pensionbee.com/blog/2022/july/teaching-kids-about-money-and-financial-literacy">11 and 17 lack confidence in managing money</a>. </p>
<p>If you’ve wondered how you can teach your children about savings and budgeting, here are five ideas to explore for children aged 10 and above.</p>
<h2>Setting goals</h2>
<p>Setting financial goals is an important part of learning how to manage money because it requires you to prioritise your financial needs. It also requires systems. <a href="https://www.theguardian.com/lifeandstyle/2017/may/10/the-psychology-of-the-to-do-list-why-your-brain-loves-ordered-tasks">Studies</a> have shown that people perform better when they have written down what they need to do. </p>
<p>There are several free and printable online goal charts that kids can use to either tick off or colour in how much they’ve accumulated in the kitty. Goal charts or clear jars are particularly helpful for children who are visual learners as they get to “see their savings grow” over time. And just like ticking off a to-do list, it’s satisfying to measure progress and have proof that you’ve worked towards achieving your goals.</p>
<h2>Savings</h2>
<p>The motivation to accumulate savings becomes stronger when it’s coupled with a financial goal. As adults, we understand the need to save for a rainy day, but this concept may be foreign to a child. Instead, consider teaching the importance of saving in relation to an event a child can understand and relate to, such as a birthday or Christmas Day. </p>
<p>This not only gives children an incentive to save towards something they are interested in. It also teaches them financial discipline (not to dip into the kitty prematurely) and delayed gratification (they can access the money in the kitty now but will miss the opportunity to have more money available from it in future).</p>
<p>Savings aren’t always driven by the need to spend. It’s also important to teach kids to save for the sake of it, because we never know what tomorrow will bring and this lesson may be better understood and appreciated as a child’s financial knowledge matures.</p>
<h2>Saving vs investment</h2>
<p>For older children, or at an age-appropriate level (research suggests this is between the ages of <a href="https://moneyandpensionsservice.org.uk/wp-content/uploads/2020/01/Money-and-Pensions-Service-Children-and-Young-People-Financial-Capability-Wellbeing-Financial-Education-in-Schools-Financial-Foundations.pdf">12 and 17</a>), the conversation on savings can be elevated to introduce the concept of investing. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/492784/original/file-20221101-25191-ie82g5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/492784/original/file-20221101-25191-ie82g5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=436&fit=crop&dpr=1 600w, https://images.theconversation.com/files/492784/original/file-20221101-25191-ie82g5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=436&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/492784/original/file-20221101-25191-ie82g5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=436&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/492784/original/file-20221101-25191-ie82g5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=548&fit=crop&dpr=1 754w, https://images.theconversation.com/files/492784/original/file-20221101-25191-ie82g5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=548&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/492784/original/file-20221101-25191-ie82g5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=548&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Saving can be a fun, educational experience for children.</span>
<span class="attribution"><span class="source">ESB Professional/Shutterstock</span></span>
</figcaption>
</figure>
<p>While saving refers to the accumulation of funds by intentionally spending less, investing is the purchasing of an asset that provides income from the asset itself. Engaging with children about knowing when to save versus when to invest can instil an important financial lesson they will benefit from in future.</p>
<h2>Budgeting</h2>
<p>The concept of budgeting can be taught in a child-friendly way. Take, for example, an upcoming birthday party: you can use straws (or anything similar) to illustrate that all the straws represent the total budget for the birthday party. The idea is to teach children how to work within the confines of the budget. Create a list of what is needed for the party and allow the child to allocate the straws according to the items on the list. This can be a teachable moment to show that allocating too much for one item will come at the expense of something else. If you consider it appropriate, actual money can be used in place of the straws. </p>
<p>You can play with this until you’ve both come to an agreement on the budget (also bearing in mind that the entire budget does not have to be spent, and what is unspent can form part of their savings). After the party, look back at the budget to reflect on what the child has learnt about the process, including their likes and dislikes. This also teaches that even a fun event involves planning and responsible spending.</p>
<h2>Helping others</h2>
<p>Children are often taught the importance of sharing. This lesson can extend into the realm of financial education. Money is not just a resource for spending or buying things – it can also be used to help others. By donating or contributing towards a cause that a child cares about, they’ll learn to be financially generous and empathise with those who do not have the same privileges they have.</p><img src="https://counter.theconversation.com/content/193632/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Parents and caregivers are the greatest influence on children’s financial socialisation.Bomikazi Zeka, Assistant Professor in Finance and Financial Planning, University of CanberraAbdul Latif Alhassan, Associate Professor in Development Finance & Insurance, University of Cape TownLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1935352023-01-05T20:37:14Z2023-01-05T20:37:14ZWhat is income protection insurance – and how’s it different to total and permanent disability insurance?<figure><img src="https://images.theconversation.com/files/494781/original/file-20221110-22-kyzg7g.jpg?ixlib=rb-1.1.0&rect=0%2C15%2C5175%2C3424&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Many of us have car insurance, home insurance and health insurance. But what about income protection insurance?</p>
<p>Having income protection insurance means that if you get sick or injured and can’t work, you’ll still get paid. The insurance company will cover a portion of your earnings, so you can still pay everyday living expenses and bills.</p>
<p>But how exactly does income protection insurance work, and how’s it different to total and permanent disability insurance (sometimes shortened to TPD)?</p>
<p>Here’s what you need to know.</p>
<h2>How does income protection insurance work?</h2>
<p>Income protection insurance usually covers only 75% of the first A$20,000 of your gross monthly income, and 50% of gross monthly income that exceeds A$20,000 per month. </p>
<p>This gap is supposed to incentivise you to <a href="https://www.booktopia.com.au/guide-to-life-risk-protection-and-planning-doug-scriven/book/9781922010292.html">return</a> to <a href="https://catalogue.nla.gov.au/Record/4364921">work</a>.</p>
<p>There’s usually a waiting period. In other words, you need to be unable to work for a certain number of days before the benefits start to be paid. </p>
<p>Generally, the longer the waiting period, the lower the premiums (“premium” means what you pay for the insurance). The usual waiting periods are: 14 days, 30 days, 60 days, 90 days, 180 days, one year or two years.</p>
<p>The “benefit period” refers to the period of time you will get paid the benefit. The usual <a href="https://www.booktopia.com.au/guide-to-life-risk-protection-and-planning-doug-scriven/book/9781922010292.html">benefit</a> <a href="https://catalogue.nla.gov.au/Record/4364921">periods</a> are one year, two years, five years, or up until you’re 55, 60, 65 or 70.</p>
<h2>How’s that different to permanent disability insurance?</h2>
<p>Total and permanent disability insurance gets you a lump sum of money if you’re permanently unable to work in your occupation or in any occupation for which you’re suited by training, education or experience – or if you’ve lost the ability to function cognitively or physically. Or, you can get a payment if you have permanent loss of sight or limbs.</p>
<p>The money can be used for things like modifying the house, medical care or medical procedures. </p>
<p>You can choose a policy that covers you if you’re unable to work in your own occupation, or one that covers you if you’re unable to work in any occupation for which you’re appropriately trained. You can get a standalone policy or one that is built into your life insurance policy.</p>
<p>Under a standalone policy, the amount you get is not <a href="https://www.booktopia.com.au/guide-to-life-risk-protection-and-planning-doug-scriven/book/9781922010292.html">restricted</a> to the amount insured under your life insurance policy. (That’s not the case when a total and permanent disability insurance is part of your life insurance policy.)</p>
<p>The main difference between income protection insurance and total and permanent disability insurance is that the former gives you an income stream and the latter provides a lump sum payment. </p>
<p>The other key difference is the amount insured under income protection cover is usually limited to 75% of your income, whereas you could have any amount of insurance coverage under your total and permanent disability policy.</p>
<h2>Hang on, isn’t this included in my superannuation?</h2>
<p>Many people have their income protection insurance, life insurance or total and permanent disability insurance built into their superannuation. In fact, more than <a href="https://www.canstar.com.au/superannuation/insurance-through-super-yes-or-no/">70%</a> of life insurance policies in Australia are held inside superannuation funds.</p>
<p>The advantages of having personal insurance in your superannuation fund include:</p>
<ul>
<li><p>lower <a href="https://www.fssuper.com.au/media/library/FS_Super/FS_Super_-_TPD_insurance_throught_super.pdf?b1ffe">costs</a> due to super funds often having more bargaining power with insurers to get a good price</p></li>
<li><p>it can be more streamlined, because the insurance premium is paid directly from your super account; the balance of your super goes down but you don’t have to take money from your salary to pay for it</p></li>
<li><p>people with pre-existing conditions might find it easier to get certain insurances via their super fund than if they went out on their own</p></li>
<li><p>potential tax benefits (best to discuss these with a financial adviser).</p></li>
</ul>
<p>It’s worth noting all benefits within superannuation, including insurance proceeds, are subject to <a href="https://www.canstar.com.au/superannuation/superannuation-industry-act/">Superannuation Industry Supervision</a> legislation. It’s difficult to satisfy the legislation’s definition of “permanent disability”; it’s often more restrictive than definitions used by insurance companies.</p>
<p>So even if you satisfy the insurer’s definition of “permanent disability” and the money is paid to your superannuation account, you might not satisfy the legislation’s definition. The proceeds can be trapped in the superannuation fund until a condition of release is satisfied.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/494782/original/file-20221110-26-u19cjo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/494782/original/file-20221110-26-u19cjo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/494782/original/file-20221110-26-u19cjo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/494782/original/file-20221110-26-u19cjo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/494782/original/file-20221110-26-u19cjo.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/494782/original/file-20221110-26-u19cjo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/494782/original/file-20221110-26-u19cjo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/494782/original/file-20221110-26-u19cjo.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>
<figcaption>
<span class="caption">Many people get personal insurances after having a brush with tragedy or knowing someone who did.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
</figcaption>
</figure>
<h2>Why do people get income protection insurance?</h2>
<p>For my <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3122189">research</a>, I interviewed financial advisers and consumers about why people get income protection insurance. Motivations included getting married, having children, buying a house, having a brush with tragedy or knowing someone who did.</p>
<p>Financial advisers often told me immigrants from the United Kingdom, the United States, South Africa or New Zealand are more likely to purchase income protection insurance, as were people they saw as “intelligent”, “conservative” or “more responsible”.</p>
<p>They also said consumers are more likely to consider insurances they thought would be most claimable, such as life insurance and income protection insurance.</p>
<p>People often (wrongly) believe income protection insurance would be paid out if the person was unable to work due to losing their job for <em>any</em> reason.</p>
<p>Financial advisers often commented Australians tend to be relaxed and think unfortunate events are unlikely to happen.</p>
<p>If you’re considering purchasing income protection insurance, make sure you understand the risk of buying it within your superannuation policy (possible downsides include a short benefit period and inability to claim a tax deduction on the cost of the insurance). </p>
<p>And seek professional financial advice when deciding on the appropriate policy. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/victims-of-nsw-and-queensland-floods-have-lodged-60-000-claims-but-too-many-are-underinsured-heres-a-better-way-178294">Victims of NSW and Queensland floods have lodged 60,000 claims, but too many are underinsured. Here's a better way</a>
</strong>
</em>
</p>
<hr>
<img src="https://counter.theconversation.com/content/193535/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>This story is part of a series on financial and economic literacy funded by Ecstra Foundation.</span></em></p>People often (wrongly) believe income protection insurance would be paid out if the person was unable to work due to losing their job for any reason.Tania Driver, Lecturer in Financial Planning, James Cook UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1958002022-12-11T19:06:34Z2022-12-11T19:06:34Z‘I thought crypto exchanges were safe’: the lesson in FTX’s collapse<figure><img src="https://images.theconversation.com/files/499168/original/file-20221206-18-xll7xg.jpg?ixlib=rb-1.1.0&rect=0%2C282%2C4594%2C2304&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Anthony* (a friend) called a few weeks ago, deeply worried.</p>
<p>A deputy principal of a high school in Queensland, over the past year he spent hundreds of thousands of dollars buying cryptocurrencies, borrowing money using his home as equity. </p>
<p>But now all his assets, valued at A$600,000, were stuck in an account he couldn’t access. </p>
<p>He’d bought through FTX, the world’s third-biggest cryptocurrency exchange, endorsed by celebrities such as Seinfeld co-creator Larry David, basketball champions Steph Curry and Shaquille O’Neal, and tennis ace Naomi Osaka.</p>
<p>With FTX’s spectacular collapse, he’s now awaiting the outcome of the liquidation process that is likely to see him, 30,000 other Australians and more than <a href="https://www.businessofapps.com/data/ftx-statistics/">1.2 million customers worldwide</a> lose everything. </p>
<p>“I thought these exchanges were safe,” Anthony said. </p>
<p>He was wrong. </p>
<h2>Not like stock exchanges</h2>
<p>Cryptocurrency exchanges are sometimes described as being like stock exchanges. But they are very different to the likes of the London or New York stock exchanges, institutions that have weathered multiple financial crises. </p>
<p>Stock exchanges are both highly regulated and help regulate share trading. Cryptocurrency exchanges, on the other hand, are virtually unregulated and serve no regulatory function. </p>
<p>They’re just private businesses that make money by helping “mum and dad” investors to get into crypto trading, profiting from the commission charged on each transaction.</p>
<p>Indeed, the crypto exchanges that have grown to dominate the market – such as Binance, Coinbase and FTX – arguably undermine the whole vision that drove the creation of Bitcoin and blockchains – because they centralise control in a system meant to decentralise and liberate finance from the power of governments, banks and other intermediaries. </p>
<p>These centralised exchanges are not needed to trade cryptocurrency, and are pretty much the least safe way to buy and hold crypto assets. </p>
<h2>Trading before exchanges</h2>
<p>In the early days of Bitcoin (all the way back in 2008) the only way to acquire it was to “mine” it – earning new coins by performing the complex computations required to verify and record transactions on a digital ledger (called a blockchain). </p>
<p>The coins would be stored in a digital “wallet”, an application similar to a private bank account, accessible only by a password or “private key”. </p>
<p>A wallet can be virtual or physical, on a small portable device similar in appearance to a USB stick or small phone. Physical wallets are the safest because they can be unplugged from the internet when not being used, minimising the risk of being hacked. </p>
<figure class="align-center ">
<img alt="A physical digital wallet is the safest way to store your cryptocurrency." src="https://images.theconversation.com/files/499901/original/file-20221209-14505-dzckvc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/499901/original/file-20221209-14505-dzckvc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/499901/original/file-20221209-14505-dzckvc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/499901/original/file-20221209-14505-dzckvc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/499901/original/file-20221209-14505-dzckvc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/499901/original/file-20221209-14505-dzckvc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/499901/original/file-20221209-14505-dzckvc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">A physical digital wallet is the safest way to store your cryptocurrency.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
</figcaption>
</figure>
<p>Before exchanges emerged, trading involved owners selling directly to buyers via online forums, transferring coins from one wallet to another like any electronic funds transfer.</p>
<h2>Decentralised vs centralised</h2>
<p>All this, however, required some technical knowledge.</p>
<p>Cryptocurrency exchanges reduced the need for such knowledge. They made it easy for less tech-savvy investors to get into the market, in the same way web browsers have made it easy to navigate the Internet. </p>
<p>Two types of exchanges emerged: decentralised (DEX) and centralised (CEX).</p>
<p>Decentralised exchanges are essentially online platforms to connect the orders of buyers and sellers of cryptocurrencies. They are just there to facilitate trading. You still need to hold cryptocurrencies in your own wallet (known as “self-custody”). </p>
<p>Centralised exchanges go much further, eliminating wallets by offering a one-stop-shop service. They aren’t just an intermediary between buyers and sellers. Rather than self-custody, they act as custodian, holding cryptocurrency on customers’ behalf. </p>
<h2>Exchange, broker, bank</h2>
<p>Centralised exchanges have proven most popular. Seven of the world’s ten biggest crypto exchanges by trading volume <a href="https://coinmarketcap.com/rankings/exchanges/">are centralised</a>.</p>
<p>But what customers gain in simplicity they lose in control.</p>
<p>You don’t give your money to a stock exchange, for example. You trade through a broker, who uses your trading account when you buy and deposits money back into your account when you sell. </p>
<p>A CEX, on the other hand, acts as an exchange, a brokerage (taking customers’ fiat money and converting it into crypto or vice versa), and as a bank (holding customer’s crypto assets as custodian). </p>
<p>This is why FTX was holding cash and crypto assets worth <a href="https://www.ft.com/content/f05fe9f8-ca0a-48d5-8ef2-7a4d813af558">US$10-50 billion</a>. It also acted like a bank by borrowing and lending cryptocurrencies – though without customers’ knowledge or agreement, and without any of the regulatory accountability imposed on banks. </p>
<p>Holding both wallets and keys, founder-owner Sam Bankman-Fried “borrowed” his customers’ funds to prop up his other businesses. Customers realised too late they had little control. When it ran into trouble, FTX simply stopped letting customers withdraw their assets.</p>
<h2>The power of marketing</h2>
<p>Like stockbrokers, crypto exchanges make their money by charging a commission on every trade. They are therefore motivated to increase trading volumes. </p>
<p>FTX did this most through celebrity and sports marketing. Since it was founded in 2019 it has spent an estimated <a href="https://decrypt.co/114210/ftx-spent-hundreds-of-millions-of-dollars-on-sports-marketing-on-road-to-bankruptcy">US$375 million</a> on advertising and endorsements, including buying the naming rights to the stadium used by the Miami Heat basketball team. </p>
<figure class="align-center ">
<img alt="FTX Arena in Miami." src="https://images.theconversation.com/files/499748/original/file-20221208-22-uu9du9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/499748/original/file-20221208-22-uu9du9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/499748/original/file-20221208-22-uu9du9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/499748/original/file-20221208-22-uu9du9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/499748/original/file-20221208-22-uu9du9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/499748/original/file-20221208-22-uu9du9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/499748/original/file-20221208-22-uu9du9.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">
<figcaption>
<span class="caption">FTX Arena in Miami.</span>
<span class="attribution"><span class="source">Lynne Sladky/AP</span></span>
</figcaption>
</figure>
<p>Such marketing has helped to create the illusion that FTX and other exchanges were as safe as mainstream institutions. Without such marketing, it’s debatable the value of the cryptocurrency market would have risen from US$10 billion in 2014 to <a href="https://coinmarketcap.com/charts/">US$876 billion in 2022</a>.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-sports-sponsorship-is-unlikely-to-save-cryptocurrency-firms-from-crypto-winter-195582">Why sports sponsorship is unlikely to save cryptocurrency firms from 'crypto winter'</a>
</strong>
</em>
</p>
<hr>
<h2>Not your key, not your coins</h2>
<p>There’s an adage among crypto investors: “Not your key, not your coins, it’s that simple.”</p>
<p>What this means is that your crypto isn’t safe unless you have self-custody, storing your own coins in your own wallet to which you alone control the private key. </p>
<p>The bottom line: crypto exchanges are not like stock exchanges, and CEXs are not safe. If the worst eventuates, whether it be an exchange collapse or cyber attack, you risk losing everything.</p>
<p>All investments carry risks, and the unregulated crypto market carries more risk than most. So follow three golden rules.</p>
<p>First, do some homework. Understand the process of trading crypto. Learn how to use a self-custody wallet. Until governments regulate crypto markets, especially exchanges, you’re largely on your own. </p>
<p>Second, if you’re going to use an exchange, a DEX is more secure. There is no evidence to date that any DEX has been hacked. </p>
<p>Lastly, in this world of volatility, only risk what you can afford to lose.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/crypto-what-could-more-regulation-mean-for-the-future-of-digital-currencies-194322">Crypto: what could more regulation mean for the future of digital currencies?</a>
</strong>
</em>
</p>
<hr>
<hr>
<p><em>*Name has been changed.</em></p><img src="https://counter.theconversation.com/content/195800/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Cryptocurrency exchanges like FTX aren’t safe. Here’s what every crypto investor needs to know.Paul Mazzola, Lecturer Banking and Finance, Faculty of Business and Law, University of WollongongMitchell Goroch, Cryptocurrency Trader and Researcher - Centre for Responsible Organisations & Practices, University of WollongongLicensed as Creative Commons – attribution, no derivatives.